What Happens to Bitcoin and Ethereum if the US Doesn’t Repay Its Debt?

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The United States is heading towards a date that could have historic consequences for global markets, running the risk of its first-ever default. This is a potential black swan event that could have an outsized impact on Bitcoin, Ethereum, and the rest of the crypto market.

US Treasury Secretary Janet Yellen warned weeks ago that the government would soon run out of funds if the debt ceiling was not suspended or raised, possibly as early as June 1. If lawmakers remain deadlocked and fail to reach an agreement on spending, Washington won’t be able to pay its bills, she said.

Similar standoffs over the debt ceiling have rattled markets in the past, such as a protracted debt ceiling disagreement that sent the S&P 500 down 16% in 2011, surprising investors before a resolution was reached. found.

This time, Wall Street yawned. The S&P 500 is down less than 1% since Yellen released his sobering remarks on May 1. However, Bitcoin fell more than 7% and Ethereum fell almost 3% over the same period, according to CoinGecko.

America’s Date X

Typically, debt ceiling debacles create more noise than news that moves the market, Amberdata’s director of derivatives Greg Magadini told Decryptbut, but he acknowledged that a failure to payment of the American debt is far from being ruled out.

It looks like a pretty intense game of chicken right now, he said. And given how crazy things have gotten over the past two years, I think anything is possible.

In the event the government defaults on its debts, risky assets like stocks and crypto will face short-term difficulties, Magadini said. He explained that this is because a decline in the quality of government-backed debt would likely increase borrowing costs, counterintuitively increasing its yield and strengthening the dollar against other assets.

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Similarly, the dollar could strengthen during a U.S. default, as U.S. traders tend to swap their dollars for foreign currencies and assets for the greenback during risky events, said James Butterfill, head of research at CoinShares, at Decrypt.

The story continues

Technically speaking, the dollar should sell when it defaults, but it won’t because people tend to outsource their dollars during times of market stress, he said. The dollar might actually get stronger, perversely, because people are worried, and it’s actually not going to be so good for Bitcoin.

Butterfill predicts the dollar will strengthen and Bitcoin will slide as the United States approaches what the White House has described as America’s X date, the official date when the government can no longer pay its bills.

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

Bitcoin can rebound

Bitcoin and Ethereum could react differently in the event of a default, Amberdatas Magadini said. Bitcoin could rebound alongside gold after an initial slide as a check on government-issued currency, while Ethereum would likely remain depressed alongside tech stocks, he said.

The sentiment was echoed by Genesis Co-Head of Trading Gordon Grant, who told Decrypt that Bitcoin has more upside than Ethereum if the government can no longer meet its debt obligations, but both coins would initially come under pressure. .

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Perhaps there is an initial wick to the downside as risk assets are completely crushed as the stock market is going to be decimated, he said. But Bitcoin is likely going higher.

For Ethereum, Grant said the second-largest crypto by market capitalization is often pegged to tech stock tracking indices like NASDAQ, making it likely to underperform Bitcoin in the event of a default.

Never mind that I think that’s a fair comparison, he said, noting that’s how some models trade the relationship between things like NASDAQ and Ethereum. Thus, we would tend to expect Ethereum to underperform.

SVB and sausage

As an example of crypto’s performance during recent risk events, Grant pointed to Bitcoin’s outsized gains against Ethereum following several bank meltdowns in March, including Silicon Valley Bank. However, he noted that there was no data suggesting how cryptocurrencies might react if the government defaulted for the first time in history.

Both Grant and Magadini pointed to increased activity in the options market for Bitcoin as a potential default draws closer, saying this suggests that mostly institutional traders are betting the coin will see increased volatility.

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Ultimately, Grant said he was confident lawmakers would exhaust their differences on Capitol Hill and come to an agreement as they always have. But, pointing to the logic of Bloombergs Tom Keene, Grant said the bigger question is whether events like these are becoming more common in an increasingly polarized political climate, and whether they will ever go away.

We can ruminate and pontificate, but the real story is this phenomenon of the US government, as a debtor nation, hitting a debt ceiling, Grant said, adding that this has become the way sausage is made in the 21st century.

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