Grayscale: U.S. Treasury Buybacks are 'Symptomatic Treatment' as Shift to Cryptocurrency is Expected

On the 26th, U.S. asset management giant Grayscale published a report analyzing the expansion of U.S. Treasury buybacks by the Treasury Department. The company argued that the buybacks are merely a response to the symptom of rising interest rates and do not address the root cause of structural fiscal deficits.

On the 19th, the Treasury announced that it would double the scale of long-term bond buybacks from $2 billion to $4 billion per auction. It was also revealed that U.S. public debt had exceeded $40 trillion for the first time on the same day.

This debt has been consistently increasing since the global financial crisis, but initially, the impact on interest rates was limited as the private sector restrained borrowing due to the collapse of the housing bubble.

On the other hand, Grayscale analyzed that the current expansion of private funding demand, driven by investments related to artificial intelligence (AI), is pushing up interest rates as both the government and private sectors are simultaneously increasing their funding needs.

Grayscale noted that the endless increase in government debt undermines trust in fiat currencies, prompting investors to seek alternative stores of value with issuance limits, such as gold and certain cryptocurrencies. The company identified Bitcoin (BTC), Ethereum (ETH), and Zcash (ZEC) with privacy features as the main beneficiaries of this "debasement trade" (capital flight in anticipation of currency devaluation).

Small Scale Buybacks

The increase is expected to apply to bids from September 9 to November 4, with the additional scale to the regular refinancing plan remaining around $14 billion. Market participants view this additional amount as limited compared to the $40 trillion debt balance.

Persistent Skepticism

There are also differing opinions regarding the appropriateness of asset allocation. Some market participants suggest that Grayscale's inclusion of Zcash in its portfolio, following the recent listing of the Zcash Trust as a physical ETF "ZCSH" on the 25th, may be aimed at boosting its own products.

Additionally, some analysts argue that gold has a longer track record as a means of preparing for declining trust in fiat currencies, and that cryptocurrencies do not automatically gain superiority. There is also a view that in a scenario where real interest rates rise due to increased borrowing by both the government and private sectors, risk assets, including cryptocurrencies, are likely to decline.

The Treasury is set to announce its next regular auction on November 4, indicating that it will reassess the scale of buybacks.