Implications For Bitcoin When The US Debt Ceiling Is Raised
The Doomsday debt ceiling is looming in the US and could have significant implications for Bitcoin. However, it remains to be seen when that will happen.
The US House of Representatives yesterday passed a bill to raise the debt ceiling. With a narrow majority, the House of Representatives, dominated by Republicans, approved the proposal of its president, Kevin McCarthy.
The bill proposes to raise the debt ceiling by $1.5 trillion, but only if there are also significant cuts in government spending. Largely because of that, the bill is not expected to have much of a chance in the Democrat-led Senate. Furthermore, President Joe Biden has already signaled his intention to veto the bill.
However, urgency is needed. Doomsday could arrive in “a few weeks”, according to experts. The US Treasury could no longer pay its bills; therefore, a quick resolution is required.
How will the US debt ceiling issue affect Bitcoin?
For Bitcoin and the entire crypto market, the debt ceiling discussion is particularly interesting from a liquidity point of view. As is known, Bitcoin is also called a “liquidity sponge”. This means that BTC and cryptocurrencies traditionally rise when there is loose monetary policy from central banks around the world and fall when liquidity is removed from the financial system.
As macro analyst Ted (@tedtalksmacro) is preaching, global liquidity is an important indicator of Bitcoin price. According to him, the rise in BTC price and the recent increase in global liquidity went hand in hand. During the banking crisis, the US Federal Reserve expanded its balance sheet with the Bank Term Funding Program (BTFP).
The restart of China’s economy after the end of Zero-COVID was driven by loose monetary policy. And finally, the current debt ceiling crisis has also helped the Bitcoin price rise, as the US Treasury currently needs to draw on its cash reserves.
However, in the coming months, that could quickly change due to the US debt ceiling, as Ted recently discussed. This is because US liquidity is made up of the Treasury’s General Account (TGA), the Fed’s balance sheet, and reverse repo injections.
Because of the debt ceiling, the US Treasury has had to resort to the TGA in recent months. When the TGA balance drops, the Treasury is said to be adding liquidity. And the consequences were not small, as Ted describes:
Treasury mitigated the negative liquidity impact of the Fed’s QT [Quantitative Tightening] efforts to date –> total liquidity injected via TGA exceeded total liquidity withdrawn via QT. Since the beginning of QT:
QT (Balance Sheet) = -$644B in Liq.
TGA reserves = +$780B in liq.
In other words, without the US Treasury, the Fed’s QT would have already hit the markets a lot harder. “Instead, the TGA supported a market conducive to riskier (liquidity) assets,” added Ted.
Raising the debt ceiling will mean the US Treasury will replenish its TGA reserves. This will be quite detrimental for Bitcoin and cryptocurrencies as the Fed’s QT will no longer be mitigated now. Ted concludes:
If QT comes to an end before TGA reserves are rebuilt -> sideways/upwards.
If QT continues and debt ceiling goes up -> down/sideways
Ultimately QT has a tighter grip on liquidity when the debt ceiling is raised and that points south unless the Fed kills QT….
Notably, the liquidity of other central banks around the world is also playing a role and could ease the impact, as Ted noted in a tweet today.
China is ramping up liquidity injections with reverse repo again. pic.twitter.com/ytuHTwIREl
— tedtalksmacro (@tedtalksmacro) April 27, 2023
Digital gold narrative grows
In the longer term, monetary policy will revert to Quantitative Easing (QE) as the credit crunch leads to an economic crisis. Bitcoin and gold will benefit from this, with both assets already showing increased correlation in recent weeks, as reported by Bitcoinist.
Renowned trader Peter Schiff commented on the debt ceiling:
Any deal to increase #DebtCeiling is not good news. It means that the US will continue not to pay its bills. So the debt will continue to grow and the Fed will continue to create inflation to pay it off. It’s bad news for the US economy, dollar and bonds and good news for gold.
At press time, the BTC price was at $28,972.
Featured Image from iStock, chart from TradingView.com