Will Fitch Downgrade U.S. Credit Rating Spark a Bitcoin Bull Run?

Author: MARCEL PECHMAN, COINTELEGRAPH; Compiler: Songxue, Jinse Finance

On August 1, a big event happened in the financial world: Fitch, a well-known credit rating agency, downgraded the US government’s credit rating from the original AAA to AA+. The rating downgrade shows that confidence in the U.S. government’s ability to effectively fulfill its fiscal responsibilities has weakened. **

** The downgrade prompted investors to take a cautious stance, leading many to pull money out of assets such as stocks, silver, oil and long-term bonds. ** Instead, they favor cash and short-term investments, which are considered safer options in times of uncertainty.

S&P 500 futures (blue), WTI oil futures (teal), US 20-year note (yellow), silver coins (orange). Source: TradingView

** As evident from the chart above, Fitch’s decision to downgrade the US government’s credit rating has broad repercussions, affecting commodities, fixed income and equities. This has implications for various financial institutions and investment portfolios, including Bitcoin. **

Traders are now considering whether bitcoin’s digital scarcity and resistance to censorship could provide shelter from a general “risk-off” movement fueled by deteriorating credit scores in the world’s largest economy.

Rating downgrade has little impact on the market

A Moody’s Analytics report in May hinted at a potential domino effect of downgrades in the United States. ** Treasuries could lead to further downgrades in the financial sector. ** It is worth noting that only Fitch and S&P have rated the US. The debt rating is AA+, and Moody’s still maintains the AAA rating with stable expectations.

Interestingly, the cost of insuring US sovereign debt against default, as indicated by credit default swaps, has remained largely stable following the downgrade, which is surprising in the face of such significant news.

US 5-Year Treasury Credit Default Swap Value. Source: World Government Bonds

This financial instrument protects against the risk of a debt default, acting like an insurance policy whereby investors pay a premium to be compensated if the debt issuer, in this case the U.S. government, defaults.

** This stability suggests that investors are not concerned about the immediate impact of the downgrade. One possible reason is that U.S. Treasuries are considered one of the safest investments in the world because they are backed by the U.S. government. The issuer guarantees to repay the debt, including interest, on a stated due date. **

A 12-hour chart of U.S. 5-year Treasury yields. Source: TradingView

Note that the recent daily yield swings appear to be less pronounced given the continued rise in five-year yields over the past two weeks. That may be related to weakening investor confidence in U.S. debt management, boosting demand for higher yields.

Aside from moves in U.S. Treasury yields, a drop in the U.S. dollar index (DXY), which measures the greenback’s value relative to other currencies, could also spell trouble. If this leads to a decline in confidence in traditional assets, investors may look to other stores of value, potentially boosting bitcoin’s appeal. **

US dollar index. Source: TradingView

In the past two weeks, the US dollar index has risen from 99.50 to 102.60, implying a possible shift in investor sentiment. Underscoring the dollar’s appeal in times of uncertainty, they may ditch Treasuries, stocks and commodities for safe haven cash.

Bitcoin price outlook is pessimistic in the short term

** Looking at the U.S. dollar index, the resilience of U.S. Treasury credit default swaps and the strength of the U.S. dollar suggest that investors may have increased their cash holdings in anticipation of market turmoil. **

As such, Bitcoin may not prosper immediately from the U.S. government’s debt downgrade. During early market turmoil, the initial liquidity flight often overlooks the benefits of decentralized assets.

**Given Bitcoin’s digital scarcity and fixed supply, it stands out as a valuable asset amidst expanding government debt, which can devalue cash. As a result, investors may increasingly view Bitcoin as a safe haven and a robust asset class that is resistant to censorship due to its decentralized nature.