The Treasury is continuously making efforts to build back the cash balance since the debt limit situation’s resolution might take away the dollar liquidity. Once that is out of the system, it can push Bitcoin into a lower position.
Analysts and experts that the crypto market should brace for impact as the U.S. government continues to be in a deadlock on the negotiations regarding increasing the debt limit of $31.4 trillion debt. The uncertainty is keeping various markets tentative.
The US Reaching its Statutory Debt Limit
On Jan 19, the U.S. reached its $31.4 trillion statutory debt limit. As a result, the Treasury had to enforce some out-of-the-box measures by running down the Treasury General Account (TGA) balance for the government to stay functional.
That made sure that in the face of concerns regarding the government’s default and the Federal Reserve’s ongoing hikes in interest rates, investments such as cryptocurrencies, which are dependent on fluctuations in the U.S. dollar availability, remained bid.
According to MacroMicro, the TGA balance decreased to $68 billion last week from the approximately $500 billion it had at the start of February.
Furthermore, Goldman Sachs reported that the Treasury cash balance will go down to a minimum of $30 billion at the start of June. It indicates that the government would have to reach a debt deal by that point to prevent what some experts believe to be a catastrophic default.
Impact on Bitcoin and Other Assets in the Market
Even in the case, the debt limit is increased, the Treasury would issue government bonds to build back its cash balance. As a result, it would suck out the liquidity of the financial system.
An increase in the issuance of bonds would push the price down and increase yields, putting upward pressure on the bond yields. Bitcoin (BTC) will most likely move in the opposite direction that the bond yields go in.
Hence, though the potential deal could remove the major economic uncertainty, investments such as the Bitcoin that has no connection with the economy and are almost reliant on fiat liquidity could suffer.
The market is looking towards a panic selling situation in case of a default. There would be a global demand for cash which was the same that we saw during the March 2020 crash due to the Covid-19 pandemic. In that scenario, Bitcoin saw a decline of around 50% in its value.
Debt Deal Might Lead to Risk-on Action.
On the other hand, a debt deal might lead to a risk-on action. According to some observers, the top cryptocurrency was able to draw haven bids in March, during the banking crisis.
While other rate-sensitive assets such as stocks in the tech sector did perform well, the traders cashed in on the early Fed shift towards cutting the rates. Simply put, Bitcoin would continue to be a significantly liquidity-sensitive risk asset.
Satyakam Gautam, who works at the India-based ICICI Bank as a rates trader believes that the Treasury will be issuing bonds worth $700 billion in the coming months, causing a major risk aversion.
“What this means is that a shortage of USD funding in the current short term will place the ceiling negotiation in a successful place. Corporate bonds markets, along with private credit, will find it challenging to roll over their current maturities” Gautam said.
He further added “This will create a real crash in the simple junk bond issues or the real estate assets funding for commercial purposes. It could well be the real deal crash that the markets in the U.S. would be eye for.”