Many operators within and beyond the crypto sector think that the political standoff that currently exists around the debt ceiling increase makes the digital assets more attractive for investors in the long term.
The US federal government’s default on its infamous debt has been averted, just for now. On October 7, 2021, the Senate voted to increase the country’s debt limit by $480 billion, a sum required for the biggest borrower in the world to keep paying off its obligations until sometime in early December 2021.
This deal secured a temporary resolution for a weeks-long major standoff that had most investors within and far beyond the United States unsettled. The previously unimaginable prospect of a United States default appeared more achievable than ever before.
As the entire system was filled with lots of uncertainty ahead of the vote, the crypto market seems to be doing just fine, led by the flagship crypto’s biggest bull run in months. This scenario has spurred customary narratives of cryptocurrency’s decoupling from the other traditional asset classes and of BTC as a haven in times of imminent financial crises.
What are now the possible effects of the debt limit crisis on the role played by digital assets in the global financial space?
Increasing Own Credit Card Limit
The United States government, due to its position as the controller of the printing press for the world’s reserve currency, seems to have a unique power to set its in-house debt limit. Congress at first imposed a cap on the aggregate national debt in 1939. This limit has been increased on more than 100 occasions since then.
While the debt ceiling increase is mostly not a partisan issue, things appear to be different this time around. Some of the embittered Democrats who have ambitious social and climate spending agendas and Senate Republicans took up a principled stand refusing to back their opponents’ trials to address the impending deadline for defaulting on federal debt or raising the debt limit.
Lack of Republican support for growing the debt limit, which needs 60 votes to pass the Senate instead of the simple majority that Democrats already wield, might be considered to be a symbolic move. Raising the amount of money that the Treasury may borrow does not permit new spending in itself, but instead is meant to enable it to cover the current obligations.
Putting partisan politics aside, some of the critics think that the federal debt policy that relies mainly on continuously increasing the borrowing cap is not ideal for the wallets of regular Americans. The co-founder and chief operating officer of crypto retirement investment provider Bitcoin IRA, Chris Kline, noted:
“The government has given itself the ability to increase its credit card limit every year for the last hundred years on average and that has ramifications for the middle class. Middle-class Americans are feeling the biggest pinch in their wallets from inflation and rising costs, all spawned from a monetary policy that is expanding the USD balance sheet.”
A Risky Haven
This temporary segment of a solution that the Senate has now agreed on just postpones the debt ceiling issue until early December. This in itself effectively perpetuates macroeconomic uncertainty. One key argument is that the uncertainty can play well into Bitcoin’s hands in the coming weeks.
The head of corporate payment solutions at crypto exchange CEX.IO, Arina Kulackovska, thinks that:
“This uncertainty could potentially continue to be a driver of a BTC rally.”
Concurrently, Kulackovska notes that cryptos are beginning to trade apart from the legacy markets. This scenario might result in cryptos being less vulnerable to macroeconomic dynamics that majorly affect more traditional asset classes.
The managing director at online trading platform Spectre.ai, Kay Khemani, thinks that the effect of the debt limit suspension on the general financial markets, including the digital assets might prove favorable since it would result in more liquidity in the system. But, this would also accumulate more debts that seem to flow to financial assets first.
Khemani also said:
“Higher debt does erode the value of the dollar over time and this further strengthens the narrative — however misguided it may be — that crypto is a haven asset.”
Nonetheless, the degree to which cryptos have managed to decouple from other assets including stocks is still a matter of extensive debate. One analyst at investment advice company The Motley Fool, Eric Bleeker, told reporters:
“As the kind of currency that relies on predetermined math instead of political brinkmanship, you’d figure Bitcoin would benefit from events like debt ceiling stand-offs. […] While most Bitcoin fans point to it being an asset with a limited supply that should gain in value while the U.S. prints more debt, the reality is that it’s been most closely correlated to the value of other risky assets in the short-term sell-offs.”
One notable example that Bleeker referred to was Bitcoin shortly losing over 50% in March 2021 at the start of the pandemic. He also said that things might play out differently in the long term, with events like the US debt ceiling crisis degrading some trust in the dollar and making alternatives like BTC more attractive to the investors.
While the analysts and participants in the industry differ on the near-term effects of the US federal debt limit uncertainty on the crypto space, a majority of them seem remarkably consonant when they debate on how it can affect the market in the long term.
Two simultaneous trends that are normally mentioned are the erosion of trust in the dollar and institutions that back it, and the growing demand for cryptocurrency.
The CEO of digital asset trading platform Apifiny, Haohan Xu, believes that:
“raising the debt ceiling will steadily apply more buy pressure on BTC, causing prices to steadily rise over time.”
On her part, the chief marketing officer at crypto exchange Gate.io, Marie Tatibouet, thinks:
“crypto’s quality as a market hedge will shine through.”
She added that the cryptocurrency industry has already outgrown the stocks market and gold since the pandemic started, adding:
“If there is indeed a financial crisis due to the government defaulting, then crypto will be a haven in the long term, as it has already proven to be.”
On the other hand, the CEO and co-founder of financial services provider Unbanked, Daniel Gouldman, refers to the entire saga surrounding the debt limit increase as ‘ridiculous’ since it makes the US’ credit score be held hostage by partisan politics:
“We welcome more people into crypto as our elected officials continue to play chicken with the full faith and credit of the U.S. dollar and U.S. government’s commitment to its own prior spending decisions.”
CEO of The Crypto Company, a blockchain education and training institution, Ron Levy, highlights the contrast between the two financial systems that the current debt ceiling crisis makes majorly conspicuous. Levy believes that it might be the ideal time when the cryptocurrency sector might finally manage to decouple from the traditional financial systems:
“On the traditional side, we have inevitably continued money printing, growing inflation, and economic uncertainty. On the crypto side, we have an industry that has grown and continues to grow exponentially.”
It might be impossible to tell in case the eventual decoupling is attainable at all, leave alone when it can be achieved. But, the debt ceiling crisis appears to go a long way toward commenting on the difference between how traditional and digital money is governed, and the comparison is not mainly favorable to the fiat currencies.