If the US defaults, will investors rush to buy Bitcoin, Ethereum?

[30/5/2023]
The US is inching towards a moment that could have historic consequences for global markets, with the risk of defaulting for the first time. This is a potential black swan event that has the potential to have a major impact on Bitcoin, Ethereum and the rest of the crypto market

A few weeks ago, Janet Yellen, US Secretary of the Treasury warned the government would soon run out of money if the debt ceiling did not slow down or increase—a risk that could happen as early as June 1. If lawmakers remain deadlocked on coming to an agreement on spending, Washington will not be able to pay its bills, she said.

Similar conflicts over debt ceilings have rocked markets in the past. For example, in 2011, before a solution could be found, a prolonged disagreement over the debt ceiling sent the S&P 500 16% plunge 16%, shocking investors.

This time, Wall Street remains calm. Since Yellen's comment on May 1, the S&P 500 is down less than 1%. However, Bitcoin has fallen by more than 7% and Ethereum by nearly 3% in the same period, according to CoinGecko.

America's "G Time"

Often, debates about debt ceilings generate more buzz than events that actually impact the market, said Greg Magadini, derivatives director at Amberdata. But he acknowledged the possibility of US debt default is not impossible.

Right now everything is "like a tense game of chicken". And with all the crazy things that have happened in the past few years, I think anything is possible

Greg Magadini, Head of Derivatives at Amberdata

In the event that the US government defaults on its debt, risky assets such as stocks and crypto will face a short-term impact. That's because a deterioration in the quality of government-backed debt, Magadini explains, is likely to increase borrowing costs, and lead to an unexpected result: rising yields and a stronger dollar against financial assets. other products.

mỹ vỡ nợUS debt default, investors will rush to buy Bitcoin?

Similarly, the dollar could strengthen during US defaults as US traders tend to repatriate US dollars — swapping foreign currencies and assets for the greenback during risky events, James Butterfill - Chief Executive Officer James Butterfill CoinShares research lab commented.

"In theory, the dollar would sell off in the event of a default, but that's not going to happen because people tend to send dollars home during times of market stress," he said. “Strange that the USD can actually strengthen, because people are worried and this is not very good for Bitcoin.”

Butterfill envisions the dollar strengthening and Bitcoin sliding as the US approaches what the White House calls America's "G-hour", the day when the government will officially no longer be able to pay its bills.

"This is a really complicated scenario," Butterfill said, noting he doesn't think default is likely. "Exactly, no one knows what will happen."

Bitcoin Pops Up, Ether Still Falling?

In the event of a default, Bitcoin and Ethereum may react differently, said Magadini of Amberdata. After the initial slide, Bitcoin could rally alongside gold — as a hedge against government-issued currencies. Meanwhile, Ethereum may still crash along with tech stocks.

Gordon Grant, Co-Head of Genesis Trading also agrees, arguing that Bitcoin has many advantages over Ethereum if the US government can no longer meet its debt obligations, but initially both The currency will face pressure.

There may be an initial drop in prices, as risk assets are completely hit, as the stock market will fall. But Bitcoin is likely to go higher

Gordon Grant, Genesis Trading Co-Head

As for Ethereum, Grant said that the coin is tied to indices that track tech stocks like the NASDAQ, making it likely to underperform Bitcoin in the event of a default.

“It doesn't matter whether I think this is a fair comparison,” he said, noting there are current models that have demonstrated a relationship between things like NASDAQ and Ethereum.

As such, we tend to expect Ethereum to underperform

Gordon Grant, Co-Head Trading of Genesis.

SVB and sausage

As an example of how crypto has performed in recent risk events, Grant points to Bitcoin's outperformance against Ethereum after several banks collapsed in March, including  Silicon Valley Bank (SVB) . However, he noted that there is no historical data that predicts the reaction of crypto if the US government defaults on its debt for the first time in history.

khảo sátSurvey the possibility of US default on Twitter. Photo: Twitter.

As the possibility of default draws closer, both Grant and Magadini highlight increased activity in the Bitcoin options market. They further said this shows traders — mostly institutions — are betting that the coin will see increased volatility.

In the end, Grant said he believes lawmakers will settle their differences on Capitol Hill and reach an agreement as they have done before. But he also points to the bigger question: in an ever more polarized political environment, will events like these become increasingly common, and will they ever go away?

“We can brood and talk, but the real story is that the US government, as a nation in debt, is hitting the debt ceiling,” Grant said, adding that this was has become “the way sausages are made in the 21st century”.