Bitcoin Capped by Rate-Hike Expectations Amid US Fiscal Concerns

Bitcoin's price action has been resembling that of gold lately as investors respond to concerns over US fiscal sustainability. According to CoinShares, the crypto asset rose from above $60,000 to the upper-$70,000s after Fed Governor Christopher Waller delivered dovish comments on monetary policy.

The brief rally touched $82,000 but was capped by renewed rate-hike expectations following Kevin Warsh's hawkish remarks at Jackson Hole. Markets now price a 66% chance of a September rate hike, which CoinShares considers too aggressive in light of labor market data and growing disagreement among Fed officials.

Investment flows into digital asset products have been influenced by the shifting outlook, with about $100 million flowing out following Warsh's comments. However, inflows have since returned to roughly $1 billion this week after $2 billion last week and $2.9 billion the week before.

CoinShares expects a potential resolution to the US-Iran war as political pressure builds ahead of the US midterms. If Chinese oil demand returns to normal while supplies remain disrupted, oil prices could rise sharply again, pushing inflation higher and strengthening expectations for tighter monetary policy, which would be a near-term negative for Bitcoin.

The 10-year Treasury yield remains around 4.7%, reflecting investor concerns over US debt at approximately 122% of GDP and the volume of government debt still to be issued. A full-blown Treasury confidence crisis is a tail risk but could strongly benefit Bitcoin and gold as investors seek stores of value outside government securities.