Grayscale: The Credibility Crisis of Fiat Currencies and the Opportunities for Crypto Assets

I. Summary of Core Views

1. The Credibility Foundation of Fiat Currencies Faces Challenges:The core value of fiat currencies relies on a system of trust. Currently, due to the United States’ high public debt, rising bond yields, and uncontrolled deficit spending, the credibility of its commitment to maintaining low inflation has shown cracks. From a macro perspective, the strategies the U.S. uses to manage its debt burden are highly likely to trigger moderate or higher inflation; if holders of dollar assets form this expectation, they will turn to alternative stores of value.

2. The Store of Value Potential of Crypto Assets:Cryptocurrencies such as Bitcoin and Ethereum have the potential to become alternative stores of value. Their essence lies in being innovative, technology-based monetary assets. As vehicles for storing value, their core advantage is a programmatic and transparent supply mechanism and autonomy free from individual or institutional control. Similar to physical gold, their utility partly derives from fixed attributes and independence from political systems.

3. The Driving Logic Behind Crypto Asset Demand:If public debt continues to expand uncontrollably, the government's promise to maintain low inflation will lose credibility, and market doubts about the store of value function of fiat currencies will intensify. In this environment, macro demand for crypto assets is expected to continue rising; conversely, if policymakers take effective measures to reinforce the long-term credibility of fiat currencies, macro demand for crypto assets may decline.

4. The Core Value of Blockchain Technology:Investing in crypto assets is essentially investing in blockchain technology, which builds public transaction database networks based on open-source software and is reshaping the way money and assets circulate on the internet. Grayscale believes that blockchain technology will have a revolutionary impact on digital commerce, payment systems, and capital markets infrastructure. Its value is not limited to improving the efficiency of financial intermediaries, but also lies in providing new tools to hedge against the risks of traditional fiat money. Understanding blockchain technology requires knowledge of computer science and cryptography, while recognizing the value of crypto assets requires combining the characteristics of fiat currency systems with macroeconomic imbalances.

II. Fiat Currency: The Underlying Logic of Trust and Credibility

(1) The Operational Foundation of the Fiat Currency System

Currently, all major global economies use fiat currency systems. The currency itself (in paper or digital form) has no intrinsic value, but its value is anchored in a systemic framework. For the system to function effectively, expectations of currency supply must be stable—without a commitment to supply constraints, fiat currency would lose its basis for circulation. Therefore, governments must commit to controlling the size of the money supply, and the public evaluates the credibility of this commitment based on their own judgment. Essentially, it is a trust-driven system.

(2) Historical Experience and Institutional Improvements

Historically, governments have frequently breached trust by overissuing currency (causing inflation) to meet short-term policy needs, leading to natural skepticism about the supply constraint commitments of fiat currencies. To enhance credibility, countries have generally established institutional frameworks. The mainstream model today is to delegate the responsibility of managing the money supply to an independent central bank, with the central bank setting explicit inflation targets. Since the mid-1990s, this model has become the global mainstream and has been highly effective in controlling inflation.

Figure 1: The Role of Inflation Targets and Central Bank Independence in Building Trust

(Note: Data source is IMF, covering all developed market economies as defined by the IMF, as of August 2025. The 2025 inflation data is an IMF estimate; the Federal Reserve's inflation target is 2%. Except for the short-term spike after the COVID-19 pandemic, independent central banks with inflation targets have generally achieved low inflation management.)

III. Real-World Cases of Fiat Currency Failure

When fiat currency credibility is high, the market pays little attention to its store of value function—this is the ideal state for policy making. For those living in a low-inflation, stable environment, it may be hard to understand the necessity of "holding a currency that cannot be used for daily payments or debt repayment." However, in many economies worldwide, the demand for high-quality currency is extremely urgent. For example, in Venezuela and Argentina, people convert part of their assets into foreign currencies or cryptocurrencies, with the core demand being to obtain a reliable store of value.

Figure 2: Failure of Currency Supply Management in Some Countries

(Note: Data source is IMF and Grayscale Investments, covering the ten economies with the highest average inflation rates from 2022-2024 and 2024 GDP not less than $100 billion; the chart shows the average annual inflation rate for 2022-24 and the exchange rate change against the dollar for 2021-24.)

The total population of these ten high-inflation economies is about 1 billion. Cryptocurrencies have become an important "monetary lifeboat" for them, including not only mainstream cryptocurrencies like Bitcoin but also blockchain assets pegged to the dollar (such as Tether, USDT, and other stablecoins). The widespread use of stablecoins is essentially a new form of dollarization—that is, shifting from the local fiat currency to the dollar, a phenomenon that has existed in emerging markets for decades.

