Potential black swan? What would happen to BTC and ETH in the event of a US debt default?

For the crypto market, there are risks and opportunities.

This article is from Decrypt, author: André Beganski

Odaily Planet Daily translator | Moni

June 1 may be a date with historical significance for the global market. The United States faces the risk of the first default on its debt, which is a potential black swan event that could have a huge impact on Bitcoin, Ethereum, and even the entire cryptocurrency market.

Several weeks ago, U.S. Treasury Secretary Janet Yellen warned that if the debt limit was not suspended or raised, the U.S. government would soon run out of money, and that day could come as early as June 1 mentioned above. The United States has never defaulted before. Interestingly, after the warning was issued, both Bitcoin and Ethereum prices fell, with losses even exceeding those of stocks.

Data shows that since May 1, the S&P 500 index has fallen less than 1%, while according to CoinGecko data, Bitcoin has fallen by more than 7% during the same period, and Ethereum has fallen by nearly 3% – it is worth noting that similar U.S. government debt ceiling stalemates have made traditional financial markets feel uneasy in the past, such as the debt ceiling dispute in 2011, which led to a 16% plunge in the S&P 500 index.

The “X-date” in the United States

Greg Magadini, derivatives director of Amberdata, believes that under normal circumstances, the U.S. government’s debt limit issue would bring more noise to the market-but he admits that U.S. debt default is not impossible:

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

Magadini said that if the U.S. 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 raise borrowing costs, and raising loan yields against intuition will make the dollar stronger against other assets.

Blockchain.com CEO Peter Smith also 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 debt limit of $31.4 trillion, the US government may default on its debt next month, which would be detrimental to cryptocurrencies and cause the market to quickly fall. However, Peter Smith also pointed out that in the long run, cryptocurrencies may experience a very strong rebound after the decline, as the cryptocurrency market follows cyclical patterns, and 2024 will be “another exponential year.”

James Butterfill, research director of CoinShares, also believes that the US government’s debt default may push the US dollar higher because US traders tend to move dollars onshore during safe-haven events, i.e., 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 stress, and the dollar may actually strengthen, which is actually not good for Bitcoin.”

James 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 slide.

Is there a possibility of a rebound in Bitcoin?

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

Greg Magadini, derivatives director of Amberdata, and Gordon Grant, co-head of trading at Genesis, analyzed that if the US government cannot fulfill its debt obligations, Bitcoin will face more pressure than Ethereum in the initial stage, but Bitcoin may rebound with gold after a short-term decline, while Ethereum, as the second-largest cryptocurrency by market capitalization, is usually tied to indices tracking tech stocks such as Nasdaq. If there is a debt default, its performance may not be as good as Bitcoin.

There is a recent example worth referring to, which is the Silicon Valley Bankruptcy event.

After several banks, including Silicon Valley Bank, collapsed in March of this year, the price of Bitcoin rose instead of falling, and the cryptocurrency market rebounded significantly, seemingly indicating that market fluctuations in traditional finance are actually beneficial to the cryptocurrency market. However, the US government’s impending debt default is not on the same scale as the collapse of US financial institutions. As Ray Dalio, the founder of Bridgewater Associates, analyzed, the Silicon Valley Bankruptcy event only affected institutions that had serious asset-liability mismatches, including US entities that purchased US government bonds and European entities that purchased European bonds due to monetary policy, and that was it.

It is worth paying attention to how cryptocurrency will react if the US government defaults on its debt for the first time in history.

According to a survey 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, with Bitcoin ranking third. On the other hand, as the potential default approaches, activity in the Bitcoin options market has increased, indicating that traders, mainly institutional traders, are betting on Bitcoin’s high volatility.

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

Disclaimer: Blocking all articles only represents the author’s point of view and does not constitute investment advice.
Original link: https://www.bitpush.news/articles/4469073

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