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Bitcoin and gold shot higher this week, with both getting a boost from some frantic action surrounding the bond market, and the cryptocurrency also benefiting from activity in Washington.
Bitcoin had dropped from a January high around $95,000 to below $60,000 at the end of June. Investors shied away from speculative assets earlier in the year and crypto supporters were concerned about the lack of movement on proposed regulation of the industry. On Friday, bitcoin rose above $77,000.
Gold hit a high above $5,300 in January but dropped to around $4,000 in June as rising rates made interest-bearing investments more attractive. Gold rose to $4,661 on Friday.
The first jolt arrived Wednesday when the Treasury Department announced plans to significantly increase its buybacks of long-term Treasurys, or government debt. On the same day, President Donald Trump, who made about $1.2 billion last year from various crypto holdings, urged Congress to move quickly on crypto legislation.
There was an almost immediate reaction, which included a dollar sell-off, and a jump in the value of gold and bitcoin as investors moved toward alternative assets.
How these two investments caught fire can be understood in the context of several developments this week.
The Treasury stepped into the bond market – forcefully
In a surprise announcement Wednesday, the U.S. Treasury Department said that it would at least double the size of its planned purchases of longer-term government debt. The maneuver was intended to calm bond markets after a sustained sell-off, meaning investors were asking for higher yields to lend money to the U.S., which suddenly seemed more risky.
That’s because while the Treasury intervention worked, at least for a short period, it also raised questions about whether the government is trying to push borrowing costs lower despite inflationary pressures. Treasury Secretary Scott Bessent is attempting to lower long-term borrowing costs, a move that can put upward pressure on inflation at a time when inflation is already elevated. Bessent’s maneuver could handcuff the Federal Reserve, which fights inflation by raising interest rates.
Debt, inflation, and the “debasement trade” heat up
Then there’s the national debt, which surpassed a record $40 trillion on the same day that the Treasury’s actions unfolded. The milestone figure was recorded just five months after the U.S. hit a record $39 trillion debt in March. It reached $38 trillion five months before that, in October.
There is already a lot of anxiety over inflation, particularly because of the conflict in Iran and soaring energy prices. If yields on U.S. bonds are not truly reflecting risk, you can often see that play out in the value of the U.S. currency, which took a significant downward swoop Wednesday.
So where does the money that was invested in the dollar or Treasurys go? This week, it appears to have been funneled into what is known as the “debasement trade,” when investors flood into alternative assets such as gold, which rose more than 2% Wednesday. The debasement trade now includes bitcoin. Bitcoin jumped more than 20% this week.
Crypto had a very good week in Washington
On Wednesday President Donald Trump, who banked nearly $1.2 billion from his crypto businesses last year, held a crypt conference at the White House where he called on Congress to pass the crypto-friendly Clarity Act, saying that it would “keep us ahead of China, keep us ahead of everyone else.”
Trump then yielded the floor to Commodity Futures Trading Commission Chair Mike Selig, who vowed to “use every tool available” to advance Trump’s agenda.
Selig’s comments came ahead of a CFTC meeting Thursday examining ways the agency can use its existing authority to ease crypto rules. A day earlier, other regulators proposed rules making it easier for crypto companies and projects to raise money from the public.
Since taking office, Trump has pushed policies friendly to the crypto industry and reversed a Biden administration regulatory crackdown.
Bitcoin’s big squeeze sent prices even higher
Bitcoin can sometimes get a bump when the U.S. dollar is on the ropes as investors try to unload the U.S. currency. But you don’t typically see the kind of related movement that was observed with bitcoin this week.
The price of bitcoin had been stuck between $62,000 and $67,000 for weeks. Investors seized on that weakness, many placing bets that the cryptocurrency would be stuck in that range for some time to come.
However, on the day that the Treasury announced its buybacks, Treasury yields fell, as did the dollar, and bitcoin blasted through that upper level of $67,000.
The Treasury’s actions negatively affected the money investors could make on U.S. bonds and the dollar, and boosted the value of bitcoin. That meant that many investors who had shorted bitcoin, or bet that its price would remain subdued, were forced to close their positions as bitcoin surged. Closing those bearish positions required buying back the digital asset, adding even more upward pressure to bitcoin’s price.
And because bitcoin was already rising, those forced purchases added fuel to the rally, potentially triggering still more liquidations as prices climbed.
