Source: TradingView, CNBC, Bloomberg, Messari
Bitcoin Should Love a Moody’s Downgrade of the USA
On Friday, Moody’s
downgraded the United States’ long-term credit rating from AAA to AA1, marking the first time the U.S. has lost its top-tier rating from all three major credit agencies. S&P downgraded the U.S. in August 2011, and Fitch downgraded the U.S. in August 2023.
The August 2011 downgrade was due to political brinkmanship over the debt ceiling and doubts about the ability of U.S. policymakers to manage long-term fiscal issues. The S&P 500 dropped nearly 7% the following Monday (Aug 8), and paradoxically, U.S. Treasury yields actually fell because investors still viewed U.S. debt as a safe haven, even from itself. The VIX spiked, and gold prices surged. Bitcoin, of course, was still in its infancy, so its behavior was not super relevant. But during this period, Bitcoin’s price experienced a sharp decline from $13.43 on August 1, 2011, to $10 on August 8th, to $6.55 a week later. This decline was part of a broader correction following its first major rally earlier in 2011, and reflected the natural volatility and market dynamics of an emerging asset class, and likely was not directly linked to the U.S. credit rating downgrade.
In 2023, Fitch cited “expected fiscal deterioration,” high and growing government debt, and repeated political standoffs over the debt ceiling. The S&P 500 once again declined over the next few trading days, but this time, U.S. Treasury yields rose. Bitcoin went sidewise that week, but ultimately fell 10% over the next few weeks, before ultimately rising over 200% over the next 6 months.
Last week, Moody’s cited several key factors in its decision, including the rising debt-to-GDP ratio, persistent deficits, and lack of political will to enact fiscal reform. U.S. equity futures dropped only modestly, falling 1% Sunday night ahead of the Monday open. Meanwhile, the dollar weakened and gold prices rose by 1.4% as Treasury yields climbed back above 4.50%. Bitcoin was volatile over the weekend, but ultimately little changed.
Outside of a few investors and counterparties that require a AAA-rating, most of this is just semantics. Treasury Secretary Scott Bessent spent the weekend discussing how the U.S. is going to grow its way out of debt, rather than administer any sort of austerity. Ironically, the Republicans had just released their 1,116-page ‘One Big Beautiful Bill Act’, which accelerates America’s upwardly sloping trajectory for both deficits and debt.
Despite the muted reaction to Bitcoin and the initial dip with the equity futures open, I’d be shocked if Bitcoin does not hit all-time highs this week, post the Moody’s downgrade. If we’ve learned anything over the past decade, it’s that Bitcoin DOES NOT act like gold as a safe haven when markets are in disarray caused by wars, or leveraged unwinds, or fear trades. But Bitcoin absolutely DOES act as a hedge against loss of confidence in banks and local governments. In some ways, Bitcoin is just sovereign and bank CDS. And Moody’s downgrade of the U.S. is an explicit symbol of this decreased confidence. Bitcoin loves that, and should rally as a result.
Publicly traded companies and crypto
The hottest trend in digital assets is…. stocks. From Robinhood (HOOD) going parabolic on crypto growth, to Coinbase (COIN) entering the S&P 500, to Galaxy Digital (GLXY) finally getting listed on the Nasdaq (previously only on the TSX)... investors can’t get enough of digital asset proxies. But of course, these real companies pale in comparison to Microstrategy (MSTR) and its numerous copycats. MSTR has mastered the capital markets, bringing digital asset exposure to an entirely new audience via debt, convertible, and preferred offerings. And this has spawned a recent slate of SPACs, reverse mergers, and rebrands. You ain’t cool unless you’re adding digital assets to your corporate treasury balance sheet.
Most are just buying BTC, some are now buying SOL, and even TAO. A handful of the biggest are in the comp table below. The first thing to note is the high premium to net-asset-value (NAV), which on the surface seems incredibly unsustainable. Matt Levine at Bloomberg has written about this several times, citing that the company is essentially “
buying BTC for $100 and selling it for $200-400” due to the premium.
Source: Bloomberg, Arca Internal Calculations
Jim Chanos agrees, as he is the
latest to try the arbitrage trade of selling the high premium shares and buying the underlying asset (BTC). It likely won’t work though. For a few reasons.
The first is that MSTR is more appealing to volatility traders than BTC traders. The high volatility in the stock is exactly what convertible bond and preferred holders want to see, as they constantly delta hedge their position.
The second, and perhaps more important, answer is that the capital markets don’t care about the premium. They care only about the “BTC per share”. This means that as long as the number of BTC (or SOL or TAO) in the pot grows, they don’t care if the premium to NAV falls because the absolute value of the stock will still go up. Take this simple example. Let’s say a new shell company owns $100 million of Bitcoin, and the stock has a $500 million market cap (5x NAV). SHELLCO then issues $200 million of convertible bonds and buys $200 million of BTC with the proceeds. The price of BTC doesn’t move, but now the underlying BTC is $300 million. Let’s say the NAV compresses to 2x from 5x, so the stock now trades at $600 million. The stock still went up 20% (from $500M market cap to $600M market cap) even though BTC was flat, and the NAV collapsed. And therein lies the problem with the long/short trade. The value of the stock has nothing to do with the price of BTC itself, but rather, it has to do with whether or not the capital markets stay open for these trades.
Further, and this is WAY down the line, but you could argue that a premium to NAV actually makes sense. If Bitcoin truly does become a scarce asset, couldn’t these BTC shell companies become the “Berkshire Hathaway” of crypto? In this scenario, a company can buy any company they want at a lower price (and thus create a higher ROI), simply because they can pay in BTC while other suitors would have to pay in lousy old worthless fiat cash? That’s likely the end game for all of these companies. Fake it until you make it, and then use the most sought-after asset on earth to become a real portfolio of companies.
“So this brings about an interesting paradox. Why does a company have cash in the first place? If they just want the flexibility and fungibility, clearly there are better options now than holding cash in banks or brokerages that are closed more than half of the time. Further, if they plan to spend that cash, but everything that they might spend the cash on is going up in price due to inflation (stocks, capex, salaries), they’d presumably need to generate an ROI on that cash to keep pace. But then again, if they expect everything to go higher, why not just buy back their stock before it too goes higher. Of course, if they buy back stock, that money would then be gone when they might need it most (ahem, March 2020). Right now, perhaps purchasing Bitcoin really is the best solution to this conundrum -- Bitcoin increases transaction flexibility, keeps pace with inflation, keeps activist investors at bay, and provides a cushion during the next crisis.”
While it is undoubtedly bad for the rest of digital assets, as money continues to flow into publicly traded stocks that are loosely connected to crypto rather than crypto itself, it is undoubtedly good for the price of BTC itself (and any other asset being held on these balance sheets).
Good luck to your Mr. Chanos, but I think this will play out a lot like shorting Tether - a failed effort to pretend you’re involved in crypto, when you’re really just out of touch.
