August 2026 in Crypto: Summer Doldrums 0 – Crypto 1

It is not just tradfi assets that typically succumb to the summer doldrums, the same also holds for digital assets. In fact, as the image below clearly demonstrates, historically August is the weakest month in terms of crypto returns.

Bitcoin Monthly Returns Since Inception

Source: Coinglass

Proxied by Bitcoin, given it has the longest back-history of any major token, nine of the fourteen Augusts closed in the red, generating a median monthly return of -7%. However, 2026 proved to be the exception to this general rule, with a slew of macro factors contributing to pushing up the value of our flagship large cap Top10 CTI by over 22% – see image.

Trakx Top10 Crypto CTI

Source: Trakx

Indeed, what appeared to be a relatively straightforward rally initially driven by expectations of a more dovish Fed evolved into something considerably more interesting. And, while softer US employment data certainly helped set the tone for the month, it was ultimately US fiscal, not monetary, policy that provided the more powerful catalyst for digital assets.

Soft US Payrolls

July’s US non-farm payroll report, released on August 7, came in significantly below expectations, with employment falling by 23,000 compared with the 80,000 increase expected by consensus forecasts. Moreover, the weakness was compounded by substantial downward revisions to previous months. June payroll growth was revised from +57,000 to just +20,000. Even though the report was not uniformly soft, with the jobless rate declining to 4.1% from 4.2%, on balance the report suggested that US labour market momentum had deteriorated materially.

The immediate market reaction was decidedly dovish. Before the release, markets had been pricing roughly a 55% probability of a 25bp rate hike at the September FOMC meeting. Following the payroll number, that probability fell to around 36%, as investors began to anticipate the Fed remaining on hold in order to assess whether the labour market was genuinely weakening – see image.

Expectations for the September Fed meeting (Pre-Jackson Hole)

Source: CME Fedwatch Tool

For digital assets, the reaction to the softer US labour data was consistent with the traditional “bad news is good news” macro trade. By reducing the perceived likelihood of further monetary tightening by the Fed, and potentially bringing forward the point at which liquidity conditions become more supportive for risk assets, the major tokens gained on the release.

However, the dovish expectations were fully reversed after Chair Warsh’s inaugural speech at the Jackson Hole Symposium – one of the most important events in the Fed speaking calendar because it provides the institution’s leadership with the opportunity to lay out their broadest thinking on the economy and monetary policy.

While continuing to eschew forward rate guidance (“we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade”) Warsh made clear that despite “better than expected” US inflation data recently, the underlying trends had not meaningfully improved. Indeed, he commented that “the responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank”, phrasing investors took to mean that a rate hike, if not a slam dunk, was firmly back on the cards for the September meeting.

Expectations for the September Fed meeting (Post-Jackson Hole)

Source: CME Fedwatch Tool

Interestingly, despite the yoyo in investor expectations about the September FOMC meeting, the detrimental impact on crypto was modest, with digital assets able to hold on to the bulk of the monthly gains. This is because it was US fiscal, rather than monetary policy, that was the key propellant for digital asset prices last month.

Treasury’s Buyback Expansion

On August 19, the US Treasury made a move that on paper was technical but which investors — correctly in our opinion — viewed as anything but. According to the press release, the US fiscal authority would expand the size of its buyback operations for longer-dated US government debt, raising the ceiling from $2bn per operation to at least (author emphasis) $4bn across the 10-to-30-year maturity buckets. The expanded operations are slated to begin on September 9 and run through the end of the current refunding quarter in early November, when Treasury is expected to revisit sizing at its next Quarterly Refunding.

The official language used in the announcement was studiously mundane, with the increase attributed to a desire for greater liquidity support in longer-dated sectors. Read in isolation, the shift appears to be one of financial plumbing rather than policy. But, as alluded to above, not many investors were convinced.

Politics Not Plumbing

For one, the announcement came after a rather substantial back-up in US long-term interest rates, with the yield on the 30-year nominal bond having hit 5.3% just two days earlier — its highest level in almost two decades.

