Democrats and Republicans are “nowhere near a deal” in raising the debt ceiling and preventing a catastrophic default for the U.S. government. Premature rumors of progress had caused a surge in the price of bitcoin.
U.S. Debt Ceiling Explained
The United States government has a limit to how much debt it can put the country into.
The current limit is $31.4 trillion, which was reached earlier this year.
If the debt ceiling isn’t raised, the government will have to either dramatically cut spending or raise new revenues, neither of which is likely.
The U.S. has been running a deficit almost continuously for decades, and cutting the deficit to a surplus is practically impossible.
Without a surplus, raising the debt ceiling is the only way for the U.S. government to continue paying its debts to bondholders, as well as paying its staff and other expenses.
The government will default on its debts as soon as June 1st if the ceiling isn’t raised before then.
The Democrats are hoping to preserve as much of their spending plans as possible, such as Biden’s climate legislation, a cornerstone of his presidency.
The Republicans, however, are looking for drastic cuts in spending, and potentially even a cap on future spending.
What Does This Mean For Bitcoin?
Standard Chartered Bank has suggested that bitcoin could become a safe-haven asset, and could go up in price by 70% in the event of the U.S. defaulting on its debt.
Investors may see bitcoin as a hedge against inflation, and might, therefore, invest in it more as the U.S. economy suffers.
However, this seems unlikely.
Investors would probably sell any holdings that are deemed even slightly risky, whilst instead putting investments in more traditional safe-haven assets like precious metals, or productive assets such as real estate.
It is considered likely that gold would benefit more than bitcoin from a debt default.
A default may well cause a stock market crash, huge unemployment levels, and a recession.
The price of bitcoin has traditionally been correlated with the stock market, partly because people invest in these assets when they have disposable income.
A recession would be bad for bitcoin because people would have less disposable income to invest, putting far less buying pressure on bitcoin.
They might also need to sell their holdings to cover expenses, meaning selling pressure on bitcoin would increase.
All this could lead to a crash in the price of bitcoin.
Rumors Of Debt Ceiling Progress Increase Bitcoin Price
Rumors that progress had been made in reaching an agreement on raising the debt ceiling, and thus avoiding a catastrophic default, seemed to lead to a surge in bitcoin price.
Whilst these rumors turned out not to be accurate, the price has not since decreased.
We can’t be sure exactly which way the price will go if the U.S. does default on its debt, but the prevailing wisdom seems to be that it won’t be good.
If the government does manage to find a solution, however, bitcoin could benefit as people are saved from the recession but continue to lose faith in our fiat-driven system.
Whatever happens, the cracks in the traditional financial system are becoming clearer.
Bitcoin will be waiting to fill the void.
