US Debt Default: Impact on Bitcoin and Ethereum

US Debt Default: Impact on Bitcoin and Ethereum

The potential for a US debt default could have a significant impact on the crypto market, causing short-term pain for risk assets like Bitcoin and Ethereum, according to industry experts.

The  United States is barreling toward a date that could have historic consequences for worldwide markets, running the danger of its first-ever debt default. It’s a potential black swan event that could have an outsized impact on Bitcoin, Ethereum (ETH), and the rest of the cryptocurrency market.

United States Treasury Secretary Janet Yellen warned weeks ago that the Government would soon run out of funds if the debt ceiling isn’t stopped or raised—possibly as early as June 1. If lawmakers remain deadlocked and can’t come to an agreement on spending, Washington will 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, Bitcoin (BTC) has  dropped greater than 7 percent and Ethereum (ETH) is down nearly 3 percent during the same period, reports by CoinGecko.

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America’s “X-date”

Typically, debt ceiling debacles create more noise than market-moving news, Amberdata’s Director of Derivatives Greg Magadini informed Decrypt—but he acknowledged that a United States debt default is far from off the table.

“It feels like a pretty intense game of chicken right now,” he stated. “And given how crazy things have gone in the past couple of years, I think anything is possible.”

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 that’s because a fall in the quality of government-backed debt would likely raise borrowing costs, counterintuitively increasing its yield and strengthening the United States dollar compared to other assets.

Similarly, the United States dollar could strengthen within a United States default as American traders tend to onshore their dollars—swapping foreign currencies and assets for the greenback—during risk-off events, CoinShares’ Head of Research James Butterfill informed Decrypt.

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“Technically speaking, the United States dollar should sell off in the event of a default, but it won’t because people tend to onshore their dollars in periods of market stress,” he stated. “The dollar can potentially essentially strengthen, perversely, because people are getting worried, and that essentially will not so great for Bitcoin.”

Butterfill envisions the United States dollar will strengthen and Bitcoin (BTC) will slide as the United States approaches what the White House has described as America’s “X-date,” the official date at which the Government can no longer pay its bills.

“This is a really complicated scenario,” Butterfill stated, noting he doesn’t think a default is likely. “It’s not that obvious what exactly will happen.”

Bitcoin (BTC) May Bounce

Bitcoin (BTC) and Ethereum (ETH) could react differently in the event of a default, Amberdata’s Magadini stated. Bitcoin (BTC) may bounce alongside gold after an initial slide—as a check on government- announced currency—while Ethereum (ETH) would likely remain depressed alongside tech stocks, he said.

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The sentiment was echoed by Genesis’ Co-Head of Trading Gordon Grant, who informed Decrypt that Bitcoin (BTC) has more upside than Ethereum (ETH) if the Government can no longer meet its debt obligations, but both coins would face pressure initially.

“Maybe there’s an initial wick down, as danger assets get definitely trounced, because the stock market is going to get decimated,” he stated. “ On the other hand, Bitcoin (BTC) is probably going higher.”

For Ethereum (ETH), Grant stated that the Second largest cryptocurrency by market capitalization is frequently tied to indexes tracking tech stocks like the NASDAQ, making it likely to underperform compared to Bitcoin (BTC) if a default takes place.

“It doesn’t matter whether I think that that’s a fair comparison,” he stated, keeping in mind that that’s how certain models trade the relationship betwixt things like the NASDAQ and Ethereum (ETH). “ And, we would tend to expect underperformance of Ethereum.”

This is Coming for Bitcoin

SVB and Sausage

For example  of how cryptocurrency has performed during recent risk-off events, Grant pointed to BTC’s outsized profits compared to Ethereum (ETH) in the wake of plenty of bank collapses in March, including Silicon Valley Bank. Nonetheless, he pointed out that there is zero data to suggest how digital 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 Bitcoin (BTC) as a potential default draws closer, saying it implies that traders—mostly institutional ones—are betting the coin will see increased volatility.

At the end of the day, Grant stated he’s confident that lawmakers will exhaust their differences on Capitol Hill and reach an agreement like they always have. On the other hand, pointing to the logic of Bloomberg’s Tom Keene, Grant stated the bigger question is whether events like these become more common in an ever-more-polarized political climate, and if they’ll ever go away.

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“We can ruminate and pontificate, but the real story is this phenomenon of the United States Government, as a debtor nation, bumping up against a debt ceiling,” Grant stated, adding it’s become “how the sausage gets made in the 21st century.”


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