Evaluating how Bitcoin will be affected if the US defaults on its debt
- This market analysis explains why Bitcoin may have difficulty securing liquidity.
- Whales and institutions demonstrated outflows as the market presented a gloomy outlook.
It was observed that Bitcoin [BTC] and altcoins were on a slippery slope in recent days. A consequence of wavering investor sentiment. But will things get better or is there more pain to come?
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Let’s shift gears a bit and consider the market from a different angle that has to do with Bitcoin’s correlation with traditional finance. There is no doubt that the US is one of the largest markets for crypto and it contributes significantly to the liquidity of Bitcoin and altcoins.
This is a double-edged sword because it also emphasizes some risks if the US were to face a liquidity crisis.
An April 25 assessment suggested that a Bitcoin liquidity crisis could only be in the cards if the US defaults on its debt obligations.
The analysis by Twitter user under the pseudonym Tedtalksmacro looks at various factors behind the liquidity that drove the YTD gains. He noted that the US Treasury began drawing down on cash reserves as the debt ceiling was reduced.
2/ The recent increase in global liquidity is due to:
– US debt ceiling situation –> Treasury draws down on its cash reserves,
– Banking crisis –> Fed balance sheet expansion to stop failing banks,
– China restarts economy after COVID -> stimulate with $$ pic.twitter.com/7NVjHeC8v6— tedtalksmacro (@tedtalksmacro) 25 April 2023
The recent banking crisis also forced the US Federal Reserve to stop quantitative easing (QT), in favor of liquidity injections. While this result stimulated the bulls, it is likely to be a temporary move when the FED has limited cash reserves to draw upon.
Will the liquidity taps run dry?
Tedtalksmacro’s assessment highlighted the risk of a liquidity crisis if the US runs out of cash reserves. When that happens, the US must raise the debt ceiling. This is to raise funds through debt instruments such as treasury bills.
Doing so would lead to more quantitative tightening, which in turn would have a negative impact on higher-risk investments like Bitcoin.
2/ The recent increase in global liquidity is due to:
– US debt ceiling situation –> Treasury draws down on its cash reserves,
– Banking crisis –> Fed balance sheet expansion to stop failing banks,
– China restarts economy after COVID -> stimulate with $$ pic.twitter.com/7NVjHeC8v6— tedtalksmacro (@tedtalksmacro) 25 April 2023
The above analysis may explain why the market is experiencing a decline in the level of liquidity entering it. The analysis also noted that FED can slow the QT rate, which does not necessarily lead to large outflows, but a lot of sideways activity instead.
How much is 1,10,100 BTC worth today
So how do whales and institutions respond to this scenario? They contributed significant liquidity to BTC from the second week of March to mid-April. However, results after mid-April indicated some outflows of liquidity.
Source: Glasnode
This analysis underscores a strong reason for investors to follow FED activity as it can provide insight into the next market move.
