U.S. Debt Growth Mirrors Bitcoin’s Global Popularity
On April 5, the U.S. Bureau of Labor Statistics (BLS) released the latest reading on the U.S. labor market. The number smashed expectations with a headline of 303,000 jobs created versus an expected 214,000. Short-term interest rates moved higher as hopes for Fed interest rate easing faded, and the initial direction in dollar hedge assets, like bitcoin and gold trended down. The weakness, however, did not last long and by the end of the day's trade bitcoin was unchanged and gold was higher.
The curious move in these assets may be explained by the internals of the labor data. Although the headline jobs number beat predictions, it became apparent that a disproportionate number of the new jobs were in government or government-related sectors. This seemed to draw market attention to the exploding federal government debt that appears to be paying for macroeconomic growth in the short term, potentially at the expense of the U.S. dollar in the long term. At the current pace, the federal government is accumulating one trillion dollars in debt every 100 days. For reference, the cost of debt service in the U.S. has now eclipsed the defense budget. In the last several weeks, several prominent voices within the economics world, including Ken Griffin and Jay Powell, have issued warnings regarding the unsustainability of the current fiscal system. As the reality settled in, both gold and bitcoin had sharp rallies from April 5th to April 8th, with bitcoin up over 7% in the three days and gold up over 2% in the same period.
Bitcoin’s outsized performance boost may be driven by several secondary factors. In approximately two weeks, bitcoin will experience its fourth "halving", which will reduce the monetary award for mining bitcoin by 50% and, theoretically, boost the price by limiting new supply. Additionally, there is a headline out of Asia that may prove to be a tailwind for the asset. Two of China's largest asset managers, Harvest Fund and Southern Fund, are rumored to have applied for a spot Bitcoin ETF through their Hong Kong subsidiaries. Even if these are only rumors, they underscore a market belief that institutional adoption continues at a blistering pace.
Another interesting development within the crypto space is the loss of market share by the second biggest coin, Ethereum. In January of 2023, Bitcoin was approximately 40% of the total crypto market cap and Ethereum was 19%. At current levels, Bitcoin is now 52% of the total while Ethereum slipped to 16%. Part of the explanation is the launch of the U.S. Bitcoin ETF coupled with the upcoming halving. Another reason for the Ethereum underperformance may be the emergence of the upstart coin, Solana. In January of 2023, Solana was only .5% of the total crypto market cap. That number has increased to over 3%. Of course, Solana remains relatively small. It is currently the fifth largest coin, but the move is worth monitoring.
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