What direction do U.S. Treasuries point for Bitcoin?

Author: Chief Analyst of HashKey Group, Jeffrey Ding

Introduction

At the beginning of the new year, the scale of U.S. national debt has exceeded $36.4 trillion. How will the U.S. debt crisis be resolved, and can the international hegemony of the dollar continue? How will Bitcoin react, and what will be the future replacement for international settlement units?

We will start with the U.S. debt economic model, then explore the current debt risks facing the internationalization of the dollar, and analyze whether the repayment plans for U.S. debt are feasible. Looking at history, let’s see where U.S. debt points Bitcoin.

Establishment of the U.S. Debt Economic Model

After the collapse of the Bretton Woods system, the dollar hegemony grew recklessly on the basis of a debt economic model.

Collapse of the Bretton Woods System: The Dollar Becomes a Fiat Currency

After World War II, the Bretton Woods system was established, linking the dollar to gold, with the International Monetary Fund (IMF) and the World Bank controlling the relevant rules, forming a dollar-centered international monetary system. However, the famous "Triffin Dilemma" accurately predicted the collapse of the Bretton Woods system: the demand for international settlements continued to grow, the dollar flowed out of the U.S. and settled overseas, leading to a long-term trade deficit for the U.S.; while the dollar, as an international currency, must maintain stable value, which requires the U.S. to have a long-term trade surplus. Coupled with the Vietnam War exacerbating the dual deficits, President Nixon announced the decoupling of the dollar from gold in 1971, transforming the dollar from a commodity currency to a fiat currency, with its value no longer guaranteed by precious metals but by the national credit of the U.S.

Establishment of the Debt Economic Model: Continuation of Dollar Hegemony

On this basis, the U.S. debt economic model was established: global trade is settled in dollars, and the U.S. must maintain a huge trade deficit to allow other countries to acquire large amounts of dollars; countries around the world purchase U.S. Treasury bonds to preserve and increase the value of dollars, then reinvest in U.S. financial products, causing dollars to flow back into the U.S.

As a world currency, the dollar is a global public good and should maintain value stability. However, after abandoning the gold standard, U.S. monetary authorities gained the power to issue currency, allowing the U.S. to change the value of the dollar according to its own interests. The dollar hegemony has been strongly sustained through the debt economic model.

Risks Facing Dollar Internationalization

The dollar faces risks from the U.S. national debt economic model and commercial real estate debt.

Dollar Internationalization Contradicts Manufacturing Reshoring

On the other hand, the U.S. needs to implement an economic strategy to promote the reshoring of manufacturing, which will reduce the trade deficit and lead to a long-term significant appreciation of the dollar, hindering the dollar's role as an international settlement currency. Although President Trump proposed reshoring manufacturing while also proposing high tariffs, which may benefit manufacturing in the short term, in the long run, it could lead to inflation, indicating a conflict between the two.

The idea of wanting both dollar hegemony and manufacturing is unrealistic. Currently, the pressure for dollar appreciation is not yet clear, and it is expected that the trade deficit will not fundamentally change in the short term, with depreciation pressure on the dollar prevailing.

Commercial Real Estate Debt Crisis

In addition to the risks associated with U.S. Treasury bonds, there are also debt risks in commercial real estate.

According to a recent report from Moody's, due to the continued expansion of remote work, the vacancy rate for office buildings in the U.S. is expected to rise from 19.8% in the first quarter of this year to 24% by 2026, with a reduction of about 14% in office space needed for white-collar industries compared to pre-pandemic levels. McKinsey predicts that by 2030, the demand for office space in major global cities will decline by 13%, and the market value of global office properties may shrink significantly by $800 billion to $1.3 trillion in the coming years.

CICC research shows that as of the end of 2023, commercial real estate loans accounted for 26% of total loans in the U.S. banking system, with large banks holding only 13% of commercial real estate loans, while small and medium-sized banks hold as much as 44%. The U.S. has experienced waves of bank bankruptcies and restructurings due to real estate risks in the late 1980s and 2008, and the risks in U.S. commercial real estate remain after the pandemic, showing no signs of improvement. The $1.5 trillion in commercial real estate debt in the U.S. is due next year, and if small and medium-sized banks face crises, it could trigger a financial crisis.

