The price of Bitcoin (BTC +2.51%) topped $106,000 on Monday as investors reacted to Moody's (MCO 4.58%) decision to downgrade the credit rating of the U.S. government from Aaa to Aa1. Moody's was the last of the big three credit rating companies to strip the U.S. of its highest grade. It said, among other things, that it expected larger deficits to drive the government's debt burden up during the next decade.
CRYPTO: BTC
Key Data Points
The announcement spurred Bitcoin to its highest level since January and brought it close to its all-time high of about $109,000. Although Bitcoin's price is up, it does Moody's a disservice to call what it did a pump for Bitcoin because the word is usually associated with pump-and-dump scams. I'm sure that the jump in crypto prices that resulted from the ratings company's action was a side effect rather than a deliberate ploy.
Even so, it raises questions of how much of a hedge Bitcoin can be against a weakening dollar and how likely a dollar crisis might be.
Is Bitcoin a good hedge against a weak dollar?
There's often a negative correlation between the U.S. dollar index and Bitcoin -- when the dollar falls, Bitcoin often rises. Indeed, a wide cohort of crypto enthusiasts believe what's bad for the U.S. dollar is good for Bitcoin. As The Kobeissi Letter (an investment-focused subscription newsletter) posted on X, "Crypto is loving the Moody's downgrade."
Particularly during uncertain times, portfolio diversification makes sense. Investors often put money into commodities like gold as a hedge against drops in assets such as currencies and stocks. And many view Bitcoin as a form of digital gold. Like gold, its value doesn't rely on governments or central banks. Its supply is capped, which can insulate it against inflationary pressures. It is also easier to store and transport than physical gold.
As investors come to grips with the ramifications of a weakening dollar, the threat of renewed inflation, and recession warnings, Bitcoin's price rise is understandable. However, Bitcoin has a history of wide and volatile swings, and it's a relatively new asset. I can see many reasons a person might include cryptocurrency in their portfolio, but safety is not one of them.
Don't forget that it's only been about three years since Bitcoin finished a seven-month slide that left its price about 70% below its peak. If you're looking for an asset that will hold its value in an economic crisis, the leading cryptocurrency may not be the right choice. It wasn't around during the last protracted U.S. recession, so we have yet to see how it might perform when the economic chips are down. But we've seen how quickly it can drop even without a recession. And we know that investors tend to pull away from riskier assets like Bitcoin when the economy stalls.
Image source: Getty Images.
Is the U.S. dollar in crisis?
Moody's downgrade didn't have a big impact on markets, in part because it largely served to confirm something that people already knew. Nonetheless, the dollar's bull run may well be coming to an end, and many economists see evidence of a shift in attitudes.
For example, JPMorgan's private bank unit points out that this is the first time in years that U.S. stocks, bonds, and the dollar have all sold off at the same time. It argues that several factors have eroded confidence in the greenback, including U.S. policy uncertainty and a loss of trust in the nation's legal framework.
Even so, reports of a dollar demise are greatly overstated. The U.S. dollar is a dominant force in the world economy, and that won't change anytime soon. Not only does it act as a global reserve currency, but it is also the backbone of the international payment system. Schwab points out that the dollar is used for more than 80% of global financial market transactions.
Plus, in the extremely unlikely scenario where the dollar did collapse, it would almost certainly take Bitcoin with it. Sure, when Argentina or Venezuela experienced hyperinflation, some people in those countries did buy Bitcoin in a bid to preserve the value of their savings. The U.S. dollar is different -- it's the cornerstone of the world economy. It is hard to even imagine the global financial panic that would ensue if it fell, or a world in which Bitcoin did not collapse alongside it.
Bitcoin is still a risky asset
Diversification makes more sense than ever, so now would be a good time to look at the balance of your portfolio and consider including gold, Bitcoin, and international stocks in it. Just be wary about assuming that a lack of confidence in the U.S. is automatically good for Bitcoin.
Bitcoin may prove itself as a form of digital gold in the long term. However, while it has many things going for it, it is not there yet. Even with the U.S. debt up to $37 trillion and a Moody's downgrade of the nation's credit rating, it is hard to see Bitcoin as a safer investment than the U.S. dollar. One of those assets has been around for more 200 years and acts as a global reserve currency. The other is a mere toddler taking its first steps into the world.
