Grayscale Research Says Government Debt Fuels 'Debasement Trade,' Boosting Bitcoin

The debasement trade is making a return, and bitcoin stands to gain from it, according to Grayscale’s crypto research team.

In a recent note, the asset manager’s research unit argued that the U.S. government’s currency debasement would push cash into digital assets.

“Unchecked government debt growth undermines the credibility of fiat currencies and drives investors to seek out alternative stores of value like physical gold and certain cryptocurrencies,” wrote Zach Pandl, head of research at Grayscale. The note added that bitcoin would be the primary beneficiary.

US public debt has reached over $40 trillion. The Treasury is buying back bonds to ease rising borrowing costs, but core deficit remains.

Grayscale Research believes this may drive investors towards the debasement trade: Bitcoin $BTC, Ethereum $ETH, and Zcash $ZEC.

The debasement trade refers to investors purchasing assets as a hedge against currency depreciation. It gained traction last year and contributed to bitcoin’s rally, though that momentum faded after October when attention shifted to AI-related stocks.

Since last week, however, bitcoin has been buoyed by news that the U.S. Treasury would at least double the scale of its liquidity-support buyback operations. That announcement weakened the dollar while boosting non-yielding assets.

“That buybacks are needed at all is the problem: heavy growth in government debt is driving up the cost of borrowing,” the note continued. “The Treasury is treating the symptoms (rising bond yields) because they cannot cure the disease (structural deficits).”

The note pointed out that on the same day as the buyback announcement, the Treasury also disclosed that U.S. public debt had surpassed $40 trillion for the first time.

With debt and interest payments expanding, the government faces options such as raising taxes, cutting spending, or issuing more debt. Bitcoin proponents view the more politically feasible route as expanding the dollar supply—negative for the currency but positive for scarce assets like bitcoin.

Following bitcoin’s surge last week, the dollar recorded its worst week of August and hit a three-month low.

On Friday afternoon in New York, bitcoin was trading at $77,493 after reaching a weekly high of $81,281. Over the past 24 hours, the coin remained flat, but over the past 30 days, it has climbed more than 20%.