Bitcoin (BTC) Is Facing a Mix of Bullish Signals and Short-Term Uncertainty

Bitcoin (BTC) is facing a mix of bullish signals and short-term uncertainty. Moody's recent downgrade of the US credit rating has heightened long-term bullish

Credit analysis firm Moody’s has downgraded the U.S. credit rating by one notch from Aaa to Aa1, removing the world’s largest economy from the last perfect credit score among major rating agencies.

It’s the first time in over a century that the U.S. lacks a top-tier rating from all three, following downgrades by Standard & Poor’s in 2011 and Fitch earlier in 2023.

The downgrade comes amid increasing worries over the country’s fiscal health and signals more pain for the U.S. dollar and markets.

Here’s a breakdown of what happened, the market reaction, and why it matters for Bitcoin (BTC) in the long-term bull case.

Moody’s Cuts US Credit Rating As Fiscal Woes Continue

Moody’s has downgraded the U.S. credit rating by one notch from Aaa to Aa1, and also placed the outlook on the rating at ‘stable.’

It’s the first time in over a century that the U.S. lacks a top-tier rating from all three major credit agencies, after S&P downgraded the country in 2011 and Fitch earlier this year.

The last time the U.S. had a negative outlook on its credit rating was in 2011, when S&P downgraded the country’s rating, which led to the departure of then-Treasury Secretary Timothy Geithner and sparked a 12% crash in the stock market at the time.

The new downgrade comes with an assigned 3-year median probability of default of 0%, which is the lowest in Moody’s assessment matrix. Despite the low probability of default, Moody’s elaborated on the factors that drove the downgrade.

Rising US Deficits, Interest Costs Drive Credit Downgrade

The credit agency cited a "substantial weakening" in the U.S. government's fiscal strength, signaled by the rapid rise in government debt over the past decade and the prospect of further deterioration in the coming years.

It also pointed to the absence of any "material progress" on rolling back the long-term tax burden and the shortfall in efforts to broaden the tax base.

Moreover, Moody’s noted that the U.S. faces "increasing difficulties in advancing major socioeconomic legislation" despite the majority party’s control of Congress and the White House.

It added that the government’s debt burden is likely to grow over the next 10 years, even in a moderate economic scenario, due to the rapid aging of the population, which will push up spending on Social Security, Medicare, and other entitlement programs.

The agency expects the U.S. government’s debt to stabilize around 80% of GDP over the next two to three years, before eventually increasing again to 90% of GDP by 2035 in a baseline scenario.

It's worth noting that the agency's baseline scenario assumes an extension of the 2024 Trump-era tax cuts, which would deepen the U.S. deficits to 9% of GDP by 2035.

If the tax cuts are extended, it could further strengthen the case for Bitcoin and other cryptocurrencies as a hedge against long-term fiscal instability.

As the world’s reserve currency comes under more duress due to excessive spending and an accumulation of debt, investors are likely to seek alternative assets to preserve their wealth.

Bitcoin Is Consolidating As Exchange Supply Fells

After a brief uptick from 1.42 million to 1.43 million between May 2 and May 7, Bitcoin’s supply on exchanges is falling once again.

This short increase in exchange balances followed a more significant decline between April 17 and May 2, when the exchange supply dropped from 1.47 million to 1.42 million.

Now, the metric has resumed its downward trend from 1.43 million on May 7 to 1.41 million today, May 12.

The supply of Bitcoin on exchanges is a key market indicator. When more BTC is held on exchanges, it often signals potential selling pressure, which can be bearish.

Conversely, a decline in exchange balances suggests holders are moving their coins to cold storage, reducing near-term sell pressure—a bullish signal.

The current drop in exchange supply from 1.43 million to 1.41 million may indicate that investors are preparing to hold their Bitcoin rather than sell it at the prevailing market rates.

This aligns with the broader market trend, as Bitcoin's price has stalled in a short-term consolidation phase after encountering resistance around the $105,000-$106,000 zone.

As investors digest recent price action and await fresh catalysts for the next leg of the bull market, there's a potential for more lulls