Why Fiat Supply Surge Fuels Crypto Demand

Bitwise CIO Matt Hougan’s memo “What the Hell Is Fiat?” warns that decades of unlimited money printing and soaring debt shattered trust in paper currency, driving investors into gold and crypto hedges.

Fiat Expansion: From Gold Abandonment to Debt Deluge

When President Nixon closed the gold window in August 1971, dollars decoupled from any limit. Since then, U.S. money supply M2 soared from $400 billion to over $21 trillion by mid-2025, and the Federal Reserve’s balance sheet topped $6.7 trillion after pandemic-era peaks. The federal debt swelled past $36 trillion, outpacing GDP and stressing global markets. 

Central banks countered with record gold purchases – official reserves now exceed euro holdings – as a bulwark against fiat instability. Meanwhile, Bitcoin’s 21-million cap and Bitcoin ETF inflows topping $45 billion in 2025 underscore crypto’s appeal as a scarcity-based store of value. Historic CPI readings above 3% continue to erode purchasing power, proving Hougan’s point: investors peacefully floated in fiat until they woke up to its hidden leak.

Quantitative easing and emergency bond buys during crises left central bank balance sheets bloated. In 2020 alone, the Fed added $3.3 trillion in assets, fuelling asset-price inflation and heightening inequality. Persistent currency debasement fuels crypto narratives. Retail forums and Twitter are abuzz with the rising cost of living and low real yields.

Bitcoin: Rising Shield Against Currency Erosion

The Wallace parable cuts deep: you swim in fiat until you realize it’s water. Inflation’s sting drives many toward Bitcoin, but research shows mixed signals. Some studies find Bitcoin reacts negatively to unexpected inflation spikes, while others note long-term demand rises as fiat weakens. Investors wrestle with these findings. They know fiat’s endless printing erodes purchasing power. They also see Bitcoin’s volatility. This tension shapes debate on whether Bitcoin truly shields against debasement.

Governments and regular people view money differently. Central banks can print or adjust rates to meet policy goals, even if it dilutes savings. Citizens bear the cost: rising prices and squeezed real incomes. Surveys show public anxiety over inflation outpaces official optimism. In contrast, policymakers cite growth targets and crisis responses. This gap fuels crypto’s appeal: individuals seek hard caps that governments cannot override.

Matt Hougan’s memo is, essentially, a wake-up call: fiat’s hidden leak drives Bitcoin interest as a scarcity play. U.S. spot Bitcoin ETFs saw sustained inflows in June 2025, with 18th as a day of nearly $400 million net inflows led by major issuers like BlackRock and Fidelity. Portfolio managers debate adding Bitcoin for its hedge potential but impose strict position limits and hedges against sudden swings. Emerging trends blend caution with conviction. On-chain metrics (Binance Research courtesy) – shrinking exchange reserves and rising active addresses – hint at growing long-term holding behavior.

Risks of Unchecked Fiat and Paths to Sound Alternatives

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status,

Hougan’s memo reads.

This reality underpins several risks. Volatility can swing portfolios wildly: studies show Bitcoin’s price reacts sharply to macro shocks and often moves with risk assets before settling as a potential hedge. That means investors may see rapid gains but also face steep losses if markets turn. Research on crypto volatility confirms large daily swings and the limits of forecasting models, underscoring the warning that traders need deep market knowledge.

The disclaimer notes “market manipulation” and “flash crashes.” Academic work highlights pump-and-dump schemes and coordinated attacks that distort prices. Liquidity risks compound this: papers on DeFi lending reveal how sudden liquidity withdrawals can trigger cascading liquidations. Even seasoned traders can struggle to exit positions at reasonable prices under stress. Knowing these mechanics matters: without it, users risk severe losses when manipulation or low liquidity strikes.

Trading in crypto assets comes with significant risks, including … cybersecurity risks and risk of losing principal,

Bitwise CIO explains further.

Security analyses detail how platform vulnerabilities, phishing, and smart-contract flaws can drain wallets or exchange reserves. Research shows multi-layered defenses, such as hardware wallets, multi-factor authentication, and protocol audits, reduce but do not eliminate these dangers. Investors must remain vigilant: no code or custody is immune to evolving threats.