How Does the U.S. Debt Ceiling Affect Bitcoin Prices?

There’s been commotion recently in the United States Senate with regard to U.S. government debt. From Republicans walking out mid-talk to fears of treasury funds running out, the contentious issue has created unrest among investors and traders worldwide. As the June deadline approaches, the question remains whether the U.S. government will default on its multi-trillion-dollar debt. Although there have been sound arguments when it comes to the discourse between Democrats and Republicans, we’ve yet to see meaningful progress as the debt ceiling argument remains at a deadlock.

From possible default scenarios to the debt ceiling deal’s potential impact on the crypto market and Bitcoin, this article will cover all you need to know about the link between the U.S. debt ceiling and cryptocurrencies, as fears of a debt default intensify.

Key Takeaways:

• The U.S. debt ceiling, or debt limit, is a legislative cap on the total national debt that the U.S. Treasury can incur. 
• U.S. debt is approaching $32 trillion, which is higher than the $31.4 trillion debt ceiling that was previously set.
• There may be impacts on the crypto market, depending on whether the U.S. debt ceiling is raised or the U.S. defaults on its debt.

What Is the U.S. Debt Ceiling?

Originally introduced in 1917 as a means of providing Congress with the ability to control the government’s overall borrowing, the U.S. debt ceiling, or debt limit, is a legislative cap on the total national debt that the U.S. Treasury can incur. The debt ceiling essentially constrains the maximum amount that the federal government can finance so they can’t supplement the existing debt with additional borrowing beyond the limit.

What’s interesting about the U.S. debt ceiling is that its original purpose was to ensure that the executive branch didn’t have unlimited power to accumulate debt. Over the years, the debt ceiling has undergone changes and amendments to reflect the evolving financial landscape of the nation.

Current U.S. Debt Ceiling Situation

With U.S. debt approaching $32 trillion, the U.S. government has unfortunately blown past the $31.4 trillion debt ceiling that was previously set. In addition to its yearly budget deficit, America has had to borrow extra money to pay for pandemic relief and stimulus packages. As such, hitting the debt ceiling is an increasingly pressing issue that lawmakers must contend with as U.S. Secretary of the Treasury Janet Yellen continues to ring alarm bells about the treasury running out of resources by early June.

Additionally, there have been talks about abolishing the entire U.S. debt ceiling in light of the various geopolitical and macroeconomic headwinds, ranging from the global pandemic to U.S.-China tensions. Critics argue that the U.S. government needs to abolish the debt ceiling so the American economy can get back on its feet and regain its competitive edge in the world.

As of May 30, 2023, U.S. President Joe Biden and Republican house speaker Kevin McCarthy seem to have come to a debt ceiling deal that suspends the U.S. debt ceiling of $31.4 trillion until January 2025, in the hopes of giving the government enough time to pay its bills. To keep new debt at a minimum, non-defense discretionary spending is promised to be flat for 2024.

What Happens if the U.S. Defaults on Its Debts?

An American debt default could result in a wide variety of issues for both the U.S. and the world.

Government Shutdown

First, a government shutdown might occur. This is a situation in which non-essential government services are effectively halted, affecting various sectors and citizens relying on government support. Americans had a preview of this during 2013’s government shutdown, when members of the government disagreed over the Continuing Appropriations Act. Overall, the government shutdown lasted 16 days, significantly disrupting the lives of federal employees as more than 1.3 million people continued to work without knowing when their next paycheck would arrive, while 800,000 employees were put on furlough and temporarily suspended.

Credit Rating Downgrade

Another severe consequence of a U.S. debt default could be a U.S. credit rating downgrade. Rating agencies such as Standard & Poor's and Moody's could take the debt default as a negative sign of America’s trustworthiness, and lower the country's credit rating. If that happens, it could be more expensive for the U.S. to secure a loan from Treasury securities in the future. 

One such scenario occurred in 2011, when S&P issued a negative outlook on the United States' AAA sovereign-debt credit rating for the first time since the rating agency's establishment in 1860. Downgrading the sovereign debt ratings from AAA to AA+ threatened the risk-free reputation of U.S. treasury securities. 

In order to prevent this scenario from recurring, the government needs to reach a consensus and increase the debt ceiling to avoid any potential repercussions of a credit rating downgrade, and the risk of tainting the reputation of U.S. Treasury securities.

