Unitedย States Treasury Secretary Janet Yellen warned weeks ago that the Government would soon run out of funds if the debt ceiling isnโt stopped or raisedโpossibly as early as June 1. If lawmakers remain deadlocked and canโt come to an agreement on spending, Washington willย not able to pay its bills, she said.
Similar standoffs over the debt ceiling have rattled markets in the past, like a prolonged disagreement over the debt ceiling that sent the S&P 500 tumbling 16 percent in 2011, startling investors before a resolution was reached.
This time around, Wall Street has yawned. The S&P 500 is down less than 1 percent since Yellen announced her sobering remarks on May 1. Nonetheless, Bitcoinย (BTC) hasย dropped greaterย than 7 percent and Ethereumย (ETH) is down nearly 3 percent during the same period, reportsย by CoinGecko.
Americaโs โX-dateโ
Typically, debt ceiling debacles create more noise than market-moving news, Amberdataโs Director of Derivatives Greg Magadini informed Decryptโbut he acknowledged that a Unitedย States debt default is far from off the table.
โIt feels like a pretty intense game of chicken right now,โ he stated. โAnd given how crazy things have gone in the past couple of years, I think anything is possible.โ
In the event that the Government defaults on its debts, danger assets like stocks and cryptocurrency would face short-term pain, Magadini stated. He stated thatโs because a fall in the quality of government-backed debt would likely raise borrowing costs, counterintuitively increasing its yield and strengthening the Unitedย States dollar compared to other assets.
Similarly, the Unitedย States dollar could strengthen withinย a Unitedย States default as American traders tend to onshore their dollarsโswapping foreign currencies and assets for the greenbackโduring risk-off events, CoinSharesโ Head of Research James Butterfill informed Decrypt.
โTechnically speaking, the Unitedย States dollar should sell off in the event of a default, but it wonโt because people tend to onshore their dollars in periods of market stress,โ he stated. โThe dollar canย potentially essentially strengthen, perversely, because people are getting worried, and that essentially willย not so great for Bitcoin.โ
Butterfill envisions the Unitedย States dollar will strengthen and Bitcoinย (BTC) will slide as the Unitedย States approaches what the White House has described as Americaโs โX-date,โ the official date at which the Government can no longer pay its bills.
โThis is a really complicated scenario,โ Butterfill stated, noting he doesnโt think a default is likely. โItโs not that obvious what exactly will happen.โ
Bitcoinย (BTC) May Bounce
Bitcoinย (BTC) and Ethereumย (ETH) could react differently in the event of a default, Amberdataโs Magadini stated. Bitcoinย (BTC) may bounce alongside gold after an initial slideโas a check on government- announced currencyโwhile Ethereumย (ETH) would likely remain depressed alongside tech stocks, he said.
The sentiment was echoed by Genesisโ Co-Head of Trading Gordon Grant, who informed Decrypt that Bitcoinย (BTC) has more upside than Ethereumย (ETH) if the Government can no longer meet its debt obligations, but both coins would face pressure initially.
โMaybe thereโs an initial wick down, as danger assets get definitely trounced, because the stock market is going to get decimated,โ he stated. โ Onย theย otherย hand, Bitcoinย (BTC) is probably going higher.โ
For Ethereumย (ETH), Grant stated that the Second largest cryptocurrency by marketย capitalization isย frequently tied to indexes tracking tech stocks like the NASDAQ, making it likely to underperform compared to Bitcoinย (BTC) if a default takes place.
โIt doesnโt matter whether I think that thatโs a fair comparison,โ he stated, keepingย inย mindย that thatโs how certain models trade the relationship betwixt things like the NASDAQ and Ethereumย (ETH). โ And, we would tend to expect underperformance of Ethereum.โ
SVB and Sausage
Forย exampleย of how cryptocurrency has performed during recent risk-off events, Grant pointed to BTCโs outsized profits compared to Ethereumย (ETH) in the wake of plentyย of bank collapses in March, including Silicon Valley Bank. Nonetheless, he pointedย outย that thereย is zero data to suggest how digitalย currencies could react if the Government defaults for the 1st time in history.
Both Grant and Magadini highlighted increased activity in the options market for Bitcoinย (BTC) as a potential default draws closer, saying it impliesย that tradersโmostly institutional onesโare betting the coin will see increased volatility.
At the end of the day, Grant stated heโs confident that lawmakers will exhaust their differences on Capitol Hill and reach an agreement like they always have. Onย theย otherย hand, pointing to the logic of Bloombergโs Tom Keene, Grant stated the bigger question is whether events like these become more common in an ever-more-polarized political climate, and if theyโll ever go away.
โWe can ruminate and pontificate, but the real story is this phenomenon of the Unitedย States Government, as a debtor nation, bumping up against a debt ceiling,โ Grant stated, adding itโs become โhow the sausage gets made in the 21st century.โ