Analysis of U.S. Debt Repayment Plans

How to break this vicious cycle mainly depends on how such a large scale of U.S. national debt should be repaid. Borrowing new debt to pay off old debt is akin to a "Ponzi scheme"; the dollar will eventually lose its credibility and thus its status as a world currency, which is clearly not feasible. We will analyze whether the following repayment plans are feasible.

Selling Gold to Repay U.S. Debt?

Analysis of the Federal Reserve's Assets

The following chart shows the details of the Federal Reserve's assets as of December 4.

Source:Federal Reserve Balance Sheet: Factors Affecting Reserve Balances - H.4.1 - December 05, 2024

The main assets held by the Federal Reserve are bonds, including Treasury bonds and quasi-Treasury bonds, totaling about $6.57 trillion, accounting for approximately 94.45% of total assets.

The gold holdings amount to $11 billion, but this is calculated at prices after the collapse of the Bretton Woods system. If we refer to the exchange rate at the time of the complete collapse of the system, 1 troy ounce of gold = $42.22, and based on the spot price of about $2700 per ounce on December 11, the value of this gold is approximately $704.36 billion. Therefore, the adjusted gold holdings account for about 10% of total assets.

Liquidity Crisis of U.S. Debt

Therefore, some have proposed selling gold to repay U.S. debt. While it seems that the amount of gold is substantial, it is actually not feasible. Gold serves as a universally accepted currency based on international consensus, playing a crucial role in stabilizing currencies and responding to economic crises. The vast gold reserves give the U.S. significant influence in the international financial market. If the Federal Reserve sells gold, it would indicate a complete loss of trust in U.S. debt, suggesting that there is "no way out," and that it would rather weaken its own influence to fill the "black hole" of U.S. debt, which would undoubtedly lead to a liquidity crisis for U.S. debt, akin to self-sabotage.

Selling BTC to Repay U.S. Debt?

Recognition Issues of Bitcoin Checks

Trump once said, "Give them a little cryptocurrency check. Give them a bit of Bitcoin, and then wipe out our $35 trillion." Although BTC serves a role similar to a store of value among cryptocurrencies, it still has greater value volatility compared to traditional fiat currencies, and whether the check can be cashed at the recognized value remains to be seen; U.S. debt holders may not necessarily recognize it. Furthermore, the economies holding U.S. debt may not implement Bitcoin-friendly policies, such as China, which may not accept Bitcoin checks due to internal regulatory issues.

Insufficient Bitcoin Reserves for Repayment

Secondly, the amount of Bitcoin held by the U.S. is insufficient to resolve the debt crisis. According to data from Arkham Intelligence as of July 29, the U.S. government holds $12 billion in Bitcoin, which is merely a drop in the bucket compared to the $36 trillion in U.S. debt. Some speculate whether the U.S. could manipulate Bitcoin prices. This is unrealistic; the issue of extracting money is a concern for speculators, and facing the terrifying $36 trillion in national debt, even if the U.S. could manipulate Bitcoin prices, it would not be able to generate a solution with just $12 billion.

In the future, it is possible for the U.S. to establish Bitcoin reserves, but this will not solve the debt problem. Senator Cynthia Lummis has proposed that the U.S. establish a reserve of 1 million Bitcoins, but this plan remains controversial.

First, establishing Bitcoin reserves would undermine global confidence in the dollar, and the world would see this as a signal that U.S. debt risks are about to collapse, potentially causing interest rates to soar and triggering a financial crisis.

Second, the U.S. is currently negotiating whether to implement Bitcoin reserves through legal or executive orders. If Trump were to use an executive order to force the purchase of Bitcoin, it could easily be interrupted due to public dissent. The American public does not have a deep understanding of the potential dollar crisis, and if the Trump administration were to acquire a large amount of Bitcoin through executive means, it might face public skepticism: "Wouldn't this expenditure be better used elsewhere?" or even, "Is it necessary to spend so much money on Bitcoin?" Legislative measures would face even greater challenges.

Third, even if the U.S. successfully establishes Bitcoin reserves, it would only slightly delay the debt collapse. Proponents of using Bitcoin reserves to repay U.S. debt cite a conclusion from asset management firm VanEck: establishing a reserve of 1 million Bitcoins could reduce U.S. national debt by 35% over the next 24 years. This assumes that Bitcoin will grow at a compound annual growth rate (CAGR) of 25% to reach $42.3 million by 2049, while U.S. national debt will grow at a CAGR of 5%, rising from $37 trillion at the beginning of 2025 to $119.3 trillion at the same time. However, we can convert the remaining 65% of the debt into a specific amount, indicating that by 2049, there will still be approximately $77.3 trillion in national debt that cannot be resolved with Bitcoin. How will this huge gap be filled?

