4 - 6 minute read
On April 26, House Republicans narrowly passed their bill to increase the U.S. debt ceiling. This has led to analysts already weighing its potential impact on the price of Bitcoin, ranging from extremely bearish to overly bullish. Ultimately, U.S. dollar liquidity is the key to both of these opposing viewpoints.
The debt ceiling represents the maximum amount of money the U.S. government can borrow to pay its bills. Raising it means they can issue more debt to generate more capital. But since the Fed is not buying bonds anymore thanks to its “quantitative tightening,” and the flow of available M2 money supply crashing, the U.S. government debt may find it hard to attract buyers.
Jesse Meyers, the COO of investment firm Onramp, believes raising the debt ceiling would prompt the Federal Reserve to print more money, thus boosting capital inflows into “risky” assets like Bitcoin. In other words, a deflationary recession that Meyers believes will force the Fed to return to its quantitative easing policy.
“Deflationary recession” to produce 2020-like BTC rally?
“When the debt ceiling is lifted and credit-contraction leads to economic crisis… They will have to print money on a massive scale,” he noted, reminding: “Bitcoin was the winner during the last round of stimulus.”
The government has already hit its $31.4 trillion debt ceiling in January 2023. So, it theoretically cannot generate more capital until the Senate passes the House-passed bill. However, it’s unlikely to pass the Senate and Biden has also vowed to veto the bill. The standoff could result in the U.S. government defaulting on its debt in June, which poses negative consequences for the U.S. dollar.
Jeff John Roberts, crypto editor at Fortune, noted, “If [Republicans] decide to go the kamikaze route during the current debt ceiling standoff, it will deliver another major hit to the dollar’s credibility—and a further boost to Bitcoin.”
Former U.S. Treasury Secretary Lawrence Summers downplays the fears associated with a potential debt default, noting that the odds of it happening stands under 2%.
Presenting a similar outlook, analyst TedTalksMacro says extending the debt ceiling would ensure that the Fed continues contracting its balance sheet through the ongoing QT. That points to lower liquidity and, in turn, more downside pressure for Bitcoin.
The potential impact of the debt ceiling standoff on Bitcoin is uncertain. Some analysts believe it could lead to increased capital inflows into the cryptocurrency, while others believe it could result in more downside pressure. Traders should keep a close eye on developments and the U.S. dollar liquidity to make informed decisions.
The Bottom Line
The U.S. debt ceiling standoff could have significant implications for Bitcoin. Traders should closely monitor developments and the U.S. dollar liquidity to make informed decisions.