IV. The Global Dominance and Potential Risks of the Dollar

(1) The Dollar's Dominance as an International Currency

The dollar serves as both the domestic currency of the United States and the world's core international currency. Any risks to the dollar's stability have global implications. According to the Federal Reserve, the dollar accounts for about 60%-70% of international currency usage, far surpassing the euro (20%-25%) and the renminbi (less than 5%).

Figure 3: The Dollar's Global Dominance as an International Currency

(Note: Data source is the Federal Reserve, IMF, Bloomberg, and Grayscale Investments; export invoicing share is the simple average across regions. Data for OTC FX trading, international bank payments, FX reserves, external currency debt, foreign assets and liabilities, global stock market capitalization (based on MSCI ACWI Index), and global bond market capitalization (based on Bloomberg Multiverse Index) are as of July 2024; market cap data as of August 29, 2024.)

(2) The Unique Risks of the Dollar

It should be clear that the U.S. is not currently experiencing the kind of monetary mismanagement seen in the emerging economies in Figure 2. However, as the world's core currency, any risks to the dollar's stability affect all asset holders (not just U.S. residents). Compared to currencies like the Argentine peso or Venezuelan bolivar, the risk to the dollar is the core driver behind large-scale capital seeking alternative assets such as gold and cryptocurrencies. Although the U.S. does not face the most severe monetary stability challenges globally, its impact is the greatest.

V. Debt Issues: The Core Source of Dollar Credibility Risk

The value of fiat currency depends on commitment, trust, and credibility. The dollar is currently facing a credibility gap—the credibility of the U.S. government's commitment to maintaining long-term low inflation is steadily declining, fundamentally due to unsustainable federal deficits and debt levels.

(1) The Evolution of U.S. Debt Imbalance

This imbalance began with the 2008 financial crisis: in 2007, the U.S. deficit was only 1% of GDP, and debt stock was 35% of GDP. After 2008, the federal government's average annual deficit rose to about 6% of GDP. Currently, U.S. national debt has reached $30 trillion, about 100% of GDP (close to the level at the end of World War II), and is expected to continue rising sharply.

Figure 4: The Unsustainable Expansion Trend of U.S. Public Debt

(Note: Data source is the Congressional Budget Office (CBO), Yale Budget Lab, and Grayscale Investments; the July 2025 legal impact forecast is based on CBO long-term baseline data combined with Yale Budget Lab simulation results.)

(2) The Structural Dilemma of the Deficit Problem

High deficits have become a bipartisan problem in the U.S.—even when unemployment is relatively low, the deficit issue persists. Currently, U.S. fiscal revenue can only cover mandatory spending (such as Social Security, Medicare) and interest payments. Achieving a balanced budget would require politically sensitive measures such as tax increases or spending cuts, which are extremely difficult.

Figure 5: The Relationship Between U.S. Government Revenue and Expenditure as a Share of GDP

(Note: Data source is CBO and Grayscale Investments, as of 2025; the "deficit" in the chart is the difference between total revenue and total expenditure, showing that current revenue only covers mandatory and interest spending.)

VI. Interest Payments: The Constraint Bottleneck of Debt Expansion

Economic theory cannot define the "safe level of government debt"; the core measure is the cost of debt financing. If the U.S. government can still borrow at low interest rates, debt expansion may be sustainable and not materially impact institutional credibility or financial markets—some economists have recently taken a relaxed view of debt growth based on low financing costs. However, the decades-long global decline in bond yields has ended, and the constraints on debt expansion are starting to show.

Figure 6: The Constraint Effect of Rising Bond Yields on Debt Expansion

(Note: Data source is Bloomberg, as of August 2025; past performance does not represent future results. The chart shows that the long-term downward trend in bond yields has ended, and rising debt financing costs will constrain debt expansion.)

(1) The Supply and Demand Logic of Bond Yields

Like other asset prices, bond yields are determined by supply and demand. The U.S. government continues to increase debt supply, while in recent years, market demand for low-yield (high-price) U.S. debt has reached saturation. In terms of funding sources, the U.S. government relies on both domestic and overseas savers, but domestic savings cannot meet all borrowing and investment needs, resulting in the U.S. having both a large public debt stock and being a net debtor in international accounts.