Dollar and BTC Pegging?

Another bold idea is that if Trump continuously releases positive news to boost Bitcoin prices, and then uses other methods to encourage countries around the world and the U.S. to settle transactions in Bitcoin, could this decouple the dollar from national credit and link it to Bitcoin, potentially solving the massive U.S. debt problem?

"New Bretton Woods System"

Linking to Bitcoin is akin to a return to the Bretton Woods system, similar to the dollar's link to gold. Supporters argue that the similarities between Bitcoin and gold lie in: rising mining costs as supply increases, limited supply, and decentralization (de-sovereignization).

The mining costs of gold rise as surface-level gold is extracted, similar to the increasing difficulty of Bitcoin mining. Both have a supply limit, making them good stores of value. Both exhibit decentralized characteristics. Modern fiat currencies are enforced by sovereign states, while gold naturally becomes a currency that no single country can control, as its supply and demand are distributed globally and relatively stable, with gold priced in different currencies having very low correlation with local risk assets. Bitcoin, due to its decentralized operation, can avoid regulation by sovereign governments.

Threat to Dollar Internationalization

The unreasonable aspect is that pegging the dollar to BTC would threaten dollar internationalization.

First, if the dollar is pegged to Bitcoin, it would mean that any group or individual has the right to issue their own currency using Bitcoin. Just like during the free banking era from 1837 to 1866 before the establishment of the Federal Reserve, when the right to issue currency was free, "wildcat banks" flourished—various states, cities, private banks, railroads, construction companies, stores, restaurants, churches, and individuals issued about 8,000 different currencies by 1860, often located in remote areas where wildcats outnumbered people, earning the nickname "wildcat banks" due to their extremely low viability.

Today, Bitcoin's decentralized nature means that if the dollar were to be pegged to Bitcoin, it would significantly weaken the dollar's international status. U.S. interests require the defense of dollar internationalization and the promotion of dollar hegemony, which would not be counterproductive, and thus would not promote a dollar-BTC peg.

Second, Bitcoin's high volatility means that if the dollar were pegged to Bitcoin, the real-time transmission of international liquidity could amplify dollar volatility, affecting the international community's confidence in the dollar's stability.

Third, the amount of Bitcoin held by the U.S. is limited. If the dollar needs to be pegged to Bitcoin, and the U.S. does not hold enough Bitcoin reserves, it would restrict its monetary policy.

Manipulating the Dollar through BTC?

Another voice suggests that if Bitcoin is the future "digital gold," can the U.S. manipulate Bitcoin like it did with gold to control the dollar?

Reviewing How the U.S. Manipulated the Dollar through Gold

After the 1976 Jamaica system, the interests of large investment banks, governments, and central banks aligned; fiat currency is based on confidence. If gold prices rise too quickly, it undermines confidence in the currency, making it difficult for central banks to control liquidity and inflation targets.

Thus, the U.S. suppressed gold prices to encourage capital to hold dollars, raising the value of the dollar. Conversely, it could raise gold prices to promote dollar depreciation.

If the U.S. were to manipulate Bitcoin prices, could it control the dollar? The answer is no.

Unrealistic to Manipulate the Dollar through BTC

First, Bitcoin operates on a decentralized network, and no single entity, including the U.S. government, can manipulate its price like it can with gold.

Second, Bitcoin captures global liquidity and is influenced by a complex array of international factors. Even if the U.S. wanted to manipulate Bitcoin prices, the effect would be greatly diminished.

Finally, even if the U.S. could manipulate Bitcoin prices, lowering Bitcoin prices would not necessarily lead to liquidity flowing into dollars. Bitcoin holders tend to have a higher risk appetite compared to traditional dollar holders and may turn to other high-risk assets. It is important to note that both the dollar and gold belong to high liquidity, low-risk asset categories, with overlapping safe-haven attributes and similar recognition, thus exhibiting a clear substitution effect, while there remains a distinction between Bitcoin and the dollar.

