If the US was to default on its debt, the consequences on the world economy would be unimaginable. Bitcoin holders, however, might actually enjoy it.
While reaching an agreement for the debt ceiling in the United States would be good news for the entire world, it would likely be bad for Bitcoin investors. The sovereign debt crisis is currently gripping the US, and its outcome is likely but still not 100% certain.
Last week, US president Joe Biden finally acknowledged the existence of the crisis and decided to cut his trip to Asia short to find an agreement with Republican opposition.
According to most estimates, the United States debt will mature in early June. Without raising the ceiling, it would mean the US would default on its debt for the first time in history.
While Republicans want to raise the ceiling to avoid default, they want it on the condition that the debt time bomb is addressed once and for all. Republican House speaker Kevin McCarthy proposed a bill that would cut public spending and start paying back the immense US debt.
During his announcement, McCarthy reminded the public that US debt amounts to $31,4 trillion, roughly 20% bigger than the whole nation’s GDP.
This absurdly large sovereign debt is threatening the US dollar’s purchasing power and many nations are already questioning its role as global reserve currency.
The impact of the crisis on Bitcoin
Bitcoins, as always, live an economical life of their own, often opposing the “canonical” economic trends.
Obviously, an American default would spell disaster for the global economy, with hardy imaginable, terrifying consequences. It would be the economic equivalent of launching an atomic bomb on the Kremlin in Moscow.
According to some estimates, American GDP would drop by 10%, hundreds of millions would lose their jobs, inflation would reach double digits again and a long global recession would come.
Nevertheless, if the US avoids default it would be bad for Bitcoin. “Money will move out of cash and risk assets into U.S. government bonds,” said crypto author Noelle Acheson. “Especially as yields on these instruments rise to offset the increase in supply.”
The logic behind it is very simple. Bitcoins are a risky asset while the US long term bonds are generally considered the safest assets to invest on. Essentially, they are on opposite poles of the financial spectrum.
An American default would, for obvious reason, plummet the yield of US long term bonds, favoring less “orthodox” assets like Bitcoins. Investors would stop putting confidence into American bonds and look for new investment ventures.
Furthermore, because a US default would likely mark an end to the dollar as global reserve currency, it would likely revolutionize the world of finance as a whole. Perhaps cryptocurrencies could have a real chance of becoming the new reserve currencies, replacing the US dollar.
But, of course, all of this is just pure speculation.
