$1T liquidity hole to follow debt-ceiling deal – what will Bitcoin do?

treasury bills, $1T liquidity hole to follow debt-ceiling deal – what will Bitcoin do?

Key Takeaways:

  • Investors should hedge from the repercussions of the possible debt-ceiling deal.
  • The sudden drain of liquidity could tumble stocks.
  • Bitcoin might adopt a safe-haven sentiment.

YEREVAN (CoinChapter.com) – The US Treasury Secretary Janet Yellen confirmed the fears that the agency would unlikely meet payment obligations by early June, triggering the first-ever US default. However, Wall Street experts predict lawmakers will ultimately agree, likely averting the disaster.

Meanwhile, how will the possible liquidity hole affect the economy?

Treasury would have to sell its bills, says expert

Ari Bergmann, the founder, and CTO of Penso Advisers, says investors should hedge for the aftermath of a possible Washington resolution.

The expert asserted that the government would need to restock its dwindling cash buffer to maintain its ability to pay the mounting debt and flood the market with Treasury bill sales.

Moreover, the supply burst, estimated at approximately $1 trillion by the end of Q3, could quickly drain liquidity from the banking sector. Also, it could raise short-term funding rates and increase the probability of recession.

My bigger concern is that when the debt limit gets resolved — and I think it will — you are going to have a very, very deep and sudden drain of liquidity. This is not something that’s very obvious, but it’s something that’s very real.

said the CTO.

Bergman also asserted that such a drop could negatively affect risk markets like equities. However, can crypto investors benefit from the crisis?

Did Bitcoin decouple from stocks?

Throughout 2022, the flagship crypto traded in unison with the risk-on assets. The correlation with equities made Bitcoin susceptible to macroeconomic turbulence.

However, the said correlation gradually declined. Since mid-April, investors have been ringing “digital gold” bells again as the cryptocurrency market seemed to flock to the safe-haven camp, trading in correlation with gold rather than stocks.

The chart below demonstrates the erratic inverse correlation between Bitcoin and the US stock market index S&P 500 (SPX).

Bitcoin decoupling from stocks. Source: TradingView.com
Bitcoin is decoupling from stocks. Source: TradingView.com

As of mid-May, if the stock market slumps on the back of the liquidity crunch, the crypto market might go the other way and adopt a safe-haven position.

However, Bitcoin’s tendency to trade with or against stocks might not be consistent. Thus, traders should take note of the flagship crypto’s current affiliation but be cautious of a possible wind change.

Also read: Bond Markets Rise Against Sour Predictions, Says Bank of America.

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