Future of cryptocurrencies as U.S raise debt ceiling till December
The recent tik-toks in Washington have raised concerns among investors on what the financial future holds for the cryptocurrency market.
It is no secret that partisan politics is the order of the day in Washington. Still, the democrats and republicans are expected to reach a compromise to avert any economic crisis.
Similar events have been ongoing through September until October 12th, when the lower legislative chamber in the US approved a bill to raise the debt ceiling through early December.
The idea behind the debt ceiling has been in inception since 1917, the US Congress imposed a cap on the total national debt in 1939, but it has raised this limit on more than 100 occasions since 1939.
So what is the fuss about the recent deal to raise the US debt ceiling? - well, times have changed, and so has the world economy.
The 2008 Economic crisis was a catalyst that led to the development of a digital currency; the idea was to prevent the government from making decisions that affect all humankind and take over the role of the middlemen.
These latest events prove the middlemen like the government and other corporate bodies wield power over every traditional financial system.
Though the US has never reneged on its debt agreement, the recent standoff in Washington has made investors wonder about the long term effect of raising the debt ceiling.
Lots of questions have been asked on the ramifications it holds for the cryptocurrency ecosystem.
The cryptocurrency market has always been correlated with the traditional stock market, but the former seems to have been on an independent trajectory amid government crackdowns and regressive economic polity.
This article seeks to examine the effects of the debt crisis on the cryptocurrency market. The need to explore the role of this constant gridlock in Washington has never been more crucial.
Cryptocurrency was developed to prevent the influnence of middlemen on the economy.
What the future holds for the cryptocurrency market
Chester Spatt, professor of finance at Carnegie Mellon University, described the debt ceiling as a "limit on the federal government's ability to increase its debt". The U.S. government maintains its obligation by borrowing.
Without raising the debt limit, the U.S. may default on its primary obligation like paying salaries to federal employees, Servicemen, funding medicare and social securities; thus, the government must borrow to meet these needs.
It only fits that the U.S. does not default on the above obligations for the short term.
Still, constant borrowing has a long term effect on the economy in general, which is why the government has to enact some measures to service its debt in the long run, like increasing tax tariffs, cutting down spending, etc.
While the politicians in Washington debated how to proceed with the apparent nightmare, traders were speculating the net effect on Bitcoin and other cryptocurrencies.
Nancy Houten, a lead economist at Oxford, noted that though uncertainty and volatility may creep in, she believes that the market has enough confidence to withstand the storm.
Bitcoin survived the 2011 debt ceiling crisis when the U.S. government came close to a full-blown economic crisis even though Satoshi Nakamoto only launched the digital currency two years before the event.
The market capitalization of bitcoin was less than 1 billion USD in 2011, but as of press time, the bitcoin market is worth more than 900 billion USD.
The Bitcoin market has proven, it can also go haywire when values look unhealthy for traditional stocks. This was seen in March 2020 when the price dipped. It dropped from 8,000 USD to 5,000 USD because of the coronavirus pandemic.
Some economists warned of doomsday if the U.S. government fails to raise the debt ceiling. The catastrophe (not raising the debt ceiling) seems to have been averted, but what does this mean for the crypto market.
Raising the debt ceiling - Pundits examine its impact on the future of cryptocurrency.
The United States is host to the world's reserve currency; thus, every action or policy from the U.S. affects the world economy indirectly.
The value of any currency originates from the trust placed on it by the people. The constant borrowing and debacle in congress are seen as spearheading the erosion of faith in the U.S. Dollar and the world economy in general.
The above is why Kay Khemani, the M.D. of Spectre.ai, insisted that higher debt will erode the value of the U.S. dollar and strengthen the people's trust in cryptocurrency.
Chris Kline, the CFO of Bitcoin IRA, also noted the government's ability to increase its credit limit every year would only affect middle-class Americans by spurring inflation and devaluation of their savings.
The temporary fix will only hold until December, when the politicians will meet again to debate how much the U.S. can borrow.
Yet, it is widely believed that these uncertainties will spur the rise of bitcoin and other cryptocurrencies. Many believe it legitimizes the idea behind cryptocurrency.
Arina Kulackovska, an official at CEX.IO, reiterated that this uncertainty could drive the Bitcoin rally. She also pointed out that the cryptocurrency market has established itself independent of macroeconomic policies that generally affect traditional markets.
However, Eric Bleeker, an Analyst in Eric for the Motley Fool, warned that Bitcoin is an asset that relies on pre-determined maths; therefore, it is still related to the value of other risky investments in short term sell-offs.
The MD of Spectre.ai made a point about the liquidity effect from the debt limit suspension. According to Kay Khemani, raising the debt limit would increase liquidity which tends to flow towards financial assets.
Experts seem not to agree on the short-term effect of the debt ceiling uncertainty on cryptocurrency.
Still, research has shown that two assertions are widely seen as likely resultant effects: Erosion of trust in the dollar and its institution (USA) and an increase in demand for cryptocurrency assets.
Haohan Xu, CEO of APifiny, predicts that raising the debt ceiling will lead to rising bitcoin prices.
Even Daniel Gouldman, CEO of Unbanked, alleged that the uncertainties around the debt limit increase make the United States' credit score hostage of partisan politics.
However, it is worth noting that the cryptocurrency market is yet to mature compared to traditional markets. The usual scepticism surrounding the cryptocurrency market makes it a risky asset for newbies.
The argument about the potential of the crypto market decoupling from traditional finance has faced valid criticism.
Christopher Russo, a research fellow at George Mason University, notes that correlation tends to be more sticky; stocks and bonds become more correlated, and Bitcoin becomes more correlated with everything.
Notwithstanding Marie Tatibouet, the CMO of Gate.io believes that the cryptocurrency market has outgrown stocks and gold since the Coronavirus pandemic.
According to him, if the government defaults due to an economic crisis... "then crypto will be a haven in the long run, as it has already proven to be".