The U.S. debt ceiling and the fallout on Bitcoin
According to U.S. Treasury Secretary Janet Yellen, the government risks running out of cash in early June 2023 and has urged Congress to raise the debt ceiling. If the measure is not approved, the United States could go into a recession and drag the whole world with it, as happened in 2008.
The debt ceiling represents the limit set by the U.S. Congress on the amount of borrowing the U.S. government can accumulate. It was introduced in 1917, with the Second Liberty Bond Act. Since then the debt ceiling has been raised or suspended countless times under different American Presidents. To date, US debt stands at $31.46 trillion.
The political debate is very heated. Republicans are pushing to cut spending sharply, while Democrats would prefer to move differently. The talks between the two parties broke down and this uncertainty is reflected in the markets. Bitcoin is “pausing” at around $26–27,000 probably due to the expectation of these important decisions. A failure to deal could lead the United States into default with a possible collapse of the markets that would also affect Bitcoin. A shutdown is also expected, with the offices of the Federal government which could be temporarily closed due to the government’s inability to pay salaries and services.
In recent days, a certain fear had spread on the financial markets regarding the hypothesis that the Federal Reserve could further raise interest rates in mid-June. This fear raised suspicions that if Powell somehow confirmed or supported those suspicions, the markets might react badly. Instead, the exact opposite happened. The markets are convinced, for now, that there shouldn’t be a further increase in rates in June, and they continue to believe it is probable that they will be cut by the end of the year, even if only slightly. As of this writing, Bitcoin Fear and Greed Index is 48 — Neutral.
Meanwhile, Bitcoin 2023 Conference kicked off in Miami, FL although organizers expect a decrease in participants compared to previous years. There was some important news: the presence of U.S. Presidential candidate Robert F. Kennedy Jr who called Bitcoin “an exercise in democracy” and announced that he is accepting donations in Bitcoin for his campaign.
Additionally, Jack Mallers announced that he is moving Strike’s headquarters to El Salvador and that his Lightning Network app will expand to more than 3 billion people across 65 countries.
The next ten days will be decisive. If an agreement is reached in Congress, however, the US Treasury will have to issue more bonds as the debt limit is lifted, leading to a further liquidity drain on the markets and with the effect of a possible further run from bank reserves.
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