Bitcoin faces new challenges after debt deal advances, warns Citigroup

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(Bloomberg) – Just as markets appear to be moving beyond the months-long drama around the US debt ceiling, holders of risky assets such as cryptocurrencies are likely facing a new challenge as the Treasury seeks to replenish its depleted cash balance with a T-Bill Flood estimate of $1 trillion.

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The imminent withdrawal from the reserves, due to the [Treasury General Account] rebuilding, may prove to be a headwind, Citi Research strategists, including Alex Saunders, wrote in a note.

Citi analyzed the performance of risky assets during drawdowns and found that they were vulnerable to higher volatility and lower returns. As such, the short-term outlook doesn’t look too rosy for Bitcoin and Ether. Both coins have average negative returns in these scenarios, and BTC has significantly underperformed in the median case, the strategists wrote on Thursday.

The TGA, which keeps money for the Treasury, has ballooned during the pandemic. It rose again last year and is now about as low as it has ever been. The Treasury, therefore, will need to replenish its dwindling cash reserve to maintain its ability to pay its obligations through bill sales, estimated to be well over $1 trillion by the end of the third quarter. This burst of supply could drain liquidity from the banking sector and raise short-term funding rates against an economy that many say is likely to slide into recession.

This doesn’t bode well for digital asset investors, who were barely recovering from fears of a no-deal scenario for the US debt ceiling. While Bitcoin rose slightly on Friday, it is still hovering around the $27,000 mark that it has failed to break for several weeks.

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Crypto markets were not immune to fears that the US would repay debt, sell on negative developments and rally to headlines suggesting progress, strategists said. They added that the crypto has generally held up well amid issues with traditional financial institutions, citing the banking turmoil in March, a period in which Bitcoin outperformed. But perhaps the risks of failure of an institution such as the US government do not point to a favorable outlook for decentralized digital assets.

To illustrate, strategists used the Cboe Volatility Index, or VIX, as an indicator of market fear to gauge whether a resolution would pass before hitting the cap. And whenever concerns in the stock markets have eased, that’s when Bitcoin has outperformed.

While in theory the potential default of an institution as impactful as the US government would bode well for decentralized technologies and systems, this may not currently be the case given that the crypto industry is still in its infancy and that the regulations have not yet been well defined. , they wrote. Another theory is that not raising the debt ceiling would lead to lower US public debt and a lower budget deficit, and give more credibility to fiat, especially the dollar.

On Friday, the Senate passed legislation to suspend the US debt ceiling and impose restrictions on public spending until the 2024 election. The measure now falls to President Joe Biden, who struck the deal with the President of the House, Kevin McCarthy, and plans to sign it days before an impending default by the United States.

Year-to-date, Bitcoin has rebounded around 60% after starting the year at around $16,500. Such optimism comes after a 64% drop in 2022, its second-worst year in its history. It was up about 1% to $27,178 as of 3:32 p.m. New York, and is slightly higher than last Friday.

Support for Bitcoin is hovering around $26,500, said Fiona Cincotta, senior market analyst at City Index, adding that a break below $25,000 could mean a deeper sell-off.

The problem is the macroeconomic backdrop, which is relatively uncertain going forward with recession fears, she said. I think what will be sought after to make Bitcoin shine is a nice pacifist pivot from the Federal Reserve. This may be the tide where we will see another decent step higher.

Range-bound trading has been Bitcoin’s defining feature of late, with its 30-day volatility reigning low at 1.8%, remaining firmly within its two-month trading range. Despite rising short-term volatility, implied option volatility has fallen over the past week, according to K33s Bendik Schei and Vetle Lunde. Even so, Bitcoin exchange-traded products have continued to see steady outflows while Bitcoin spot and futures volumes are trending lower.

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