Can Bitcoin Solve The Sovereign Debt Crisis?

The United States is facing a fiscal crisis of historic proportions. Ballooning deficits, runaway debt service costs, and the risk of a bond market meltdown are pushing the nation toward uncharted territory. Traditional solutions, whether austerity, tax hikes, or controlled inflation, are inadequate.

Could a radically different approach, leveraging bitcoin, chart a path forward? A thoughtful post by @stackhodler on X entertained the idea that bitcoin could play a role in addressing a sovereign debt crisis.

This thought experiment requires an understanding of how money systems evolve during times of upheaval, plus a little imagination. From the collapse of the Roman denarius to the end of the Bretton Woods gold standard, monetary resets are not new. How might bitcoin kick off the next chapter in global money?

A Debt Based System on the Brink

The problem starts with unsustainable debt. In the wake of trillions in COVID-era spending, the U.S. has grown dependent on short-term Treasury bills, leaving its finances vulnerable to rising interest rates.

Government spending is totally out of control, and the number of people who are partially or wholly dependent on government transfer payments has mushroomed. For all the consternation among conservatives about Democratic policies moving the U.S. in the direction of socialism, there is surprisingly little attention paid to the reality that it is already here.

As outlined in our earlier analysis, there is a danger that rising interest rates could lead to a debt spiral in Trump’s second term. Higher borrowing costs would beget more borrowing, which would fuel yet higher costs in turn. This would apply inflationary pressure to the dollar that would be difficult to counteract, even with the radical spending cuts promised by the DOGE initiative spearheaded by Elon Musk and Vivek Ramaswamy.

This feedback loop is hard to escape in the fiat system. Tax hikes slow growth, spending cuts invite backlash, and inflation – though politically expedient in the short term – would destroy the purchasing power of the voting public.

The result is a system teetering on collapse, where trust in the dollar erodes as global competitors like China siphon soft power away from the United States.

The question is: how could bitcoin fit into a solution for sovereign debt? Don your tinfoil hat and get ready to entertain a fascinating, if speculative, scenario.

Step One: Engineer a Strategic Reset

As U.S. policymakers recognize the inevitability of a monetary reset, the first move would be strategic devaluation of the dollar. By flooding global markets with dollars, the U.S. would trigger inflation across rival economies, destabilizing their currencies while counterintuitively protecting the dollar’s status as the premiere global reserve currency.

Sound familiar?

The inflationary result of the COVID and post-COVID debt bonanza was predictable, leaving one to speculate about why the powers-that-be allowed it to transpire.

The explanation need not require a grand conspiracy. The Cantillion Effect is reason enough. On an individual level, powerful politicians and financiers store their wealth in assets, not cash. Printing money does not put them at risk, since more dollars chasing the same number of scarce assets simply raises the prices of the assets they already own. And because they can use their privileged position to acquire assets with the newly printed money faster than the broader market can, they are even able to increase their wealth by snapping up more assets before inflation causes their prices to rise.

Combine that with the power to route newly printed dollars to institutions (and stakeholders within them), and you have strong incentive alignment among elites to print and spend as much money as quickly as they can. If they agreed in aggregate that the dollar’s demise is inevinable, you would expect to see them racing to print dollars and scoop up assets, while using their power to bestow money (and the assets it can buy) upon those in their trust networks to strengthen their positions in the social hierarchy.

This logic is sound, if perverse, and it would explain why the U.S. government spent trillions of dollars unnecessarily under the guise of COVID spending after the crisis was long over. If you’re in a car careening at high speed towards a chasm, and your brakes don’t work, you press down on the accelerator and hope that by increasing your speed you might make the jump to the other side. The other side is bitcoin – not because bitcoin is perfect or desirable, but simply because there is no alternative.

Step Two: Trigger Mass Bitcoin Adoption

For over a decade, the U.S. government has battled bitcoin – from the unjust withholding of approval to sell financial products involving it, to the frontal attack on bitcoin-friendly banks by the Biden-Harris administration. However, in 2024, the tune suddenly changed. The ultimate Big Finance insider, BlackRock, began selling and promoting bitcoin. Pension funds, family offices, and individual investors now have easy access to bitcoin exposure, with no need of technical knowledge.

Now that capital markets are open to large-scale adoption of bitcoin, the U.S. is free to pivot to endorse it as a reserve asset. Whether or not it is yet happening, it’s now indisputably possible for the masses to use bitcoin as a hedge against the declining dollar.

If the Strategic Bitcoin Reserve comes to fruition and the U.S. Department of the Treasury begins purchasing and holding bitcoin, other nations would need to compete by doing the same. Some would sell assets – including U.S. Treasury bonds. Others would print their currencies to purchase bitcoin. The result would be further acceleration of capital exiting the fiat system and entering the bitcoin ledger.

Step Three: Monetize The Debt Through Bitcoin Reserves

Suppose the U.S. Treasury acquires significant bitcoin reserves while simultaneously allowing the dollar to slide into oblivion. As bitcoin appreciates – potentially into multi-million-dollar territory in terms of today’s dollar purchasing power – it could offset the national debt in nominal terms. A hyperinflating dollar paired with appreciating bitcoin reserves would invert the current debt dynamic, allowing liabilities to shrink relative to assets.

Perhaps this is what President Trump was gesturing at when he suggested that the U.S. could pay off its $35 trillion debt with bitcoin. Much derided at the time, could this have been another example of Trump’s intuition being correct, if not clearly expressed?

Transitioning from the dollar to bitcoin wouldn’t come without pain. Dollar hyperinflation would create chaos and dislocation across the entire global economy. But bitcoin would provide a foundation on which to rebuild. And, those holding bitcoin – governments, financial institutions, and individuals – would have their wealth preserved through the upheaval.

Now that Americans have clearly marked exits to bitcoin, the U.S. economy could emerge in the 21st century strongly positioned to continue its dominance, while late adopters scramble to adjust.

Step Four: Usher In a Bitcoin-Based Economy

If bitcoin were to become a global reserve asset, it would herald a new era of fiscal discipline.

Unlike fiat, bitcoin’s fixed supply imposes natural constraints on government spending, forcing policymakers to operate within the bounds of sound money principles. Reckless deficit spending, forever wars, and currency debasement would become relics of the fiat past.

A bitcoin-based financial system wouldn’t just rein in excess, it would encourage investment in ultra-long-term, ambitious projects. Bitcoin would be used to underwrite energy resource development, infrastructure revitalization, and most importantly, interplanetary expansion. Freed from the distortions of fiat monetary policy, markets could allocate capital more efficiently, fostering an explosion of productive growth.

Looking Forward

This scenario is not as far-fetched as it may first seem. By historical standards, the dollar is past its sell-by date, and the postwar “rules-based international order” is clearly under renegotiation.

The sovereign debt crisis is a test of ingenuity and resolve. As nations and institutions recognize bitcoin’s potential, the competition to build reserves could intensify. The real winners would be those who moved first, securing their positions in a new economic order based on sound digital money.