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Analysts at odds over Fed, US debt ceiling impact on Bitcoin price


On April 26, House Republicans scarcely passed their bill to increase the U.S. debt ceiling. This led to analysts already weighing its potential impact on the price of Bitcoin (BTC), ranging from extremely bearish to overly bullish.

Ultimately, U.S. dollar liquidity is the key to both of these opposing viewpoint.

“Deflationary recession” to produce 2020-like BTC rally?

Some analysts, including Jesse Meyers, the COO 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.

BTC/USD daily price chart vs. dollar liquidity. Source: TradingView.com

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 they 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 M2 money supply crashing, the U.S. government debt may find it hard to attract buyers. 

M2 year-over-year flow versus stock. Source: Bloomberg 

In other words, a deflationary recession that Meyers believes will force the Fed to return to its 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 noted, reminding:

“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. So, it theoretically cannot generate more capital until the Senate passes the House-passed bill.

U.S. public debt to date. Source: FRED

However, it’s unlikely to pass the Senate and Biden has also vowed 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 noted. 

Former U.S. Treasury Secretary Lawrence Summers meanwhile downplays the fears associated with a potential debt default, noting that the odds of it happening stands under 2%.

Summers:

“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 go QE, bears argue

Presenting a similar outlook, analyst TedTalksMacro says extending the debt ceiling would ensure that the Fed continues contracting its balance sheet through the ongoing 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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