A potential debt crisis in the US is heating up.
After having hit the current public debt ceiling of $31.4 trillion a few months ago, the US Treasury has been fast drawing down on its cash reserves.
Treasury Secretary Janet Yellen has warned that the government could completely run out of cash by the 1st of June, the so-called “X-date”.
Running out of cash on June 1st would mean that the US government is no longer able to pay back its debt on bonds expiring after that date.
In other words, the US could default on some of its debt as soon as early June.
The crisis is a result of politics, not the US government’s inability to pay back its debt.
Republicans, who control the House want spending cuts in order to raise the debt ceiling.
Democrats, who control the Senate, want tax hikes.
It’s a traditional ideological clash between the two sides, but if it leads to a default, the effects on the economy could be disastrous, even if a deal is quickly made to repay the creditors who were first defaulted on and raise the debt ceiling again.
The US government’s credibility in the eyes of investors around the world could be irreparably damaged (a rating agency downgrade would certainly occur), resulting in structurally higher borrowing costs, which could ripple across the economy and cause a recession.
A default would also hurt financial markets, with stocks likely to plunge.
What Happens to BTC and ETH If US Defaults?
While the markets base case seems to be that a deal will be reached and a default averted, with both sides reportedly making progress after all-night talks on Thursday, the impact of a default on BTC and ETH of a possible default is being hotly debated.
On the one hand, both asset classes tend to move in line with stock markets.
A default would likely send both asset classes crashing, at least in the short-term, a reflection of the fact that many investors who view Bitcoin and Ether as risk assets would be panic selling.
But Bitcoin’s strong bounce from its initial sell-off in March on fears about a US bank crisis were a testament to the fact that investors are more and more viewing it as a safe haven against troubles in the traditional, fiat-based financial system.
And nothing spells trouble in the traditional fiat system more so than a default by the US government, the issuer of the world’s reserve currency (the USD) that powers the majority of global trade, finance and commerce.
Any initial sell-off in Bitcoin could quickly reverse and see BTC surge to fresh highs for the year, just as happened in March.
With Ether, the outlook is a bit murkier.
The much younger cryptocurrency might have a tougher time benefitting from safe-haven inflows given its shorter proven track record as a robust alternative financial system.
But you would have to think that if Bitcoin was to surge to year-to-date highs after an initial sell-off, Ether would mirror this price action to some extent.
Remember, a brand-new financial system is being rebuilt from the ground up on the Ethereum network (and other smart-contract-enabled layer-1 and layer-2 protocols), whereas this isn’t really the case for Bitcoin.
In the grand scheme of things, the ongoing debt ceiling debacle only highlights the flaws of the current fiat-based financial system – ever-rising debt powering a slow, but consistent inflation tax on fiat currency holders.
That only boosts the case for decentralized cryptocurrencies like Bitcoin and Ether.
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