Bitcoin’s latest rally was hard to miss.
On August 19, bitcoin surged nearly 8% in a day. More than $1 billion in bitcoin short positions were liquidated in about an hour, while a record $2.7 billion in bearish bets were wiped out across the broader crypto market.
The rally kept going. By August 25, bitcoin had pushed above $80,000 and was up 28% for the month, according to Reuters.
What happened?
There’s an obvious crypto-specific explanation, and we’ll discuss that.
But another story was unfolding in Washington at almost exactly the same time – one involving $40 trillion in federal debt, rising borrowing costs and an unusual Treasury Department intervention in the bond market.
And that second story may tell us more about why bitcoin is increasingly discussed in the same breath as gold, federal debt and the U.S. dollar.
First came the short squeeze
A short seller is betting an asset’s price will fall. When prices instead rise sharply, leveraged short positions can be forced by their brokers to close out their positions (the dreaded margin call) – which requires buying the asset they shorted.
That buying can drive prices higher, forcing still more shorts to close.
That helps explain the speed of bitcoin’s August 19 move. And the scale, too – over 24 hours, $2.7 billion in bearish crypto bets were wiped out. That’s “the largest wave of forced short closures in records going back to 2021,” according to CoinDesk. Friends, that is what we call a big deal.
But a short squeeze is more accelerant than explanation. Forced buying can absolutely magnify a rally – but only after it starts. It doesn’t tell us what lit the match. Nor does it explain why prices remained substantially higher after the short squeeze ended.
One likely catalyst got a lot of attention…
White House schedules crypto CEO meeting
On the same day bitcoin surged, President Trump met with crypto executives at the White House and continued urging Congress to advance cryptocurrency market-structure legislation.
Meanwhile, the Securities and Exchange Commission has proposed a new framework called “Regulation Crypto Assets,” including tailored exemptions and disclosure requirements for certain crypto-asset offerings.
Now, those are proposals and policy signals, not completed regulatory reforms. But they fit a broader trend: Digital assets are increasingly being brought inside mainstream U.S. financial policy – instead of languishing in a regulatory gray area.
That could obviously influence investor sentiment.
But Washington produced another market-moving headline that day – one that got a lot more attention…
The other Washington story: $40 trillion (and counting)
One day earlier, total U.S. public debt crossed $40 trillion for the first time.
Now, there’s nothing magical about a round number. The economy doesn’t suddenly behave differently at $40.0 trillion than it did at $39.9 trillion. Round numbers tend to get attention, though, because they’re easier to intuitively grasp.
It’s not the specific number so much as the underlying trend that matters.
Federal deficits remain unusually large. Meanwhile, higher interest rates have increased the cost of servicing outstanding debt. Reuters reports that net federal interest costs have risen to roughly double their share several years ago. (Over $1 trillion this year alone!)
Twenty years ago, the national debt to GDP ratio was 61% – today, it’s more than double. That’s a problem, because real economic growth is the only thing that enables a nation to pay down its debts. This trend leads lenders to worry that the U.S. seems increasingly unlikely to simply grow its way out of the debt mountain.
Recently, investors have demand higher yields on federal loans. Just like with credit cards and mortgages, if a nation starts to look like a risky borrower, they’ll have to pay a higher APR to persuade lenders to part with their cash. That makes future government borrowing more expensive.
This isn’t just an accounting problem, either, because Treasury yields influence borrowing costs across the real economy. Mortgages, corporate loans, auto loans, credit card rates – they all tend to go up when Treasury yields do.
That pressure recently became particularly visible in long-term (10 to 30-year) Treasury bonds. The concern is that rising mortgage rates etc. slow economic growth, which lowers tax revenue, which makes the already-expensive annual refinancing costs even more difficult to pay off. Potentially creating a self-reinforcing, negative feedback loop.
Then Treasury Secretary Scott Bessent did something about it.
The Treasury Department steps in – and investors notice
The Treasury Department was already planning substantial bond buybacks. On August 5, it announced plans to purchase up to $38 billion in older Treasury securities during the quarter to support market liquidity.