Due to the way the US financial markets work, US Treasury yields act as key benchmarks for many other financial products, chief among them US mortgage rates. Since the Iran war began yields at the back-end of the US Treasury curve have risen by more than 70bp, dragging 30-year mortgage rates towards 6.75%, a move that negatively impacts many US households’ budgets at a time when they are already under pressure from rising energy prices.

With the US mid-terms just several weeks away, and the polls suggesting they could go either way – see image below – there are obvious political consequences from allowing long-term borrowing costs to continue rising. The Treasury’s decision to upscale its buyback programme should therefore be viewed against this broader backdrop.

Balance of Power: 2026 Midterms

Source: Polymarket

Relative to the level of US federal debt, now above the $40tr mark , the outstanding stock of long-term Treasury securities of approximately $13tr, or the annual budget deficit of around $1.9tr (almost 6% of nominal GDP), the scale of the current buyback programme appears extremely modest. However, the significance of the announcement lies less in the size of the purchases than in the policy option it creates.

There is another reason why the Treasury’s willingness to intervene in the long end of the market may prove important. The administration is simultaneously using the US financial system as an increasingly powerful instrument of foreign policy, most notably in its efforts to isolate Iran. While these policies are ostensibly unrelated to Treasury market management, they share a common vulnerability: the US government relies heavily on foreign investors to absorb its enormous stock of outstanding debt.

If geopolitical tensions were to cause one of the largest foreign holders of US government securities to reduce its willingness to finance Washington, the pressure on long-term yields could become considerably more acute.

China In The Cross Hairs

Indeed, alongside announcing the expansion of the Treasury buyback programme, Secretary Bessent unveiled a significant escalation in the administration’s economic campaign against Iran. Labelled “the single greatest financial offensive ever” against Iran, the objective of this so-called “economic D-Day” is to sever the remaining financial and commercial channels through which Tehran generates revenue and to force its international partners to choose between continuing to deal with Iran and maintaining access to the US financial system.

Critically, the measures extend beyond Iran itself. Bessent warned that countries, banks and companies continuing to facilitate Iranian trade would face increasing financial isolation.

Why is this important?

Because China is by far Iran’s most significant economic partner. The Middle Kingdom purchases roughly 90% of Iranian crude oil exports, making it an essential source of revenue for Tehran. The administration therefore faces a potentially uncomfortable dilemma. The more aggressively Washington seeks to enforce secondary sanctions against Iran’s trading partners, the greater the risk that what began as a confrontation with Tehran becomes a confrontation with Beijing.

China has several potential avenues for retaliation. One of the more obvious is to apply further restrictions on strategically important commodities, including rare earth metals and other materials in which China occupies a dominant position in global supply chains. Such measures could be particularly problematic for the US given the importance of these inputs to advanced manufacturing, electronics and – critically – the defence industry.

There is, however, another potential response that is directly relevant to the Treasury market.

Even though China has been steadily reducing its holdings of US government paper over the past several years – see image – it remains one of the largest foreign holders. According to the latest US Treasury data, mainland China held approximately $633bn of Treasury securities as of June 2026, making it the third-largest foreign holder behind Japan and the UK. Including state-controlled or affiliated commercial banks and financial institutions, China’s broader exposure to US government securities could plausibly be closer to $1tr, although this figure is necessarily less precise given the difficulty of attributing securities held through offshore custodians and intermediaries.

Mainland China’s Holdings Of US Treasury Securities

Source: US Department of the Treasury,

It would be wrong to assume that China would simply liquidate this portfolio in response to sanctions (a longstanding market fear). Indeed, there are good reasons why Beijing might be reluctant to do so. A large-scale sale would push down the value of China’s remaining holdings, potentially dramatically strengthen the CNY (not good when you are the world’s largest goods exporting nation) and disrupt one of the world’s most important financial markets. Nevertheless, the threat is important even without an actual fire sale.

The more realistic risk is incremental: weaker Chinese demand for US government debt, combined with a higher risk premium demanded by other foreign investors as geopolitical tensions increase. In other words, the issue is not whether China suddenly sells $633bn of Treasuries, but whether it becomes less willing to accumulate additional US government debt at existing yields.

