Potential Black Swan? What will happen to BTC and ETH in the event of a US debt default?

Possible problem? What will happen to Bitcoin and Ethereum if the US can't pay its debts?

Original Author: André Beganski, decrypt; Translator: Moni, Odaily Planet Daily

June 1st may be a date that has historic significance for the global market. The United States is facing the risk of its first-ever debt default, a potential black swan event that could have a huge impact on Bitcoin, Ethereum, and even the entire cryptocurrency market.

A few weeks ago, US Treasury Secretary Janet Yellen warned that the US government would soon run out of funds if it did not suspend or raise the debt ceiling, and that the earliest day for this to happen would be June 1st mentioned above. The United States has never defaulted before. Interestingly, after this warning was issued, both Bitcoin and Ethereum prices fell, with losses even greater than the decline in stocks.

Data shows that since May 1st, the Standard & Poor’s 500 Index has fallen by less than 1%, but according to CoinGecko data, during the same period, Bitcoin fell by more than 7% and Ethereum fell by nearly 3% – it’s worth noting that similar US government debt ceiling stalemate in the past has made traditional financial markets very uneasy, such as the 2011 debt ceiling dispute that caused the Standard & Poor’s 500 Index to plummet by 16%.

US “X-date”

Greg Magadini, Derivatives Director of Amberdata, believes that normally, the US government’s debt ceiling issue will bring more noise to the market, but he admits that US debt default is not impossible:

“It feels like a very intense cockfight now, considering how crazy things have become in the past few years, I think anything is possible.”

Greg Magadini said that if the US government defaults on its debt, risk assets such as stocks and cryptocurrencies will face short-term pain, because the decline in government-supported debt quality may increase borrowing costs, and if interest rates are raised counterintuitively, it will cause the US dollar to strengthen relative to other assets.

Peter Smith, CEO of Blockchain.com, shares the same view. According to Reuters, at the Qatar Economic Forum organized by Bloomberg, Peter Smith said that if the US Congress does not raise the government’s borrowing limit of $31.4 trillion, the US government may default on its debt next month. This situation will be unfavorable to cryptocurrencies and will see the market quickly fall back. However, Peter Smith also pointed out that in the long run, cryptocurrencies may have a very strong rise after the fall, because the cryptocurrency market follows a cyclical pattern, and 2024 will be “another exponential year”.

James Butterfill, Director of Research at CoinShares, also believes that a US government debt default may push the dollar higher because American traders tend to move dollars onshore during periods of risk aversion, exchanging foreign currencies and assets for dollars.

“Technically, if the US government defaults, the dollar should be sold off, but that’s not the case because people tend to keep dollars onshore during market pressure periods. The dollar could actually strengthen because people are becoming increasingly worried, and this situation is not actually good for Bitcoin.”

Butterfill predicts that as the US approaches the “X Date” mentioned by the White House, the official date on which the government can no longer pay its bills, the dollar will strengthen and Bitcoin will decline.

Is there a possibility of Bitcoin rebounding?

If the US government does ultimately default on its debt, Bitcoin and Ethereum may have different reactions.

Greg Magadini, Derivatives Director at Amberdata, and Gordon Grant, Joint Head of Trading at Genesis, analyzed that if the US government can’t meet its debt obligations, Bitcoin will face more pressure than Ethereum in the early stages, but Bitcoin may rebound with gold after a short-term decline. For Ethereum, the second-largest cryptocurrency by market capitalization, it is usually tied to indices tracking tech stocks such as the Nasdaq, and its performance may not be as good as Bitcoin if a debt default occurs.

There is an example worth referring to recently, which is the bankruptcy of Silicon Valley Bank.

After several banks, including Silicon Valley Bank, collapsed in March of this year, Bitcoin prices rose instead of falling, and the cryptocurrency market rebounded significantly, indicating that market volatility in traditional finance may actually be beneficial to the cryptocurrency market. However, the looming US debt default is not the same magnitude as the bankruptcy of US financial institutions. As Ray Dalio, founder of Bridgewater Associates, analyzed, the Silicon Valley Bank incident only affected institutions with significant asset-liability mismatches, including US entities that purchase US government bonds and European entities that purchase European bonds, and that was all.

From this perspective, it is worth paying attention to how cryptocurrencies will react if the US government defaults on its debt for the first time in history.

According to a survey conducted by Bloomberg’s Markets Live Pulse, if the US government’s debt ceiling rises sharply, gold is the preferred investment for investors, followed by US treasuries, and then bitcoin ranking third. On the other hand, as the potential default approaches, activity in the bitcoin options market has increased, indicating that traders (mostly institutional traders) are betting on high volatility in bitcoin.

If a US debt default does occur, it may trigger a global redistribution of wealth, which poses both risks and opportunities for the cryptocurrency market.

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