Bitcoin poised to rival gold as U.S. grapples with ‘debt death spiral’

Bitcoin prices may rival gold as the U.S. Federal Reserve continues to work through the country’s “debt death spiral,” according to analysts at Jefferies.

The token has lost around 60 percent since peaking at nearly $70,000 in late 2021, wiping out about $2 trillion in value from the cryptocurrency market. However, Decrypt reported that major cryptocurrency prices had remained stable over the past week with little movement.

Bitcoin has increased by 2.7 percent. At one point, it reached a two-month high of $28,000 on Sunday. Meanwhile, Bitcoin’s closest contender, Ethereum, fell 2.1 percent last week to $1,636, despite positive news such as the UBS asset tokenization trial and the launch of nine Ethereum futures ETFs in the U.S.

Christopher Wood, the global head of equity strategy at Jefferies, warned that the Fed might have to quickly shift to a more dovish stance. It could happen if there were a delayed response to the Fed’s interest rate hikes to curb post-2020 money supply growth.

“Such a failure to exit from unorthodox monetary policy in a benign manner is likely to culminate in the collapse of the U.S.-dollar paper standard to the benefit of both gold bullion owners and also owners of bitcoin,” Wood wrote.

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Jefferies analysts point out that to tackle the $33 trillion debt, the central bank may have to print more money, risking the dollar’s stability. This situation can prompt a prolonged rally for Bitcoin.

The Fed began reducing its nearly $9 trillion balance sheet in the spring of 2022 after expanding it significantly during the COVID-19 pandemic. This process, known as quantitative tightening, involves the Fed removing liquidity from the financial system and shifting the responsibility for newly issued debt to the private sector. In addition, the Fed has been continuously raising interest rates to combat surging inflation.

Support for Bitcoin

Microsoft’s planned crypto support, BlackRock’s bullish stance and the SEC’s likely approval of a Bitcoin spot ETF could boost Bitcoin’s price.

On September 25, Forbes reported a leaked document that revealed tech giant Microsoft was planning to add crypto wallet support to its next Xbox console. According to the document, dated May last year, Microsoft was developing a new “ecosystem generation,” encompassing consoles, phones, web browsers, a handheld system, PCs, a cloud console and AI/ML support. The new ecosystem is not expected to be released until 2028, with possible changes.

In early October, the price of Bitcoin received a significant boost after BlackRock CEO Larry Fink shifted his stance on Bitcoin to bullish, sparking a rush toward the crypto market on Wall Street.

“Bitcoin has now become investible for institutions, with custodian arrangements in place for digital assets, and represents an alternative store of value to gold,” added Wood.

This enthusiasm was further fueled by former BlackRock managing director Steven Schoenfield, who predicted that the SEC would greenlight a Bitcoin spot ETF in “three to six months.”

Franklin Templeton, BlackRock, Fidelity, Invesco Galaxy and WisdomTree, with a combined AUM of $17.7 trillion, have filed spot Bitcoin ETF applications with the SEC. Some analysts suggest that SEC approval is “inevitable” despite the recent “death cross” pattern in Bitcoin’s price.

“Instead of completely rejecting the whole list, they’ve asked for comments, which is a marginal but significant improvement in the dialogue,” Shoenfield said.

U.S. lawmakers have instructed the SEC to reevaluate Grayscale’s application to transform its main Bitcoin trust into a complete Bitcoin spot ETF. Schoenfield said the SEC would likely approve the conversion.