Potential black swan? What happens to BTC and ETH if the US debt defaults?

Original author: André Beganski, decrypt; Odaily Planet Daily translator: Moni

June 1st, a date that could have a historic impact on global markets, the US is at risk of defaulting on its debt for the first time ever, a potential black swan event that could have implications for Bitcoin, Ethereum , and even the entire cryptocurrency market.

U.S. Treasury Secretary Janet Yellen warned a few weeks ago that the U.S. government would quickly run out of money if it didn't suspend or raise the debt ceiling, and that could happen as early as the aforementioned June 1st. The U.S. has never defaulted on a contract before. But what’s interesting is that this time Janet Yellen said something like this—“Washington can’t pay the bills.” After the warning was issued, the prices of Bitcoin and Ethereum both fell, and the losses even exceeded the decline in stocks.

The data shows that since May 1, the S&P 500 has fallen by less than 1%, while according to CoinGecko, Bitcoin has fallen by more than 7% over the same period, and Ethereum has fallen by nearly 3% — you know, something like The deadlock over the US government's debt ceiling has rattled traditional financial markets in the past, such as a 2011 split that caused the S&P 500 to plunge 16%.

"X-date" in the United States

Greg Magadini, Director of Derivatives at Amberdata, believes that the U.S. government’s debt ceiling issue would normally create more noise in the market – but he concedes that a U.S. debt default is not out of the question:

"It feels like a really intense game of cockfighting right now, and I think anything is possible given how crazy things have become over the last few years."

Risky assets such as stocks and cryptocurrencies will face short-term pain if the U.S. government defaults on its debt, Greg Magadini said, because the decline in the quality of government-backed debt could raise borrowing costs, and counterintuitively raising loan yields would make borrowing easier. The dollar strengthened against other assets. **

Peter Smith, CEO of Blockchain.com, also held 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 US$31.4 trillion government borrowing limit, the US government may be in the next round. There will be a debt default in the next month, a scenario that would be bad for cryptocurrencies and see the market pull back quickly. However, Peter Smith also pointed out that in the long run, cryptocurrencies may have a very strong rise after a 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 period of U.S. government debt default may drive a stronger dollar because U.S. traders tend to move dollars onshore during risk-off events, that is, exchanging foreign currencies and assets for U.S. dollars.

** "Technically, if the U.S. government defaults, the dollar should be sold off, but that's not the case, and because people tend to keep dollars onshore in times of market stress, the dollar may actually strengthen as people increasingly The more worried, and the situation is actually not that good for Bitcoin."**

James Butterfill predicts that the U.S. dollar will strengthen and bitcoin will slip as the U.S. moves closer to what the White House calls the “X Date” — the official date when the government can no longer pay its bills.

Is there a possibility of a bitcoin rally?

If the U.S. government does end up defaulting on its debt, Bitcoin and Ethereum may react differently.

Greg Magadini, director of derivatives at Amberdata, and Gordon Grant, co-head of trading at Genesis, analyzed that if the U.S. government fails to meet its debt obligations, Bitcoin will be under pressure in the initial stage compared to Ethereum, but Bitcoin may fall with gold after a short-term decline. While ethereum, the second-largest cryptocurrency by market capitalization is often tied to an index tracking tech stocks such as Nasdaq, could underperform bitcoin in the event of a debt default.

Here is a recent example worthy of reference, that is - the bankruptcy of Silicon Valley Bank.

After the collapse of several banks, including Silicon Valley Bank, in March this year, the price of Bitcoin rose instead of falling, and the encryption market also experienced a relatively large rebound, which seems to indicate that the volatility of the traditional financial market is actually beneficial to the cryptocurrency market. However, the debt default that the U.S. government is about to face is not of the same magnitude as the collapse of U.S. financial institutions. As analyzed by Ray Dalio, the founder of Bridgewater Fund, the Silicon Valley Bank incident actually only affected institutions with serious asset-liability mismatches, including U.S. entities that buy U.S. government bonds, European entities that buy European bonds because of monetary policy, and so on, and that's it.

From this perspective, if the US government defaults on its debt for the first time in history, it will indeed be interesting to see how cryptocurrencies will react.

According to a survey conducted by Bloomberg Markets Live Pulse, if the U.S. government’s debt ceiling rises sharply, gold is the top choice for investors, followed by U.S. Treasuries, while Bitcoin is third. On the other hand, activity in the Bitcoin options market has increased as a potential default looms, suggesting that traders, mainly institutional traders, are betting on Bitcoin’s high volatility.

If the U.S. debt default does happen, it may trigger a global redistribution of wealth. For the encryption market, there are both risks and opportunities.