By
Bhushan Akolkar
April 16th, 2024
Amid mounting debt-limit default risks, US investors have turned to Bitcoin as ‘digital gold’ to better hedge their savings.
Amid rising debt-limit default risks, Bitcoin (BTC) is the preferred safe-haven asset compared to other established global fiat currencies. A recent report stated that investors have turned to BTC to hedge their investments, compared to the US dollar, Japanese yen, or Swiss franc-yielding assets. In addition, Bitcoin’s growing popularity as a veritable option rivals that of gold now.
The likelihood of a US debt default is at its highest point in recent times and threatens to upend global markets. The ongoing US banking crisis has done little to assuage fears, with more investors repurposing their assets toward crypto. Some analysts believe BTC’s rising popularity could see the popular crypto revisiting its record high in early 2024. With institutional investors braced to invest in Bitcoin in the second half of this year, the asset is already experiencing a diminishing correlation with stocks. Conversely, Bitcoin’s correlation with gold is on the rise, being 50% in early April compared with the 20% BTC-stock 20% correlation.
Gold Still Top Choice in US Debt-Limit Default Risk Outlook
Gold remains a favorite among investors seeking protection amid the risk of debt-limit default. A recent Bloomberg Markets Live Pulse survey revealed over 50% of finance professionals would buy gold on a government loan default. However, many American investors were still open to buying US Treasuries if the government failed to honor its obligations. This development is interesting because the risk of defaulting on Treasuries is high.
Political and financial stakeholders have warned about dire implications if the US debt ceiling situation spirals out of control. For instance, US President Joe Biden suggested that the “whole world [could be] in trouble”. Meanwhile, JPMorgan (NYSE: JPM) CEO Jamie Dimon said the situation could be “potentially catastrophic”. The International Monetary Fund was just as grim in its assessment of a full-blown debt limit default case in the US, foreboding “very serious repercussions”.
Investors Believe US Should Not Overlook Precarious Debt-Limit Situation
Despite the US’ long-vaunted status as an economic superpower, many think the country should pay close attention to its erring debt profile. In a survey, respondents compared the current debt situation with the debilitating debt-limit crisis from 2011. According to 60% of MLIV Pulse participants, there has been an exponential increase in insurance costs from non-payment since 2011. As Invesco’s head of fixed income, alternatives, and ETF strategies, Jason Bloom, put it:
“The risk is higher than before, given the polarization of the electorate and the Congress. The way both sides are so dug in means there is the risk they don’t get their act together in time.”
Notwithstanding, surveyed respondents still believe that the actual possibility of default remains relatively slim. Instead, an overwhelming majority of MLIV surveyed investors anticipate a rally in 10-year Treasuries in the most extreme case.
Some investors also believe that the US debt-ceiling blues has impacted the dollar. For instance, 41% say the greenback could lose its primary global reserve status if the US defaults.