A new way to play the US dollar debasement trade?

As if investors didn't have enough other things to worry about, the discourse around the debasement of the US dollar is now moving entire markets. 

It's part of the reason gold and silver have been on historic rallies, and why the US Dollar Index (DXY) is now down 9.6% in the last year. 

But last week's shock sell-off in precious metals saw many calling the death of the debasement trade, especially after Bitcoin, another player in the so-called debasement trade, also hit multi-year lows. 

The trigger was the announcement of Kevin Warsh as the incoming chairman of the US Federal Reserve, whose previous hawkish comments were taken as a sign that he might take a similar approach once he's behind the desk at the Fed. 

But Trump, the man who handpicked Warsh, has demanded further rate cuts, and recently described the decline in the dollar as "great". Warsh himself has openly floated the idea of lowering rates, even at a time when the US economy is running hot. 

So, is there a chance investors may have jumped the gun? Is the debasement trade really dead or simply taking a breather? 

Digital asset manager Merkle Tree Capital certainly doesn't think so, and it's something that remains firmly on my radar.

I reached out to Ryan McMillin, Merkle Tree co-founder and CIO, to discuss the company's new fund that is plugging directly into the debasement theme. 

Launched in January, the MTC Bitcoin & Gold Fund is a managed fund that dynamically allocates to two "hard-money assets": gold and Bitcoin. 

It's obviously very early days, but had this fund existed over the last few years investors would have been looking at impressive returns. 

He explains why he thinks the debasement trade still has legs, how he first became convinced of the idea, and why they're taking a systematic approach to allocating capital. 

Why did you decide to launch this fund, and specifically, why now?

Bitcoin is often referenced as “digital gold”, and that framing has kept us watching gold closely since the launch of our digital asset strategies. 

We’ve always liked gold for many of the same reasons we like Bitcoin: it can act as a hedge against reckless government deficit spending and monetary debasement. Since Russia’s invasion of Ukraine, gold’s non-sovereign quality has also felt increasingly relevant.

That theme really accelerated through 2023-24 as investors like Paul Tudor Jones, Stanley Druckenmiller and Ray Dalio publicly discussed the case for dedicated “debasement hedges” in portfolios that include both gold and Bitcoin.

Internally, we started debating whether we should include a gold allocation within the “store of value” bucket of our digital asset fund — which we did.

Then in Q4 last year a few clients reached out asking for a more dedicated solution. 

The timing felt right: gold had begun a sustained move that, in our view, made a multi-year repricing (more akin to the 1970s than the 2010s) plausible. 

Importantly, it was also a period where gold and Bitcoin diverged at times, which highlighted the benefits of holding both in a basket rather than making a single-asset bet.

How does the fund dynamically allocate between the two assets?

For this fund we wanted to take a systematic approach. I spent a lot of my career working on risk parity and multi-factor strategies, and I was keen to apply that toolkit here.

The fund starts with a risk parity framework, meaning we size allocations so that each asset contributes roughly equally to overall portfolio risk (primarily driven by volatility). That’s important because Bitcoin’s volatility can otherwise dominate a portfolio, even at relatively small weights.

On top of that, we use a Sortino-style overlay so we’re not mechanically penalising an asset for strong upside moves (i.e., we’re more focused on managing downside risk than treating upside volatility the same as downside volatility).

Finally, we apply a multi-factor overlay that can tilt the allocation, particularly toward Bitcoin, when conditions are supportive. Those factors are proprietary and draw on a blend of macro conditions, on-chain data, sentiment, and technical signals.

At a high level (longer time frames), we think of both assets as “debasement hedges”, but they often behave differently across macro regimes. In broad terms, gold tends to behave more like a risk-off hedge, while Bitcoin can behave more risk-on. 

There’s also evidence within cycles that gold can move first and Bitcoin follows, with gold consolidating as Bitcoin rallies. Our testing suggested the combination, when sized and managed systematically, can deliver returns closer to Bitcoin with volatility closer to gold, which we felt was compelling enough to bring to market.

What role do you think this can play in an investor portfolio? What type of investor does it suit?

We broadly agree with the view that a dedicated monetary inflation/debasement hedge should be a more standard part of portfolios, at least until inflation risk clearly recedes and there’s a credible path toward more sustainable fiscal settings in major economies.

We see the fund as a diversifying satellite allocation designed to provide exposure to two assets that can behave differently from traditional equity/bond mixes, particularly in the type of environment we appear to be in: currency debasement concerns, inflation shocks, uncertainty around real yields, and a more multipolar world.

It can suit investors who want measured exposure to Bitcoin without it dominating portfolio risk, value gold as a defensive anchor, but want something more adaptive than a static 60/40-style allocation decision, and are looking for diversifiers that may respond differently across macro regimes than equities and bonds.

For most investors, a meaningful (but appropriately sized) allocation can make sense. Ray Dalio called for 15% allocation to a basket of these 2 assets, particularly if investors are concerned about persistent government deficits, debasement risks, and rising sovereign/geopolitical uncertainty.