After several weeks of deliberation on Capitol Hill, President Donald Trump took a victory lap on July 4 after he signed the "big, beautiful bill" into law. For now, it's difficult to determine which sectors or specific companies will be most vulnerable or stand to benefit from the new policies set to take effect under the law.
Let's explore some of the major themes covered in the megabill, as well as some of the economic headwinds that could emerge now that this legislation has passed.
From there, I'll detail why Bitcoin (BTC 0.41%) could be the biggest winner and why investors may want to keep their eye on the cryptocurrency right now.
CRYPTO: BTC
Key Data Points
Analyzing the "big beautiful bill"
At its core, the "big, beautiful bill" revolves around major changes to tax and spending policies.
On the tax side of the equation, the bill seeks to extend Trump's 2017 tax cuts as well as reduce taxes on tips, overtime pay, and retirement income. Lower taxes results in less revenue for the federal government.
Regarding spending, the bill includes provisions to reduce certain areas under Medicaid as well as some Supplemental Nutrition Assistance Program (SNAP) benefits.
While reductions to federal spending should help offset lower revenue from taxes, the Congressional Budget Office (CBO) still projects that the bill will increase the national debt by almost $3 trillion during next decade.
Image source: Getty Images.
There could be an unwanted consequence of the bill...
Large-scale tax cuts could spur demand from consumers and businesses. In theory, this increased economic activity could result in higher prices for goods and services.
Although history by no means serves as a guarantee for what's to come, the dynamics illustrated in the chart below suggest inflation could be an unwanted consequence of the legislation.
US Government Surplus or Deficit data by YCharts
Per the graph above, the U.S. deficit worsened throughout 2020 and 2021. This isn't a coincidence because this period featured unusually high government spending in the form of COVID stimulus packages. Shortly thereafter, inflation levels peaked at about 9% as federal spending remained elevated.
To be clear, deficits alone don't inherently cause inflation. As the chart shows, the U.S. was running a deficit before 2020 but inflation rates remained relatively steady at about 2%.
The more nuanced point here is that deficits can help contribute to inflation, especially during demand surges -- which could very well occur under the new policies put in place. Moreover, prolonged deficits -- which the CBO expects under the "big, beautiful bill" -- do not always inspire inflationary environments immediately, but they can act as a risky setup.
With this in mind, the mere perception that an inflationary storm is on the horizon could lead to an interest in alternative assets. This is where Bitcoin enters the picture.
...and Bitcoin could be your best hedge
The chart below indexes the price of Bitcoin against U.S. inflation rates during the past 10 years.
Bitcoin Price data by YCharts
There are a couple of important takeaways from the trends above. First, the price of Bitcoin started rising before inflation peaked during the summer of 2022. This could mean that investors were anticipating inflation anchored by enormous government stimulus.
However, the price of Bitcoin sold off sharply throughout 2022 as inflation continued rising. I think the main factor behind Bitcoin's precipitous drop during that period is tied to aggressive interest rate hikes by the Federal Reserve -- essentially reducing liquidity flowing through the markets in an effort to tame inflation.
During the past couple of years, Bitcoin has rebounded in spectacular fashion, and it now hovers near all-time highs. To me, the trends explored in the graph above imply that Bitcoin performs best when inflation fears are present but the economic picture also features robust liquidity. In essence, Bitcoin can act as a hedge against inflation, but it is also important to note that the cryptocurrency is sensitive to changes in monetary policy.
If the government continues spending -- essentially fueling the economy with mounting debt -- while the Fed holds off on raising interest rates, Bitcoin could become much more than a hedge. Investing in Bitcoin could be seen as a high-conviction view that current policies could bring the current system to a breaking point. In a scenario like this, Bitcoin's upside could be explosive. While the downside will likely be intense volatility (pictured above), I think that is worthwhile in the short term relative to hoarding cash.
For these reasons, I think big, beautiful Bitcoin could emerge as the hidden winner from Trump's new legislation.
