Historically, sovereign bonds like the US Treasurys, Japanese government bonds and German Bunds have been go-to assets for risk-averse investors. They are usually perceived to be minimal-risk assets offering steady returns. However, since the emergence of Bitcoin 13 years ago, the narrative of Bitcoin as an alternative to bonds has been gradually growing in the minds of investors.
The interplay between the Federal Reserve's balance sheet and the M1 and M2 money supply is also a significant consideration to help understand why some investors are shifting to Bitcoin. The M1 money supply is a measure of the total amount of money readily available in an economy. It includes the most liquid assets: cash, demand deposits (checking accounts) and other similar checkable deposits. The M2 money supply is a wider measure of money supply than M1. It includes all of the M1 assets, combined with savings deposits, retail money market funds (MMFs) and small-time deposits.
The US Federal Reserve's actions on expanding and shrinking its $6.69-trillion balance sheet directly influence the M1 and M2 supply, which in turn affect inflation, bond yields and investor confidence in fiat assets. When the Fed adds or removes money, it changes how much cash (M1) and savings (M2) are available. These changes affect inflation, how much interest bonds pay and how much people trust traditional (fiat) money. In the past few years, the Fed has kept the federal funds rate in a high range between 4% and 5% and has also signaled that rate cuts might not be necessarily imminent.
On May 26, 2025, Moody's downgraded the US debt rating from AAA to AA1, citing fiscal instability and political dysfunction. Additionally, the Japanese bond crisis of 2024-2025 exemplified how a shift in the relationship between bond demand and yields, amplified by US tariff policies, can impact investor sentiment and the safe haven status of government debt. In this macroeconomic scenario, Bitcoin is
Billionaire hedge fund manager Ray Dalio is turning away from traditional bonds and embracing Bitcoin as a safer bet for the future. Speaking at Abu Dhabi Finance Week, Dalio warned that a looming debt crisis in major economies like the U.S. and China could disrupt financial stability. He's been vocal about the “unprecedented levels” of debt, which he believes are unsustainable, with the U.S. and China on a collision course with a debt crisis in the coming years.
Dalio, best known for founding Bridgewater Associates, has long been critical of conventional financial assets. With inflation eroding the value of currencies, he sees Bitcoin as a key “hard money” asset. “It is impossible for these countries to be able to not have a debt crisis,” Dalio said, emphasizing the uncertainty facing traditional bonds. He also pointed to gold's rise as a parallel to Bitcoin's increasing appeal, with Bitcoin recently hitting new all-time highs over $100,000.
Rising U.S. public debt has just recently surpassed $36 trillion USD which amounts to around 123% of GDP – the highest level ever recorded. This, coupled with increasing fiscal deficits and geopolitical tensions, raises inflation risks and erodes trust in traditional financial systems. As a result, investors are seeking alternative stores of value such as Gold or Bitcoin, moving away from U.S. Treasuries.
Bitcoin presents a compelling digital alternative. This eliminates counterparty risk, as Bitcoin holdings are not intermediated by a central entity and remain resistant to censorship or confiscation. Foss (2021) suggests that Bitcoin can act as "portfolio insurance" against sovereign bond defaults. Under a model linking Bitcoin's value to the default risk of G20 sovereign bonds—currently valued at $69.1 trillion with an average 10-year default probability of 6.2%—Bitcoin's "fair value" could already be in the thousands per BTC.
While gold remains the primary safe-haven asset, Bitcoin's technological advantages and adoption trends suggest it could challenge gold's status over the long term. Ahmed et al. (2024) provide further evidence of Bitcoin's hedge properties, showing a correlation between rising sovereign default risk and increased crypto adoption in emerging markets. With its decentralized, counterparty risk-free nature and growing scarcity, Bitcoin remains a compelling hedge against sovereign financial instability.
In a theoretical model, Bitcoin can serve as “portfolio insurance” against the default of a basket of major sovereign bonds with a current “fair value” of around 219k USD based on this model. Bitcoin can be an interesting alternative for investors looking to hedge both a sovereign default and hyperinflation scenario on account of its decentralised counterparty risk-free characteristics and its increasing scarcity.