The financial world stumbled Monday as Moody’s Investors Service stripped the U.S. of its pristine AAA credit rating, triggering a 3% plunge in major cryptocurrencies like Ethereum (ETH), Dogecoin (DOGE), and XRP. Stocks and crypto alike faltered under fresh concerns over America’s $36 trillion debt burden and political gridlock. The downgrade, Moody’s first since 1919, heightened fears of rising borrowing costs and long-term economic instability, sending shockwaves through global markets.
Markets React Swiftly to Moody’s Historic Move
Cryptocurrencies mirrored traditional markets’ slump hours after Moody’s cut the U.S. sovereign rating to Aa1. Ether dropped 4% to $2,491, while DOGE and XRP each shed 3% as risk-averse investors retreated. Simultaneously, the 10-year Treasury yield climbed to 4.49%, and S&P 500 futures slid 0.6% in after-hours trading. The crypto market’s total valuation hovered near $3.3 trillion, trimming earlier gains that briefly touched weekly highs. Analysts linked the sell-off to Moody’s warning of “swelling deficits” and ineffective fiscal policies. “Investors are reassessing risk exposure,” said Spencer Hakimian of Tolou Capital Management. “Both crypto and equities face pressure until clarity emerges.”
Why Moody’s Pulled the Trigger
Moody’s decision followed months of political stalemate over U.S. spending. The agency flagged the nation’s debt-to-GDP ratio, projected to hit 134% by 2035, alongside rising interest costs. Critically, it criticised lawmakers for failing to pass a Republican-led tax and spending bill on May 16, a move signalling deepening fiscal dysfunction. Notably, the downgrade aligns the U.S. with lower ratings from Fitch (2023) and S&P (2011). However, Moody’s offered a silver lining, revising its outlook from “negative” to “stable” due to America’s economic resilience and the dollar’s dominance.
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White House Fires Back
The Trump administration swiftly dismissed Moody’s decision as “politically motivated.” Communications Director Steven Cheung targeted Moody’s economist Mark Zandi, citing his past Democratic ties. Treasury Secretary Scott Bessent downplayed concerns, calling the agency a “lagging indicator” and touting Trump-era tax cuts as growth catalysts. Meanwhile, critics warned that extending Trump’s 2017 tax policies could inflate deficits by $4 trillion over a decade. “Political brinkmanship is worsening fiscal health,” said Carol Schleif of BMO. “Markets won’t ignore this forever.”
Crypto’s Mixed Signals
Historically, Bitcoin thrived during debt crises as a hedge against inflation. Yet this time, even crypto faced headwinds. Alex Kuptsikevich, FxPro’s chief analyst, noted Bitcoin’s resilience at $104,000 but warned of a “short-term decline” due to profit-taking. ETH faced sharper scrutiny, with analysts eyeing a drop to $1,930 if bearish momentum persists. South Korean exchanges like Upbit saw DOGE and XRP volumes spike, signalling retail speculation. “Altcoins often overreact,” said Hakimian. “But macro uncertainty could prolong volatility.”
What Comes Next for Investors?
Market veterans urge caution. Barclays analysts downplayed long-term risks, citing muted reactions to past downgrades. Still, Moody’s warned that fiscal proposals like stalled spending bills could deepen deficits. Traders now watch for Fed responses and Congressional action ahead of November’s elections. “Bitcoin’s holding pattern may not last,” Kuptsikevich added. “Pressure near range highs suggests a correction before the next rally.” Meanwhile, Treasury’s rising yields could lure investors from risk assets, further squeezing crypto.
A New Era of Fiscal Uncertainty Dawns
Monday’s turbulence underscores a harsh reality: even the world’s largest economy isn’t immune to fiscal reckoning. While Moody’s stable outlook offers hope, the downgrade highlights systemic risks now rattling both Wall Street and crypto. For everyday investors, diversification and vigilance remain key as debt debates dominate headlines.
Written By Fazal Ul Vahab C H
