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- The first default by the U.S. government could be catastrophic for the economy and the stock market.
- It will be interesting to see how Bitcoin and the overall crypto space react in such a situation.
On Tuesday, September 28, Treasury Secretary Janet Yellen warned lawmakers that the federal government will likely run out of cash. This could be subjected to the U.S. Congress failing to raise the debt ceiling by next month October 18, 2021.
This could potentially be the first-ever default on its debt by the U.S. government if Washington fails to act. It shows that the U.S. could be facing a major liquidity crunch that could be catastrophic for the economy and the stock market. Furthermore, it could also mean delaying payments to millions of Americans coming from the government.
“It is uncertain whether we could continue to meet all the nation’s commitments after that date,” Yellen wrote in a letter, as accessed by CNN. The deadline projection depends on the estimated tax payments by the government.
The warning comes as the Senate Republicans recently blocked the bill that would suspend the debt limit. Yellen said that the October 18 deadline is only an estimate because the federal government’s cash flows are “subject to unavoidable variability”. At present, the U.S. government’s average daily cash flow nears $50 billion. The cash flow has also surpassed as high as $300 billion. Yellen added:
It is important to remember that estimates regarding how long our remaining extraordinary measures and cash may last can unpredictably shift forward or backward. This uncertainty underscores the critical importance of not waiting to raise or suspend the debt limit. The full faith and credit of the United States should put at risk.
What could happen to Bitcoin and the crypto market
If the U.S. government defaults on the debt, it is clear that the trust in the government’s way of handling money shall be lost further. Well, there’s a general perception that Bitcoin and the crypto space serve as a hedge against the traditional economy.
In this case, if the money moves out of the stock market it can potentially enter into Bitcoin and crypto. However, historical trends suggest that things don’t always move as per theoretical perception. We have seen that crypto markets have reacted in tune to the U.S. stock markets. The classic example is the March 2020 crash in both – the crypto market and the global stock markets.
In this case, Bitcoin can tank further and it would be difficult to say how far this would go. But a lot of market analysts have been positive about the bitcoin rally for Q4 2021. Historically, the fourth quarter has been one of the best-performing quarters for the crypto market. Some analysts have already given a $100K BTC price target by the end of this year.
Knowing the fact that the crypto market is highly volatile, it can spiral in any direction.
