In its latest macroeconomic outlook report, the International Monetary Fund (IMF) pointed out that global public debt is rapidly increasing. At the current trajectory, the IMF predicts, public debt worldwide will reach 100 percent of global gross domestic product (GDP) by 2029. In such a situation, it is expected that every unit of income produced in national economies will go to pay off the debts of governments, leaving no resources for new investments and social needs.
Global debt spiral and potential impacts
The IMF report stated that the USA and China led the increase in debt, and that the increase in defense expenditures in many countries also aggravated the debt burden. While the expansion of defense budgets creates additional pressure on public finances, it further increases the general debt stock.
The report stated that if the economic growth rate cannot keep up with the new borrowings of governments, markets may begin to question the fiscal strength of governments, which may cause bond yields to increase. If investors demand higher returns on government bonds, governments may have to bear a higher interest burden when servicing their debt.
Scenario of turning to Bitcoin
In this environment warned by the IMF, assets such as bitcoin may come to the fore due to its decentralized structure and not being affiliated with any state or central bank. Cryptocurrencies stand outside the traditional financial system, providing an alternative for investors in times of global economic stress.
Bitcoin’s history shows that investor interest increases during financial turbulences such as banking crises. Following the Cyprus banking crisis in 2013, losses imposed on depositors caused bitcoin to rapidly gain value. Similarly, during the regional banking problems in the USA at the beginning of 2023, bitcoin recovered from the level of approximately 25 thousand dollars and entered an upward trend. CryptoAppsyAccording to , these periodic increases stand out as a remarkable indicator for crypto.
The fact that global debt exceeds GDP may change investors’ risk perception and the tendency towards alternative assets may increase. Bitcoin’s decentralized structure and its supply limited to 21 million make it attractive compared to fixed income investment instruments.
Bond yields and crypto assets
According to experts, rising bond interest rates can generally create a negative outlook for risky assets such as bitcoin. Because while bonds provide a fixed return, investors cannot earn income from the money held in bitcoin in return for this return, and this is where the “opportunity cost” arises. As this opportunity cost increases, the transition from risky assets to bonds may accelerate.
As of the end of 2021, when the US Central Bank Fed started to increase interest rates, bitcoin experienced a decline from approximately 70 thousand dollars to 16 thousand dollars. At that time, the rise in bond yields weakened the “digital gold” narrative of cryptocurrencies and increased the selling pressure. However, the reason for the interest rate increases at that time was the aim of reducing inflation rather than concern about the fiscal strength of governments.
The IMF’s latest report may change the picture. Because this time, if the rise in interest rates occurs due to the risk of states not being able to pay their debts, the exit from traditional assets may accelerate and investors may turn to bitcoin or similar alternative investment instruments.
The reason for this is that, in the face of increasing debt burden, most states may choose to borrow more, cut public expenditures, raise taxes or cause inflation to reduce the real value of the debt as a solution. However, all these methods reduce the real income of fixed income investments.
Bitcoin, on the other hand, is seen as more resistant to these economic fluctuations thanks to its limited supply and independent structure from central banks. Experts state that the IMF’s warnings increased the long-term interest in bitcoin, and large institutional investors began to include more of this asset in their portfolios for similar reasons.