This matters because the Treasury market is already operating against an unusually challenging backdrop. Any indication that one of the world’s largest official holders is becoming a less reliable source of marginal demand could therefore have an outsized effect on the price investors are willing to pay for Treasury securities. This is precisely why the Treasury’s decision to expand its buyback programme becomes more interesting when considered alongside the Iran sanctions.

If the administration succeeds in forcing China and other countries to reduce their economic relationships with Iran without materially damaging the Treasury market, the strategy may prove highly effective. If, however, secondary sanctions trigger retaliation from Beijing or simply accelerate the gradual diversification of FX reserves away from US government debt, the Treasury market could face an additional source of upward pressure on long-term yields. This would be particularly problematic because it would arrive at precisely the moment when the US government appears increasingly unwilling to tolerate materially higher long-term borrowing costs.

The more aggressively Washington weaponizes the US dollar-based financial system, therefore, the greater the risk that it eventually undermines one of the principal sources of demand for the US government debt. For the Treasury, this raises an obvious question: if foreign demand were to weaken, what additional flexibility does it have to support the Treasury market?

One answer is sitting on the Fed’s balance sheet.

Treasury’s Flexibility: The General Account

The Treasury General Account (TGA) is effectively the US government’s bank account at the Fed. At the time of writing, it holds approximately $940bn. Secretary Bessent has indicated that the enlarged buyback programme can be funded using the TGA, meaning the Treasury does not necessarily need to issue additional short-term debt specifically to finance the purchases..

The mechanics are relatively straightforward. When the Treasury buys a government bond from an investor, it pays for that security using funds held in its TGA. The Treasury’s cash balance at the Fed consequently falls, while the commercial bank receiving the payment sees its reserve balance at the Fed increase. At the same time, the private sector holds fewer long-duration Treasury securities and more cash or bank deposits. In simplified terms, the transaction exchanges a government liability with a relatively long duration for one that is effectively cash-like.

It is important to stress that this is not QE of the type investors became accustomed to during the GFC or the pandemic. The Fed is not buying the bonds, its securities portfolio does not increase and the Treasury is not literally creating money. Nevertheless, the operation can have some of the liquidity characteristics associated with monetary easing. This distinction could become increasingly important if the US Treasury were to substantially expand the programme.

For example, a hypothetical $100bn of TGA-funded buybacks would result in $100bn less long-duration Treasury securities being held by the private sector and, all else equal, $100bn more in bank reserves following the movement of funds out of the TGA. A much larger programme — say $250bn or $500bn over a number of months — would begin to look considerably more consequential from a liquidity and market-function perspective.

There is, however, an important limitation. The current TGA balance should not be interpreted as $940bn of spare capital that the Treasury can simply deploy on bond purchases. It needs to maintain a cash buffer to meet government expenditure, debt-service payments, tax refunds and other obligations. Indeed, current financing estimates assume an end-September cash balance of approximately $950bn, falling to around $850bn at year-end.

This suggests that the amount of TGA cash that could be deployed immediately without changing the Treasury’s existing cash-management assumptions is relatively modest. That being said, the TGA is not a static pot of money. It is continuously replenished by tax receipts and Treasury borrowing and depleted by government spending, debt repayments and other fiscal outflows. The account can therefore operate the account dynamically, allowing it to spend down the balance during periods when it is high and subsequently replenish it through normal fiscal receipts and borrowing.

Bessent has indicated that the Treasury intends to maintain its normal auction schedule while using the TGA to help fund the buybacks. In other words, the immediate mechanism need not be to buy long bonds and then issue additional T-bills to pay for them. The Treasury can instead use existing cash, allowing the buyback to proceed without an equivalent increase in new issuance at the time of purchase.

For markets, the significance lies less in the immediate $4bn-per-operation figure than in the optionality this gives Treasury. If long-term yields were to rise substantially again, the US Treasury would have the ability to increase the size and frequency of buybacks without necessarily waiting for the next refinancing cycle. This potentially creates an important asymmetry.