Then, just two weeks later, Treasury went further. On August 19, they announced they would at least double the maximum size of those purchases beginning September 9.
Some folks called this “shadow QE,” but that’s nonsense. This isn’t like the Federal Reserve’s money-printing to fund the federal government. The official story was, this move would improve liquidity in parts of the long-term bond market where trading conditions have become strained.
The most common interpretation was, “Secretary Bessent is borrowing short at 3.8% to pay off long loans at 5%.” Interestingly, the total amount of debt didn’t change. Just the repayment schedules.
Still, markets reacted. Long-term Treasury yields fell following the announcement, while the dollar weakened. Stocks, gold and bitcoin all benefited from the shift in market conditions.
That prompted Deutsche Bank strategist George Saravelos to describe the emerging policy mix as a “soft form of financial repression.”
That’s his interpretation, obviously. But the concern is straightforward: Treasury yields are set at auction. A higher yield therefore means there’s either too much supply, or not enough demand. Now, the average person would correctly interpret this as lenders saying, “Hey, maybe instead of borrowing more money, you should get your house in order?”
Bessent chose to interpret it differently. His intervention showed a willingness to fight the iron law of supply and demand. “Financial repression,” by the way, is a deliberate policy of allowing inflation to rise above the cost of borrowing – over time, this reduces the real (inflation-adjusted) debt burden.
Great for the federal government! Terrible for the federal government’s creditors – which, by the way, include every single central bank on earth, every other bank on earth, all insurance companies, all pension funds… Basically everybody everywhere.
The positive results didn’t last – via CNBC, federal debt yields bounced back the very next day.
And that very concern brings us back to bitcoin.
The return of the “debasement trade”
Analysts have been using the phrase “debasement trade” to describe investors favoring assets they believe may hold value when fiscal or monetary policy raises concerns about a currency’s future purchasing power.
Gold is the classic example. Increasingly, bitcoin appears in that conversation right alongside gold.
Reuters explicitly connected bitcoin’s move above $80,000 with a softer dollar and renewed interest in the debasement trade.
There’s a reason.
Bitcoin follows a predetermined issuance schedule and has a maximum supply of 21 million coins. Washington cannot issue more bitcoin to finance a deficit, and a central bank cannot create additional bitcoin as part of monetary policy. Bitcoin is inflation-proof just like gold (there’s a reason they call it “bitcoin mining!”)
That doesn’t make bitcoin’s price stable – as we’ve discussed many times, bitcoin price is extremely volatile.
But its supply characteristics are fundamentally different from government-printed currencies. When investors become more concerned about debt, inflation or purchasing power, bitcoin is one of the few assets that can’t be inflated, printed or diluted.
So what really caused the rally?
Probably all of it.
Crypto-friendly policy developments helped. A heavily oversold market may have helped. Falling yields improved conditions for risk assets generally. The short squeeze clearly amplified the move (remember Gamestop and Melvin Capital?). Demand through spot bitcoin ETFs also rose – which tells me it’s not just crypto-native investors paying attention, but anyone with a brokerage account.
And long-term Treasury yields rebounded the day after the buyback announcement, effectively undoing Secretary Bessent’s work almost immediately. That gives you an idea of how uncertain the situation remains.
So it would be wrong to say investors saw $40 trillion in federal debt and rushed into bitcoin.
The more interesting conclusion is a lot more specific: Bitcoin is increasingly being discussed in the same context as Treasury bonds, gold and the U.S. dollar.
Treasury bonds and the dollar have been considered safe-haven assets for decades, since the mid-1980s. Gold has for over 5,000 years! Bitcoin, though? The newest kid on the block? Honestly, bitcoin volatility works against its safe-haven case. However, the inverse of that volatility – potential price growth – gives bitcoin a possible upside that’s literally off the charts.
Yes – an 8% daily gain makes headlines for the day, maybe the week. For long-term investors, though, the more important question looks like this: Why bitcoin is acting like (and being analyzed beside) the very same forces and assets shaping traditional markets?
There’s no simple answer to this question. (The complicated answer is what I explore every week – and thanks, by the way, for coming with me on this ride.)
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