What is the Debasement Trade? How Investors Hedge Against the Declining Dollar

There’s been a lot of discussion surrounding the “debasement trade”. The idea is that because the value of the U.S. dollar is declining in real terms, investors are seeking a safety and hedge against that devaluation through the purchase of hard assets like gold or real estate, and speculative ones like Bitcoin.

As part of my ongoing curiosity into why markets behave the way they do, I’ve been digging into this to learn more. I’m finding it helpful to start at the beginning. Specifically, what causes currency debasement?

What Causes Currency Debasement?

Currency debasement occurs when a currency loses purchasing power. That can happen as a result of an increase in money supply (e.g. money printing, creating digital reserves) or as a result of government reducing its credibility and backing.

When government runs higher and higher deficits, the country’s debt burden expands. Investors may not want to purchase that debt, and government steps in to buy it (Quantitative Easing).

This results in more money chasing the same amount of goods and assets (particularly financial assets). Even if inflation comes back down, the amount of currency has already expanded. Thus, each dollar represents a smaller claim on assets and economic output.

How, then, do investors approach this?

Unpacking the Debasement Trade

As investors observe out of control government printing and spending, they try to avoid holding assets that are fixed in nominal terms (e.g. cash, bonds of long duration). Instead, they seek assets that may benefit from monetary expansion because they can’t be diluted.

Gold is a historic example. There is a finite amount of gold, it holds value because other people say it does, and it also happens to have real world applications. Similarly, Bitcoin supporters point to its fixed supply (there can only be 21 million Bitcoin, allegedly…) and corresponding increase in value when compared to currencies like the USD.

Additionally, stocks in companies with exceptional pricing power look more attractive, as do currencies in countries with stable balance sheets.

Outstanding Question

It remains a bit curious, that as of October of 2025, assets ranging from gold to Bitcoin to stocks are rising in unison. Historically, gold acts as a true hedge, performing better when stocks suffer, and underperforming when stocks rise.

Whether a new era of broad asset inflation continues to take hold remains to be seen.