$40 Trillion Debt Load Sparks Confusion Over Bitcoin's Prospects

The US national debt has surpassed $40 trillion, a milestone that some expected to be bearish for Bitcoin. However, the cryptocurrency rallied around 23% in late August, reaching the high $70,000s. The sharp price increase was largely driven by liquidity and real yields, rather than the debt milestone itself.

Many crypto investors view rising US national debt as an opportunity, citing the so-called 'debasement trade.' This theory suggests that stable assets will outperform if the government allows inflation to run high. More debt means more money in circulation, potentially weakening the dollar and boosting the value of inflation hedges like gold, bonds, real estate, and Bitcoin.

However, a closer look at the data reveals a different story. The correlation between Bitcoin and gold, often cited as evidence for the debasement trade, is actually quite weak. In fact, Bitcoin behaves more like a risk asset when it matters most, selling off sharply during times of financial stress.

The real yield problem also raises questions about the viability of the debasement trade. As bond investors demand higher returns, real yields climb, making Treasury notes appear more attractive than Bitcoin. With no dividends or yield-earning mechanism in place, Bitcoin's price volatility may ultimately make it a less appealing option for investors seeking safe-haven assets.