The macroeconomic scenario is getting increasingly complicated: following the latest revelations about the Unitedย States debt ceiling crisis and a possible default of the worldโs 1st superpower, there are already those who are speculating about taking cover with safe haven assets such as Gold and Bitcoin.
The digitalย currency is increasingly being associated with yellow gold, despiteย theย factย that the data show a big difference betwixt the two assets, especially the correlation with stock markets.
Letโs try to explore this in more detail in this article.
Bitcoinย (BTC) and gold as safe haven assets in case of a Unitedย States debt ceiling crisis
In difficult times like these, investors set out in search of the best safe haven investment, and onceย more eyes are on gold and Bitcoin.
Afterย theย banking crisis in March that saw the failure of institutions such as Silicon Valley Bank, now it is the turnย of the Unitedย States debt ceiling crisis.
Theย Unitedย States has a federal debt ceiling of $31.4 trillion: the threshold is about to be crossed after the mountain of debt that Government and households have taken on in recent years.
Reportsย by the Federal Reserve Bank of New York, the amount of Unitedย States household debt exceeded $17 trillion for the 1st time in the 1st quarter.
The figure gives pause for thought when we consider that since March 2022, when the Fed began a restrictive policy by raising interest prices on Government bonds, households have increased their debt even more, which outlines that the change in lending prices does not affect the habits of Unitedย States citizens.
Inย particular, since the Federal Reserve 1st tightened its monetary policies, consumers have added greaterย than $860 Billion to total mortgage balances, $145 Billion in credit card debt, $93 Billion in auto loans and $14 Billion in student loans.
As of today, the federal funds price is betwixt 5 percent and 5.25%, but it does not appearย to have slowed down the Unitedย States debt frenzy, especially as it relates to credit cards.
To be fair, betwixt the end of 2022 and the end of March 2023 there were no notable increases, onย theย otherย hand, the figure shows that at $1 trillion, the interest Americans owe on their credit cards reached its highest point ever.
Asking for a balance on oneโs card now comes at a very high cost, with an average interest price of 20.92%.
Althoughย while it seems crazy for Europeans to ask for credit at these prices, it is common practice in the Unitedย States to take on debt in this manner seeingย as that numerous households have debt on greaterย than one credit card.
All this only alarms investors: this mountain of debt connected with high interest prices mightย propel the Unitedย States into a debt crisis, gaveย the Government does not raise the ceiling as it did in previous years.
What do investors prefer in times of crisis: gold or Bitcoin?
Letโs try to better understand investorsโ attitudes in times of crisis.
At the Bitcoinย (BTC) Conference in Miami, which tookย place severalย days ago, participants were requested to express their opinions about what they would buy if the Unitedย States debt ceiling was reached, and they ofย course chose gold and its virtual version.
Nonetheless, these opinions are unreliable since everyone at the conference has a soft spot for Bitcoinย (BTC) and the cryptocurrencyย market in general.
Forbes, on the other hand, tried to take a more representative sample by asking 637 different investors which assets they would prefer in the event that the Unitedย States defaulted on its obligations and did not pay its federal debts.
The result isย quite interesting: traditional gold comes in 1st place with an equal number of choices betwixt retail and institutional investors, followed by Unitedย States treasuries and Bitcoinย (BTC) taking the podium with 7.8 percent preferences from institutional and 11.3 percent from retail.
Traditional currencies such as the dollar, Japanese yen and Swiss franc lag behind highlighting a fallacy in being able to serve as safe haven assets, at least reportsย by investorsโ thinking.
Bitcoinย (BTC) and gold have always been praised for their decentralization and deflationary nature, although digitalย currency, unlike the yellow metal, likewise enjoys the characteristic of being resistant to censorship.
With Bitcoin, it would not be possible to replicate what Unitedย States President Franlink D. Roosevelt did when he announced Executive Order 6102 on 5 April 1933 with the aim of prohibiting the possession of any form of gold, depriving its citizens of it.
Satoshi Nakamoto designed his virtual digitalย currency in such a way that itย canย potentially withstand these attacks and serve as a true reserve, not controllable by anyone.
Beyond that, gold is certainly a more conservative and more reliable choice, given the presence of a broader history of price performance and given the low correlation with stock markets.
Althoughย while inย theย previous 5 years gold had a correlation index of 0.04 with the S$P500, Bitcoinย (BTC) records a very strong correlation of 0.88, meaning that it often moves in the same direction as stocks.
What would happen to the cryptocurrencyย market if the Unitedย States goes into default?
The Unitedย States is approaching the debt ceiling set during 2021, fueling fears of an inability of the Government to repay bondholders consequently leading to a default of the nation.
Nonetheless, it isย frequently forgotten that the federal โdebt ceilingโ has been raised as numerous as 78 times since 1960 until the last time Congress decided that value to theย present $31.4 trillion.
Until 2007, before the worldwide financial crisis, the federal debt had been held below $10 trillion.
Within 15 years this has greaterย than tripled resulting in a red-hot political climate betwixt Democrats and Republicans.
The fact that the debt is approaching the maximum allowed ceiling does not necessarily mean a danger of default: first, because the debt ceiling can be raised even 1 day before the ceiling is exceeded.
Furthermore, in extreme cases, a โ Government shutdownโ would take place, i.e., a cut in Government costs beginningย with salaries of nonessential employees and moving on to payments of suppliers of goods and services, current expenditures, etc.
Markets would be immediately influenced by this contingency strategy, but it would still be possible to avoid default, which would lead to much more catastrophic effects.
In the most pessimistic case, i.e., one in which the Unitedย States proves unable to honor the federal debt in the monthsย ahead, markets, especially the more speculative ones such as digitalย currency markets, would experience a colossal downturn.
Althoughย while Bitcoinย (BTC) and Ethereumย (ETH) would probably be able to weather the storm, albeit with double-digit negative price changes, numerous cryptoย tokens in the cryptoย altcoin segment would perhaps not be able to survive.
All the more so if we are talking about digitalย currencies with no fundamentals behind them or with derisory projects such as memecoins, a default could spell the end of these financial experiments, while in the long run assets with more intrinsic value would still manage to emerge.
