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Cryptocurrencies under pressure: Understanding the impact of the U.S. rating downgrade


The credit rating agency Fitch Rating downgraded the long-term foreign currency sovereign debt ratings of the United States, removing its triple-A status from the world's largest economy. This event has a negative impact on cryptocurrencies as it is associated with an increase in global interest rates. The downgrade of the United States' ratings reflects the expected fiscal deterioration over the next three years, the high and growing burden of government debt, and erosion of governance.


When Fitch removes the triple-A rating from the United States, it indicates that the rating agency is less confident in the country's ability to honor its long-term debt obligations. This action is a result of the agency's analysis of the country's worsening public finances and fiscal challenges it faces.


A triple-A rating is the highest grade given by rating agencies, indicating that the country is highly reliable with low risk of default. Losing this rating may lead investors to perceive higher risk associated with U.S. debt, which can have several significant consequences, including an increase in interest rates.


When investors' confidence in the U.S. debt repayment capacity is shaken, they may demand a higher premium to purchase U.S. government bonds. This premium is reflected in higher interest rates as investors expect greater compensation for taking on additional risk.


The rise in global interest rates can lead to a devaluation of cryptocurrencies, as investors may prefer assets with higher yields, such as traditional bonds and investments, over cryptocurrencies. Moreover, the increase in interest rates may reduce risk appetite in the financial market, leading to capital outflow from higher-risk assets, including cryptocurrencies.


Another crucial factor is that the increase in U.S. interest rates can result in the appreciation of the U.S. dollar against other currencies, negatively impacting the value of cryptocurrencies denominated in currencies other than the dollar.


The appreciation of the U.S. dollar against other currencies reduces the attractiveness of risk-denominated assets in those currencies. This occurs as investors seek safety during uncertain times, moving towards safer assets like U.S. government bonds. With reduced demand for risk assets, investments in stocks, bonds of emerging countries, and commodities may decrease, negatively affecting their prices. Additionally, the appreciation of the dollar increases costs for investors who borrowed in other currencies, potentially leading to sales of risk assets to pay off debts, further accentuating price declines.


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