Key Takeaways:
Some investors try to use this predicament to their benefit, but the risks are reasonably high.
Cryptocurrencies must brace for change either way but most likely won’t benefit from this affair.
The threat of US default is more visible than ever.
Debt limit-raising deal talks are moving slowly.
Opinion: US Debt Crisis is a Catch-22 Situation for Crypto Investors
YEREVAN (CoinChapter.com) — The future of crypto is looking iffy thanks to US debt uncertainty, and the opinions vary vastly.
The US reached its debt limit of $31.4 trillion in January 2023. In response, Treasury Secretary Janet Yellen said that the US is enacting ”extraordinary measures” to combat the situation.
Historically the US’s debt ceiling has been raised numerous times since 1917, suggesting a last-minute escape from becoming a country that defaults.
Theoretically, a potential default situation is bad for international actors, including countries and organizations that heavily rely on US assistance financially and politically.
The US statutory debt limit has been rising, and the solution to the problem is not yet clear. The Roots of the 2023 US Debt Crisis
In 2019, the US government funneled over 60% of the federal budget into programs like Social Security, Medicare, and Medicaid, while allocating 30% to discretionary spending, including defense. The remainder went to pay for interest on the debt itself.
In the meantime, an overview provided by the Council on Foreign Relations states that mandatory spending programs and interest on the debt were forecasted to take up more of the federal budget. Yet, at the same time, tax revenues were anticipated to remain the same that year.
While in the fiscal year of 2022, the federal government generated $4.90 trillion in revenue but spent $6.27 trillion, accumulating a net budget deficit of $1.38 trillion, the fourth-highest of the 21st century. Moreover, the US government has run with a yearly deficit since 2001.
This type of budget strategy has been in action for many years, which created the conditions that made the current debt ceiling crisis a reality that we see today in front of our very own eyes.
Many investors warn that this crisis holds more dangers than even the one that happened in 2011 Fear and Opportunities in Potential US Debt Default
Investors and politicians are pondering whether the default can happen or if it is a temporary scare until a deal is forged. But either way, the clock is ticking, and different parties involved have different estimates of when the government might exhaust its ability to fund itself.
The administration has communicated that it might fall through the roof as early as June 1. Wall Street either agrees with governmental cues or proposes its late-summer estimates, as shown in the image below. Nevertheless, it understands that the Treasury’s pockets will be slim around that time.
X-day forecasts by top US banks. Source: Bloomberg
The only parameter determining whether the US government can pay its debts and meet its spending obligations is the amount of cash in its checking account. That figure is crucial and fluctuates based on spending, tax receipts, debt repayments, and new borrowings.
However, congressional infighting has created barriers to proper decision-making for months already.
The Republicans and Democrats couldn’t engage in meaningful dialogue or find a win-win consensus that suits their agendas. But, at the same time, time doesn’t wait for either of them, and the crunch date is looming closer every day.
CDS Will Grow 2,400% — Bloomberg
Times of crisis create both dangers and opportunities, and some speculators focus on the latter more.
The Federal Reserve’s rapid series of interest rate hikes pushed the value of sovereign bonds lower, with even some trading below 50 cents on the dollar. That, in turn, means that speculators can potentially buy these bonds at low prices and then use them as collateral to buy Credit Default Swaps, or CDS.
A CDS is a financial swap agreement compensating the buyer during a debt default or other credit event.
So, if the US defaults, the value of said CDSs will skyrocket, resulting in a payout of over 2,400% according to Bloomberg calculations.
Nevertheless, this strategy is speculative and involves high risks, especially when optimistic outlooks still permeate through the thick cloak of pessimism surrounding these circumstances.
No Point of Return
Since the decision to raise the debt ceiling has become a constant occurrence, some economists have started to consider the likely repercussions in case of a US default, and these consequences are everything but hope-inducing.
In September 2021, global economics scholar Roger W. Ferguson Jr stated:
If the government defaulted, the US credit rating would plummet, interest rates on treasury bonds would go up sharply, interest rates both in the US and abroad would spike, and payments on benefits and salaries for the military will stop.
A different analysis written by Noah Berman, an assistant writer at CFR, identifies that probable consequences and losses would include reduced consumer belief. In other words, a recession can stomp about 10% of the US economy, increase the cost of a 30-year mortgage, lose three million jobs in the US, and increase the national debt because of higher interest rates.
Also, it is important to note that if the US defaults on its debt, providing continuous military support to Ukraine will be extremely difficult. Moreover, that default can be fate-changing for the US and Ukraine by proxy since she is even in a tight spot.
How Crypto Comes into Play?
The US default can leave a myriad of consequences for cryptocurrencies. On the one hand, in the best-case scenario, investors might consider crypto a new safe haven asset, driving up its price.
If we listen to Geoff Kendrick’s opinion from Standard Chartered, he could expect that the Bitcoin price can substantially increase by about $20,000. However, even if not all cryptocurrencies take advantage of a possible US default, Bitcoin will still have a market advantage, in his opinion.
In the worst-case scenario, where there would be mass layoffs, payment failures, and cratering of US markets, that can trigger investors to abandon any risky US holdings, which may include cryptocurrencies and related assets.
The problem also lies in the reality that investors, after a catastrophic default, can’t easily transfer money from the banking sector and put it into cryptos. So, it means that even if, in theory, there are benefits from the default, crypto won’t be able to capitalize on it, thanks to how the traditional banking system works and how its pillars of trust operate.
It is more likely that investors would, en masse, rely on more traditionally accepted safe-haven assets like physical gold. It’s unlikely that crypto will reap substantial benefits since the default as a concept is more of a destructive force than a transformative one by its very nature.
Nonetheless, likely, crypto won’t reap any fruit from this debacle. Still, investors may be more mindful of decentralized currencies after witnessing the illnesses that fiat currencies experienced this year alone.
US Debt Crisis is a Catch-22 Situation
It is very difficult to imagine that someone can wholeheartedly benefit from a catastrophic event like a default in any country, let alone in the US. Even if someone is on the good side of fortune and gains a miraculous victory, that victory is pyrrhic by design and short-term in length.
A default is deliberately corrosive to the economy, and expecting its benefit is somewhat ill-thought-out.
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