A political deadlock looms over the U.S. debt ceiling and its potential impact on the price of Bitcoin, which is already up 75% in 2023.
On April 26, the United States House of Representatives passed a bill to increase the U.S. debt ceiling. This led analysts to weigh its potential impact on the price of Bitcoin (BTC), ranging from highly bearish to overly bullish.
Ultimately, U.S. dollar liquidity is the key to both of these opposing viewpoints.
“Deflationary recession” to produce 2020-like BTC rally?
Some analysts, including Jesse Meyers, the chief operating officer of investment firm Onramp, believe raising the debt ceiling would prompt the Federal Reserve to print more money, thus boosting capital inflows into “risky” assets like Bitcoin.
The debt ceiling represents the maximum amount of money the U.S. government can borrow to pay its bills.
Related: Fed balance sheet adds $393B in two weeks — Will this send Bitcoin price to $40K?
Raising it means it can issue more debt to generate more capital. But since the Fed is not buying bonds anymore thanks to its “quantitative tightening” and the flow of available money crashing, U.S. government debt may find it hard to attract buyers.
In other words, a deflationary recession is coming, with Meyers believing it will force the Fed to return to a quantitive easing policy.
“When the debt ceiling is lifted and credit-contraction leads to economic crisis... They will have to print money on a massive scale,” he stated, adding:
“Bitcoin was the winner during the last round of stimulus.“
Dollar credibility blow would boost Bitcoin price
The government has already hit its $31.4 trillion debt ceiling in January 2023 and theoretically cannot generate more capital until the U.S. Senate passes the bill to raise the ceiling.
However, it’s unlikely to pass the Senate, with President Joe Biden also vowing to veto the bill.
The standoff could result in the U.S. government defaulting on its debt in June, which poses negative consequences for the U.S. dollar, according to Jeff John Roberts, crypto editor at Fortune.
“If [Republicans] decide to go the kamikaze route during the current debt ceiling standoff, it will deliver another major hit to the dollar’s credibility—and a further boost to Bitcoin,” he stated.
Meanwhile, former U.S. Treasury Secretary Lawrence Summers downplayed the fears associated with a potential debt default, saying the odds of it happening stand under 2%:
“I think the odds that we will default in the sense of insolvency, and over some interval people who hold bonds will not be able to get paid, are - assuming the absence of a major war - certainly under 2% over the next decade.“
Fed won’t do quantitative easing, bears argue
Presenting a similar outlook, analyst TedTalksMacro says extending the debt ceiling would ensure that the Fed continues contracting its balance sheet through ongoing quantitative tightening (QT).
That points to lower liquidity and, in turn, more downside pressure for Bitcoin.
“One caveat to the liquidity down/sideways for the rest of 2023 would be the Fed winding up or slowing the current pace QT,” TedTalksMacro adds.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
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