Bitcoin and gold surge after US elections, but $378 million short squeeze casts doubt on debasement trade

Bitcoin's rally above $81,000 alongside gold has revived speculation that investors are seeking protection against the weakening US dollar.

The largest cryptocurrency rebounded from about $75,600 on Nov. 4, while gold futures surged 3.4% to $4,061.10, their biggest daily gain in three months. The dollar also weakened as investors digested the Democrats' sweeping victory in the US midterm elections.

The simultaneous gains revived talks of “the debasement trade,” a strategy in which investors buy scarce assets such as Bitcoin and gold to protect their wealth against currency depreciation and mounting government debt.

However, broader financial markets told a more complicated story. The S&P 500 jumped 1.6%, the Dow gained 3%, and Treasury yields declined as investors welcomed the prospect of reduced political uncertainty and constraints on President Donald Trump's fiscal agenda.

Those developments suggest Bitcoin's recovery could have more to do with improving market sentiment than a fundamental shift in how investors view the dollar.

The argument that Bitcoin is increasingly behaving like gold has gained traction among institutional investors in recent months.

In August, Grayscale reported that Bitcoin's 90-day correlation with gold had climbed above 0.50 from almost zero earlier in the year. Its correlation with the Nasdaq-100, meanwhile, declined from more than 0.60 to approximately 0.33.

Bitwise subsequently found that Bitcoin's relationship with gold had reached its strongest level since 2020, when extraordinary fiscal and monetary stimulus heightened concerns about the purchasing power of traditional currencies.

Those concerns have a substantial economic foundation. The Congressional Budget Office projects that the US federal deficit will reach $1.9 trillion in 2026 before expanding to $3.1 trillion by 2036, with publicly held debt rising to 120% of GDP.

Yet Wednesday's market reaction offered another explanation for why Bitcoin and gold moved together.

The 10-year Treasury yield declined from approximately 4.95% to 4.89%, while market expectations for inflation over the next year fell from about 2.4% to 2.1%.