The Fiscal Dominance Train and Bitcoin's Bullish Outlook for 2025

Briefing Notes contain: (1) a summary of podcast content; (2) potential information gaps; and (3) some speculative views on wider implications for Bitcoin. Most summaries are for Bitcoin-centered YouTube episodes but I also do some on AI and technological advance that spill over to affect Bitcoin.

Summary

The August 19, 2024 episode of Coin Stories features Lyn Alden analyzing how U.S. fiscal dominance and Treasury issuance shape markets. Alden links Bitcoin’s price most tightly to global liquidity and expects a more supportive environment as the Federal Reserve transitions from QT to balance-sheet growth. She outlines policy dynamics around bipartisan support, privacy and custody, and the strategic reserve debate.

Take-Home Messages

1. Fiscal dominance: Persistent deficits and issuance choices outweigh incremental rate moves in setting macro conditions.
2. Liquidity-Bitcoin link: Global liquidity remains the strongest correlate for Bitcoin’s price path into 2025.
3. Issuance trade-offs: Heavier T-bill reliance supports money markets but heightens rollover sensitivity and policy coordination needs.
4. Policy guardrails: Bipartisan footholds reduce hostile-action tail risks; the contested terrain is privacy and user custody.
5. User-level tech: E-cash models and open payment discovery can expand everyday Bitcoin use while testing regulatory limits.

Overview

Lyn Alden opens by characterizing the midsummer drawdown as a leverage washout, not a structural break, and criticizes inflated claims about carry-trade size. She underscores how fast reversals and book deleveraging expose market fragility and overreactions. The segment cautions against mistaking short-term panic for systemic stress.

She argues that fiscal dominance now sets the backdrop while incremental rate changes mainly affect sentiment at the margin. Treasury’s tilt to short-duration bills sustains liquidity yet raises rollover sensitivity, even as prior long-dated issuance holds average duration near norms. In this framework, modest cuts matter less than deficits, issuance composition, and balance-sheet policy.

On growth, Alden sees potential for a mild recession masked by conflicting labor data and sectoral divergence. She likens the setup to the early-2000s cycle but with stronger ongoing fiscal impulse, limiting typical disinflation. Her base case anticipates a shift from quantitative tightening to balance-sheet growth to maintain “ample” reserves, lifting global liquidity into 2025.

Turning to Bitcoin, Alden emphasizes the historical correlation with global liquidity over quarter-to-quarter catalysts. She highlights policy dynamics: bipartisan support that blunts extreme actions, alongside looming fights over privacy and custody. She also flags stablecoin-driven T-bill demand, sovereign reserve debates, and user-facing tools like e-cash wallets and payment discovery that could broaden usage.

Stakeholder Perspectives

1. Monetary authorities: Preserve ample reserves while contemplating the timing and scale of balance-sheet growth amid fiscal dominance.
2. Treasury and debt managers: Manage short-duration issuance to support liquidity without amplifying rollover and rate-path risks.
3. Legislators and regulators: Balance bipartisan support for Bitcoin with concerns over privacy, payments, and self-custody frameworks.
4. Institutional allocators: Align Bitcoin exposure with liquidity cycles, deficit trajectories, and policy inflection points.
5. Bitcoin builders and users: Advance privacy-preserving payments and reduce reliance on centralized custodians without inviting prohibitive rules.

Implications and Future Outlook

If the Federal Reserve pivots to balance-sheet growth while deficits persist, liquidity conditions likely improve into 2025. That backdrop historically aligns with stronger Bitcoin performance than narrow rate-path narratives suggest. Decision-makers should track issuance mix, reserve balances, and cross-border liquidity gauges, not just policy rates.

Policy outcomes hinge on whether bipartisan support stabilizes rulemaking while privacy and custody become the core regulatory battlegrounds. Clear, targeted standards can enable compliant innovation without pushing users into opaque channels. Ambiguity risks chilling investment and concentrating assets in a few custodians.

Stablecoin growth may expand global access to T-bills even as the United States wrestles with de-industrialization pressures linked to dollar demand. Sovereign Bitcoin reserve debates, while nascent, could signal shifts in asset-allocation norms and geopolitical messaging. User-level tools such as e-cash wallets may widen everyday use and complicate surveillance-centric approaches.

Some Key Information Gaps

1. How should policymakers weigh the real impact of structural deficits versus short-term Fed rate moves? Clarifying drivers of market conditions will improve macro management and investment planning.
2. In what ways can conflicting employment indicators be clarified to detect early-stage recessions more accurately? Better signals reduce the risk of mistimed or blunt policy responses.
3. How can bipartisan collaboration around Bitcoin prevent harmful overregulation while safeguarding users? Durable, cross-party frameworks lower tail risks and support responsible growth.
4. Which mechanisms and outcomes would arise if the U.S. government formally adopted a Bitcoin strategic reserve? Evaluating scenarios informs reserve strategy, market plumbing, and geopolitical signaling.
5. Are stablecoin-driven T-bill purchases reshaping global dollar usage enough to affect sovereign financing strategies? Understanding magnitude and transmission channels guides prudent debt and regulatory policy.

Broader Implications for Bitcoin

Liquidity-Centric Macroeconomic Playbooks

As balance-sheet tools eclipse small rate moves, institutions will need liquidity dashboards that integrate fiscal issuance, banking reserves, and cross-border dollar flows. This reframes risk management for allocators and supervisors who have over-indexed on policy-rate guidance. A liquidity-first lens could make Bitcoin exposure more programmatic for institutions during expansionary phases.

Privacy as the Policy Fault Line

Wider adoption of privacy-preserving payment tools will force regulators to separate illicit-finance concerns from legitimate user confidentiality. Jurisdictions that converge on proportionate, auditable privacy standards can attract capital and fintech talent. Overreach risks driving activity offshore, undermining surveillance aims and domestic innovation.

Reserve Composition and Signaling

Even exploratory sovereign allocations to Bitcoin would recalibrate reserve-asset signaling and benchmark construction. Blended reserve models could emerge alongside gold and high-quality collateral, reshaping hedging practices for public and private balance sheets. Over a 3–5 year horizon, index providers and risk frameworks may adapt to price such exposures explicitly.

Stablecoins and Dollar Channels

If stablecoins become mainstream conduits for T-bill demand, the dollar’s reach may deepen while domestic industry faces renewed competitiveness trade-offs. Policymakers will weigh seigniorage and market-depth benefits against structural deficits and external imbalances. Outcomes will influence payments policy, capital controls debates, and international standard-setting.

User-Centric Infrastructure and Custody

Growth in e-cash models and open payment discovery can decentralize custody and reduce single-point concentrations. This shifts operational risk, insurance needs, and consumer-protection design toward lighter, verifiable attestations. Over time, retail and municipal actors could adopt mixed-custody mosaics that complement institutional custodians rather than replace them.