In an unexpected turn of events, renowned global rating firm, Fitch, has downgraded the US government’s credit rating from AAA to AA+. This was motivated by a forecast of financial degradation over the coming three years, alongside growing government debt burden and the ongoing trend of governance lapses, evident in recurring debt limit stalemates and last-minute resolutions. It’s interesting to note the first such downgrade occurred 12 years ago, courtesy of another rating agency, Standard & Poor’s (S&P), following a strikingly similar debt ceiling standoff.
Janet Yellen, the US Treasury Secretary, dismissed the decision as arbitrary and accused it to be based on obsolete data. Despite the shock amongst investors, the market impact was minimal. Observing from the world of cryptocurrencies, Bitcoin was found trading just over the $29,400 mark, showcasing an applaud-worthy rise of almost 3% from its early-day lows.
However, caution flags are being raised. The last time S&P downgraded US’ credit rating in 2011, the stock market witnessed a sell-off, stemming from a hit to investors risk appetite. Fears are growing that this instance may lead to a similar domino effect, particularly with S&P 500 futures currently trading around 0.3% lower at the start of the Wednesday Asia session.
This could potentially place the crypto market in the line of fire, inducing intensified sell pressure. However, it is worth noting that the US economy, in recent weeks, came out to be performing extraordinarily commanding. So, investors might not be overly critical of Fitch’s decision for now. The forthcoming US labor market data, expected on Friday, could play an influential role in the investment scenarios.
On one hand, crypto enthusiasts argue that the downgrade mirrors the deteriorating long-term economic fundamentals that impart value to scarce cryptocurrencies like Bitcoin. According to these proponents, an ever-growing US debt burden essentially chips away the value of the US dollar, partly due to the inflationary aftermath of deficit spending.
Crypto advocates may latch on to Fitch’s downgrade as more ammunition to support their idea that the conventional, fiat-based US economic structure is weakening. They suggest a transition to a decentralized financial system steeped in cryptocurrencies like Bitcoin and smart-contract-enabled blockchains like Ethereum.
Despite the arguments, it is unlikely that this development will trigger near-term buying pressure. The attention of most crypto traders is currently riveted on topics like applications for Bitcoin ETF spots and the ongoing SEC’s regulation by enforcement drive. A severe incident underscoring the frailty of the conventional fiat-based financial system could be the spark to ignite a fresh wave of safe-haven demand for crypto.
Source: Cryptonews
