Standoff Over $28T of US Government Debt Could Rattle Bitcoin Market. As a stalemate in the US Congress escalates the danger of a default on the government’s $28 trillion debt. Some cryptocurrency traders are wondering if the deadlock would lead bitcoin values to plummet at some point.
“I believe markets have seen enough of these finite events to be confident that it will be addressed, but I believe concern and volatility will seep in,” said Nancy Vanden Houten, chief economist at Oxford Economics.
Bitcoin was barely alive during the 2011 debt ceiling crisis. When the US government was on the verge of financial collapse, having been established only two years before. Its market value was well below $1 billion at the time, compared to almost $800 billion presently.
The price of the largest crypto by market value has become considerably more connected with other hazardous assets, like equities. Since then, and it has proved sensitive to abrupt fluctuations when traditional markets go wild. Consider the month of March 2020, when bitcoin values plummeted as the coronavirus’s inevitable economic toll became clear.
Markets might be in jeopardy once more
Economists warn that if the US government fails to make debt payments and meet other legal responsibilities, such as financing Social Security and military salaries, the markets might be in jeopardy once more, with no immediate resolution in sight.
A U.S. default, according to Christopher Russo, a research scholar at George Mason University’s Mercatus Center, may prompt more than the standard “risk-off” transaction that occurs on a regular basis in markets. He used the word “catastrophe” in his statement.
“This is a project that began with Alexander Hamilton’s assumption of the state’s war debt, the issue of the first U.S. Treasurys, and the assurance that these securities are backed by our full confidence and credit,” Russo added. “I believe that failing to keep that commitment for a day would have far-reaching economic implications. Well beyond merely delaying payment. It would send a message to the rest of the globe that something fundamental about the US and its administration had changed”.
Bitcoin has already responded favourably to the economic downturn in the United States. Such as last year, when its price quadruple while most business and consumer activity was static. As a result, another seismic market event might provide bitcoin with an opportunity to establish itself as a hedge against government financial instability in the United States.
However, the cryptocurrency sector is still in its infancy comparably with the traditional financial system. And bitcoin is still widely visible as a high-risk asset. So there’s no reason to believe it will be immune to the market upheaval.
“In a crisis like a debt-limit incident, that’s especially difficult or impossible to achieve,” Russo added. “All correlations increase during a default. Stocks and bonds are becoming more intertwined, and bitcoin is becoming more entwined with everything”.
During the 2011 debt ceiling crisis, Republicans, who controlled Congress at the time, collaborated with Democrats to increase the debt ceiling. Only after Democrats committed to a series of future expenditure cutbacks. The argument threw financial markets into a spiral. And Standard and Poor’s (S&P) downgraded US debt for the first time in its history. Depriving the government of its pristine triple-A rating.
Republicans are playing hardball this time. And it’s possible that the Democrats, who now have a majority in Congress, may have to increase the debt ceiling through the so-called budget reconciliation procedure. As a result, Vanden Houten believes they will be able to enact laws with a simple majority. On Monday night, Senate Republicans defeated a bill that would have kept the government open by suspending the debt ceiling.
When the federal government would run out of money
The question of when the federal government would run out of money if the debt ceiling is not lifted is one of the issues at hand. According to Vanden Houten’s projections, the US government will run out of money around October 25. Treasury Secretary Janet Yellen believes it may occur as early as October 18.
“This implies that the Treasury Department can continue to run auctions. And that Wall Street traders are willing to participate in such auctions,” Vanden Houten added. “We can’t promise that will happen. And if the Treasury doesn’t generate enough funds, they may find themselves in even deeper trouble”.
According to Steven Kelly, a research associate at the Yale Program on Financial Stability, a Yale University initiative concentrates on understanding financial setbacks, there may be an in-between storyline in which the US defaults on its debt briefly but financial markets remain tranquil. With investors assuming that the US government will raise the debt limit lastly. Kelly noted that it’s unknown how long a default would have to persist before investors lose their cool.
Many people believe that if [Congress] increases the debt ceiling one second too late, the United States would lose its reputation as the world’s safest asset provider and leading financial system, Kelly added. “I’m not so sure about that, but there’s always the possibility of short-term volatility”.
When the ‘save haven’ defaults
Even when questions about the US Treasury’s ability or desire to repay US debt have emerged in the past, investors have continued to flock to the government’s bonds. Because they are still visible as safe-haven investments in times of great uncertainty.
“We really saw rates decrease in 2011 when S&P downgraded the US,” Kelly explained. (When the price of a bond declines, the yield rises). “It’s a strange contradiction that when the debt ceiling problem causes a risk-off attitude in the short run, the greatest possible assets for a risk-off event are still US Treasurys. This makes me less confident that if the government is one second late on payments, it would result in our financial structure’s long-term demolition”.
The argument that the dollar has no alternative has some truth. However, Russo said that nothing “carved into the laws of nature” prevents it from changing.
“If the US government’s debt becomes dangerous, or is visible to become risky, as a result of default or for some other reason, Treasury securities rates will rise. And investors seeking a secure asset may pick another country,” Russo added. “They could pick Germany, or France, or a mix of nations with various sovereign issuers. Potentially providing a risk-free return”.
For some investors, Bitcoin might be a viable alternative to the largely dollar-based global economy.
But, according to Russo, bitcoin would have to have a zero or completely negative correlation with other assets in the early aftermath of default for it to increase.