Dollar Devaluation

In the case of a U.S. debt default, the value of the dollar will likely fall in global financial markets. While the U.S. dollar is usually seen as the world’s reserve currency, the inability of the government to resolve its debt repayment could undermine faith in the dollar as confidence in U.S. Treasury securities dips. In turn, this could lead to higher inflation rates, affecting other global economies due to their reliance on American imports and exports. 

Additionally, U.S. citizens could see decreased access to money from retirement funds or other investments because of the government's inability to properly manage its debt payments.

How Does the U.S. Debt Ceiling Affect the Crypto Market?

The section below speculates as to what could happen if the U.S. debt ceiling is raised in time, as well as the alternate scenario if the U.S. defaults on its federal debt.

1. The U.S. Debt Ceiling Is Raised

Although the U.S. debt ceiling is raised and the potential of default is postponed until 2025, the issue of America’s trillion-dollar debt remains, with no near-term solution in sight. While the raising of the U.S. debt ceiling might cause money to flow from alternative assets toward stocks and bonds, this may not be the case in the long run. 

As headwinds (such as the banking crisis contagion and an upcoming credit crunch) continue to plague the economy, the long-term bull case for cryptocurrencies will continue to grow stronger. Will Bitcoin and other altcoins be that “flight to safety” for investors seeking shelter from the world’s macroeconomic troubles? Only time will tell, as the world continues to fight the fires of runaway inflation.

2. The U.S. Defaults on Its Debt

The U.S. debt default might create a ripple effect that could very well end up impacting the price of Bitcoin and other digital currencies as the confidence in the U.S. dollar is shaken. Investors may possibly dump their U.S. dollars, and turn away from traditional investments. They could then seek alternative assets to hedge against the fiat economy. This includes digital currencies, because they’re viewed as decentralized assets, shielded from the volatility facing fiat money.

On a macro note, a default on U.S. debt could also cause inflation to skyrocket, as Treasury securities become less attractive because they’re no longer considered as risk-free as they once were. This would further benefit Bitcoin, because its fixed supply means it can’t be devalued by inflationary policies, unlike fiat money.

How to Trade Bitcoin During the U.S. Debt Ceiling Crisis

With the fate of the U.S. debt ceiling still hanging in the balance, investors and traders uncertain of the potential impact it could have on the market should exercise caution and manage their risk. For those looking to invest in Bitcoin and other altcoins during this period, it’s important to keep in mind the following basic strategies when building a position in cryptocurrencies.

Diversification

While you may hear Bitcoin or Ether maximalists exclaiming that a “maxi” portfolio consisting of only one coin is ideal, this can be extremely risky during times of economic uncertainty. Diversification is key when trading any asset, and the same applies to Bitcoin and other cryptocurrencies. By investing in a range of cryptocurrencies, you can help spread your risk across multiple markets and reduce the potential impact, should one or more of them experience a significant downturn.

Dollar-Cost Averaging

Dollar-cost averaging (DCA) is an investment strategy that involves spreading your trades over a period of time to reduce the inherent risk of any single trade. With DCA, you’re buying a cryptocurrency at regular intervals, regardless of price fluctuations. This approach allows you to buy more of the same cryptocurrency when prices are low and less when prices rise, thus helping to reduce overall volatility in the market. 

By doing this over time, you can build up a position in crypto without taking on too much risk associated with investing in one go. This approach takes away some of the financial speculation involved with crypto investing, and helps to maximize your returns by making sure that you’re not entering at peaks, or leaving at troughs.

Event-Driven Speculation

The following Bitcoin trading strategy should only be attempted if you’re actively managing your portfolio, and are making use of tight stop-losses in order to prevent massive losses. 

In theory, the U.S. debt ceiling issue should be resolved in due time, now that a deal between both parties has been arranged. While there might be near-term volatility because of possible delays and macroeconomic headwinds, once the deal is finalized, we could see the return of rampant speculation in cryptocurrencies, as bullish traders flood the market with funds that they’ve been sitting on since the start of the U.S. debt crisis.

On the flip side, a similar bearish argument could be made for users to transfer their funds to safer assets like commodities, stocks and bonds. This outflow could cause a short-term correction for cryptocurrencies.

The Bottom Line

In conclusion, the U.S. debt ceiling crisis could have an effect on cryptocurrency prices. It’s important for investors to be prepared, with a plan in order to protect their investments and stay ahead of any sudden changes in the market. This includes fundamental strategies like diversification and DCA investing, which will help investors and traders strategically manage positions and minimize losses due to volatility. With the right preparation and knowledge about how these techniques work, you can benefit from trading digital assets during this period of economic uncertainty.

Disclaimer: The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Bybit or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.