Figure 7: U.S. Reliance on Overseas Savers for Financing

(Note: Data source is Bloomberg and Grayscale Investments, as of Q1 2025; negative values indicate U.S. liabilities to foreign creditors exceed its foreign assets.)

(2) Multiple Factors Behind Declining Overseas Demand

In recent years, overseas demand for low-yield U.S. government bonds has dropped significantly, due to factors such as slower official reserve accumulation in emerging markets and the end of Japan's deflationary cycle. In addition, changes in the geopolitical landscape may also weaken structural overseas demand for U.S. Treasuries.

(3) The Expanding Pressure of Interest Payments

As the U.S. government refinances its debt at higher interest rates, the share of interest payments in total spending continues to rise. Over the past 15 years, low bond yields masked the impact of rising debt stock on interest payments, but this buffer has now disappeared, making the debt problem much more urgent.

Figure 8: The Constraint of Interest Payments on Debt Growth

(Note: Data source is CBO, Yale Budget Lab, and Grayscale Investments; the July 2025 legal impact forecast is based on CBO long-term baseline data combined with Yale Budget Lab simulation results.)

VII. The Formation Mechanism of the Debt "Snowball Effect"

To control the debt burden, policymakers must achieve two main goals: (1) balance the primary deficit (i.e., the budget gap excluding interest payments); (2) ensure that interest costs are lower than the nominal growth rate of the economy. Currently, the U.S. primary deficit is about 3% of GDP. Even if interest rates remain stable, the debt stock will continue to rise; the risk of a "snowball effect" (i.e., interest rates exceeding nominal growth rates, causing the debt burden to accelerate) is increasing.

(1) The Core Equation of Debt Burden

Assuming the primary deficit is balanced:

• If the average debt interest rate < nominal growth rate, the debt burden (public debt / GDP) will fall;

• If the average debt interest rate > nominal growth rate, the debt burden will rise.

(2) Scenario Simulation of Interest Rates and Growth

Assuming the primary deficit remains at 3% of GDP and nominal GDP growth is stable at 4%, the speed of debt burden expansion varies significantly at different interest rate levels—the higher the interest rate, the more pronounced the "snowball effect" on the debt burden.

Figure 9: The "Snowball Effect" of Debt Burden in a High-Interest-Rate Environment

(Note: Data source is Grayscale Investments; simulation assumes the primary deficit is 3% of GDP, nominal GDP growth is 4%, showing the path of the debt/GDP ratio from 2025-2050 at different interest rate levels.)

(3) Structural Factors Behind Slowing Nominal Growth

With rising bond yields, the market generally expects U.S. structural GDP growth to slow: the CBO predicts potential labor force growth will fall from the current 1%/year to 0.3%/year by 2035. If the Federal Reserve can achieve its 2% inflation target (currently uncertain), lower real growth will lead to a decline in nominal growth, further accelerating the expansion of the debt stock.

VIII. Potential Outcomes of the U.S. Debt Problem

By definition, unsustainable trends will eventually end, and the disorderly expansion of U.S. federal government debt is no exception. However, the specific way it ends is uncertain. Investors must assess the probabilities of various potential outcomes based on data, policy actions, and historical experience. There are four core, non-mutually-exclusive outcomes.

Figure 10: Four Paths to Address Unsustainable Debt Growth

(Note: Data source is Grayscale Investments; the four paths are: fiscal contraction (balancing the budget or achieving a surplus through spending cuts/tax increases, i.e., "thrift"), booming economic growth (high GDP growth driven by technologies such as AI, i.e., "increasing income"), artificially low interest rates and inflation (maintaining low rates to overheat the economy and dilute debt through inflation, i.e., "inflation resolution"), and default (full or partial non-payment of debt).)

(1) Probability and Feasibility Analysis of Each Outcome

1. Default:Extremely unlikely. U.S. debt is denominated in dollars, and the cost of diluting debt through inflation is much lower than defaulting. The government has no incentive to choose default.

2. Fiscal Contraction:May become part of the solution in the future, but is not feasible in the short term. The recently passed "One Big Beautiful Bill" ensures that U.S. fiscal policy will maintain high deficits for the next decade, with little likelihood of reducing deficits through tax increases or spending cuts.

3. Booming Economic Growth:Ideal but unrealistic. The U.S. economy is currently sluggish, and potential growth is expected to slow further; although AI technology may drive a surge in productivity, it has not yet provided substantial growth support.