The Treasury cannot eliminate the underlying fiscal deficit, but it can influence the maturity composition and liquidity characteristics of the government’s debt. Buying back long-duration bonds reduces the amount of duration private investors need to absorb, while spending down the TGA can increase liquidity in the banking system. This is not the same thing as formal yield-curve control, and it would be premature to describe it as such¹. Nevertheless, from the perspective of an investor, the distinction may become less important if markets increasingly believe that US policymakers are unwilling to tolerate a disorderly rise in long-term borrowing costs.

That belief is what raises the much broader question: at what point does financial-market intervention begin to look less like temporary liquidity management and more like a deliberate attempt to suppress the cost of government borrowing?

This is where the debasement trade comes in.

The Debasement Trade Is Back

The bond market’s reaction to the buyback expansion was arguably ambivalent — an initial dip in yields followed by partial reversals — but the reaction in hard assets was unambiguous. Both physical gold and its digital analogue (Bitcoin) rallied hard following the August 19 announcement.

Gold moved first and fast, with the price of the yellow metal gaining several percentage points around the announcement. Bitcoin’s move was even sharper, rallying over 20% in the days following the Treasury announcement.

In our judgement, the gains were not a reaction to near-term inflation worries — since, as noted above, unlike the Fed, the Treasury cannot simply create money to fund its purchases of long-term government debt. Rather, the announcement reinforced investor perceptions of the ultimately unsustainable nature of the US fiscal trajectory.

If investors genuinely believed Treasury’s liquidity-support framing, the rational reaction would have been relatively muted. A technical operation designed simply to improve market functioning should not, in theory, dramatically increase the value of scarce, non-yielding assets. Instead, the strength of the move in both gold and crypto suggests markets are pricing in a non-trivial probability that this is an early step towards sustained intervention in the Treasury market — potentially accompanied over time by financial repression and currency debasement. Or, in the memetic phrasing of Lyn Alden…

Nothing Stops This Train

Source: X, via @LynAldenContact

The crucial point is that the debasement trade does not require the US government to literally “print money” tomorrow. It only requires investors to conclude that the political and fiscal constraints facing Washington make a prolonged period of high real interest rates increasingly difficult to sustain.

The feedback loop is straightforward:

Source: Claude

If US policymakers subsequently intervene to break that loop, investors may reasonably conclude that the adjustment will instead occur through some combination of financial repression², lower real rates, a weaker currency and higher nominal asset prices. In this environment, scarce assets should thrive. And this is where Bitcoin’s evolution as an institutional asset becomes particularly relevant. Gold has long been the traditional hedge against currency debasement and fiscal instability. Bitcoin increasingly offers investors a digital equivalent: an asset whose supply cannot be increased in response to deteriorating government finances.

The August rally therefore looks increasingly less like a conventional risk-asset move driven solely by expectations of Fed easing and more like the beginning of a broader fiscal-debasement trade.

A Lack of Clarity

Finally, it is worth noting that not all macro developments were positive last month.

As discussed in the previous monthly update , passing the CLARITY Act before the summer recess, which began on August 7, was always going to be a major challenge. And, while there was some favourable momentum in July, it proved impossible to meet the legislative deadline.

Even though Majority Leader Thune committed to bringing the legislation back for a vote on September 15, the requirement for 60 votes and the limited legislative calendar before the November mid-terms, amid continued partisan disagreements, means that passage in 2026 is far from certain. Indeed, according to the online prediction platform Polymarket, the odds have declined to 14%.

Clarity Act signed into law in 2026?

Source: Polymarket

For digital assets, the legislative delay is clearly disappointing. Regulatory clarity remains one of the most important structural catalysts for institutional adoption of crypto in the US. However, the market’s reaction in August also demonstrates something important: regulatory progress is no longer the only macro driver of digital-asset valuations and, critically for the bulls, the Treasury’s buy-back announcement was sufficiently powerful to overwhelm the negative regulatory signal.

1 We have have long held the view that the ultimate end game for what are clearly unsustainable fiscal trends in most of the large economies is yield-curve control and rising inflation to erode the real value of the debt. Indeed, it was this expectation that triggered our interest in Bitcoin back in 2012-13.

2 Do not rule out the possible reintroduction of capital controls as part of the financial repression.