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An announcement by the Treasury has ignited fears that money printing could return.
In order to stem the rise in longer-dated bond yields, Treasury Secretary Scott Bessent announced that a bond buyback program would triple in size from $2 billion to $6 billion.
Those amounts are tiny next to the $40 trillion in U.S. debt outstanding. But the move still sent the market a message: Public officials are willing to take action.
Rather than calming the bond market, assets geared toward something called “the scarcity trade” felt the most significant impact.
Here’s why the announcement sparked a rally in Bitcoin… and what the chart says about the next move.
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The Treasury’s buyback program invoked bad memories of quantitative easing (QE), the Federal Reserve’s program to create money in order to purchase Treasury securities.
QE increased the money supply, and investors questioned whether the Fed was simply printing money to cover government deficits.
This time, the Treasury’s move isn’t exactly QE. The buyback program is designed to issue short-term debt to buy back long-term debt, which means no net change in the money supply.
But that hasn’t stopped fears of currency debasement.
Currency debasement means a currency loses value – usually because the government expands the money supply.
While Treasury yields didn’t respond much to the announcement, the real impact was felt in the U.S. dollar and assets sensitive to its movements. Scarce assets tend to perform well when debasement fears are on the rise and the U.S. dollar is weakening.
Traditionally, precious metals were the primary beneficiaries of debasement fears. But in modern times, Bitcoin has emerged as the digital equivalent.
Bitcoin jumped following the announcement, and the chart tipped a rebound was in store. Now evidence is emerging that Bitcoin’s rally could be prone to a reversal.
Fears over currency debasement are delivering a boost to Bitcoin. But it was no surprise that a rally unfolded when it did.
The Bitcoin price area around $60,000 has been tested multiple times this year. It is also a key congestion zone tested numerous times in 2024. That makes $60,000 an important “make-or-break” level.
While Bitcoin was testing support, a positive momentum divergence formed. Take a look at the chart:
The shaded area shows the $60,000 support level. At the start of June, Bitcoin started testing support at “1.” A second test at “2” produced a lower low in price. But a positive divergence on the Relative Strength Index (RSI) showed downside momentum was fading.
That helped spark a rally, which picked up steam as Bitcoin surged above the 50-day moving average (MA – blue line) following the Treasury’s buyback announcement.
But the current move has left Bitcoin extended far above the 50-day MA. Meanwhile, a negative divergence is now forming in the RSI. That means Bitcoin is showing signs of a reversal lower.
Bond market intervention and QE fears will spark renewed volatility in Bitcoin. That means this is an asset to keep an eye on in the coming weeks.
For right now, the evidence suggests that Bitcoin’s rally has gone too far.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