4. Artificially Low Interest Rates & Inflation:The most probable path. If the U.S. maintains interest rates around 3%, 2% real GDP growth, and 4% inflation, it could theoretically stabilize the debt stock without reducing the primary deficit. Although the Federal Reserve has independent monetary policy decision-making power, its independence is being questioned; historical experience shows that when fiscal pressure intensifies, monetary policy often yields to fiscal policy, and resolving debt through inflation becomes the "path of least resistance."

Based on the above analysis, Grayscale judges that the U.S. strategy for managing its long-term debt burden is highly likely to result in inflation rates consistently above the Federal Reserve's 2% target.

IX. The Return of Crypto's Macro Hedging Value

(1) The Demand Logic for Cryptocurrencies

Due to the U.S.'s massive debt stock, rising interest rates, and lack of effective solutions, the credibility of its commitment to controlling money supply and inflation has declined. The value of fiat currency essentially lies in the government's credible promise not to overissue money. If this promise is questioned, holders of dollar assets will be forced to reassess portfolio risks and seek alternative stores of value—cryptocurrencies are one such potential option.

(2) Classification and Value Positioning of Crypto Assets

Cryptocurrencies are digital commodities based on blockchain technology, with a wide variety and significant differences in use cases. Most are unrelated to the "store of value" function (e.g., public chain applications for payments, gaming, AI, etc.). Grayscale, in cooperation with FTSE/Russell, has developed a "Crypto Sectors" framework to classify crypto assets based on their core use cases.

Among the many crypto assets, only a few possess viable store of value attributes, which must meet three conditions: widespread market adoption, high decentralization, and limited supply growth. Currently, the highest market cap assets—Bitcoin and Ethereum—meet these standards. Their value does not come from "asset backing," but from two core advantages: (1) supporting peer-to-peer digital payments without censorship risk; (2) having a credible commitment to "no over-issuance."

(3) The Case of Bitcoin's Supply Mechanism

Take Bitcoin as an example: its supply cap is fixed at 21 million coins, with a current daily supply of about 450 coins, and the new supply growth rate halves every four years. This mechanism is clearly written into open-source code, and any changes require consensus from the Bitcoin community, free from control by governments, institutions, or other external entities (e.g., no need to overissue to repay debt). This "transparent, predictable, and ultimately limited supply" is the core feature that has driven Bitcoin's market cap past $2 trillion.

Figure 11: Bitcoin's Predictable and Transparent Supply Mechanism

(Note: Data source is Coin Metrics and Grayscale Investments, as of September 6, 2025; the left axis of the chart shows Bitcoin's current and maximum supply (in millions), the right axis shows the average daily supply change (in coins).)

(4) The Common Value of Cryptocurrencies and Gold

Like gold, Bitcoin does not generate interest and is not widely used for daily payments, but its core utility lies in its "passive attribute"—the supply is not affected by government debt repayment needs, and no institution can control its supply. This is its core hedging value when the credibility of fiat currency is shaken.

Currently, investors must allocate assets in an environment of "macroeconomic imbalance (especially uncontrolled public debt expansion)." The core purpose of holding crypto and other alternative monetary assets is to provide a hedging tool against fiat currency depreciation risk for the portfolio. As long as this risk continues to intensify, the value of crypto assets with hedging attributes is expected to further increase.

X. Potential Reversal Factors for Crypto Asset Demand

Crypto asset investment carries multiple risks. From a macro perspective, the core long-term risk is that the government restores fiat currency credibility through effective policies, which may include: stabilizing and reducing the government debt/GDP ratio, reaffirming support for central bank inflation targets, and strengthening central bank independence.

Fiat currency already has the attribute of a convenient medium of exchange. If the government can also ensure its effective store of value function, market demand for alternative tools such as cryptocurrencies will decline significantly. For example, gold performed well during the 1970s when U.S. institutional credibility was damaged, but its price performance was weak during the 1980s-90s after the Federal Reserve successfully controlled inflation.

Figure 12: The Correlation Between Inflation and Gold Prices (1980s-1990s)

(Note: Data source is Bloomberg; the chart shows the trend of U.S. inflation and gold prices in the 1980s-1990s, indicating that gold performed poorly during periods of declining inflation.)

Public chain technology has provided innovative momentum for digital finance. The highest market cap blockchain applications today are digital currency systems with "differentiated characteristics," and their demand is highly correlated with macroeconomic imbalances such as high public debt. Grayscale believes that in the long run, the growth of the crypto asset class will be driven by two factors: first, hedging demand triggered by macroeconomic imbalances, and second, market adoption of various innovative applications based on public chain technology.