Killing the Creditors: Japan and the Jewish Financial Consortium?

Jewish Financial Consortium Should Not Be Challenged

In addition to state holders, the Jewish financial consortium plays an important role on Wall Street. About 80% of the debt is held by domestic investors and financial institutions in the U.S., such as pension funds, mutual funds, and insurance companies. Most shareholders of these financial institutions are Jewish, referred to as the Jewish financial consortium. Some believe that the Federal Reserve may leverage the growing public dissatisfaction with the "rich" to shift part of the blame for the economic crisis onto the Jewish consortium. We believe this move would be too costly and difficult to implement.

Attacking the Jewish consortium would affect economic stability, potentially leading to rising unemployment, stifled innovation, and declining investor confidence and international competitiveness. This is a self-destructive act, especially as the debt crisis approaches; such actions would only accelerate economic collapse.

Moreover, the Jewish consortium has strengthened its political influence over the years. For example, the Biden team has a high proportion of Jews, and the core members of his cabinet have remained particularly stable during his administration, unlike in other government periods, perhaps indicating that the Jewish consortium intends to step out from behind the scenes to seize power. In the future, it is foreseeable that the Jewish consortium will actively engage in political power to counter the U.S. government, making it not easy to target the Jewish consortium.

Impact of Debt Crisis on International Settlement Units

Therefore, we will see that the inability to repay U.S. debt and increased tariffs on goods will lead to imported inflation. If this interacts with the U.S. commercial real estate debt crisis, the effects will compound, and inflation will rise rapidly. A financial crisis is imminent; Bitcoin may experience a short-term decline alongside the financial market but is expected to rise in the long term.

Short-term Decline of Bitcoin

Bitcoin as Noah's Ark

In the long run, Bitcoin is expected to become Noah's Ark during the financial crisis, potentially becoming an important pillar of the future international settlement system.

First, Bitcoin is a strictly scarce liquid asset. In the face of significant depreciation of the dollar, Bitcoin can maintain its scarcity and has broad applicability globally, making people more willing to hold it as a long-term store of value. In other words, Bitcoin will be closer to the bottom of Exter's Pyramid, highlighting its safe-haven attributes. Despite being affected by short-term market sentiment, the precious nature of Bitcoin as a store of value will still be recognized by the market.

Second, the behavior of investors and consumers will also change after the crisis. The collapse of U.S. debt will be an epic shock, leaving devastation in its wake. Trust in financial institutions and sovereign states/governments and monetary authorities will collapse and be rebuilt. Bitcoin, as a relatively independent asset not controlled by states/governments, will become the top choice for future investments.

Thus, given that the debt economic model is unsustainable, the collapse of U.S. debt is merely a matter of time, and dollar internationalization will be severely impacted, the world will witness another wave of Bitcoin adoption.

Will Bitcoin Become Tomorrow's International Currency?

Once the dollar system collapses, what will take over the baton from the dollar and become the next generation of international settlement currency?

Looking back at the history of currency, the three main elements of currency are a measure of value, a medium of exchange, and a store of value. Among these, the most important is the function of a medium of exchange. In this regard, Bitcoin operates around the clock, without geographical limitations, and can evade sovereign state transactions, capturing global liquidity and completing transactions more effectively than traditional finance. In terms of value measurement, the application scenarios of Bitcoin are continuously expanding, effectively measuring the value of various goods and services. In terms of store of value, as Bitcoin mining continues, the marginal supply will decrease, further strengthening its function as a store of value.

Are there other fiat currencies that could potentially replace the dollar as the international settlement currency? Currently, there are no other fiat currencies that can rival the dollar. Moreover, after the explosive destruction of the dollar system due to the U.S. debt crisis, it is believed that people will have more doubts about traditional financial markets. If there were truly free currency, could it lead humanity towards genuine freedom and true decentralization, avoiding the impacts of traditional sovereignty on the economy?

Some may argue that there are cryptocurrencies that are technically more advanced than Bitcoin and can facilitate smooth transactions; why can't other cryptocurrencies become international settlement units? This is because value is based on consensus. Among cryptocurrencies, Bitcoin achieves the highest consensus, with the greatest recognition, the widest acceptance, and the strongest influence.

Therefore, in summary, Bitcoin already possesses the potential to become the next generation of international settlement unit; it remains to be seen whether the era will grant it the opportunity.