Following last week’s warning by the US Treasury Secretary that the federal government is about to attain its statutory debt limit on January 19, the crypto industry went into a panic mode. As a result, investors were beginning to reconsider the sustainability of the current Bitcoin market rally.
The US Debt Ceiling And Crypto Asset
Janet Yellen said her agency would adopt extra steps to prolong the time necessary to reach a deal before considering any shutdown. This also includes further limits on new debt instruments yet to be issued, which is expected to limit the supply of the United States treasuries and possibly push prices up and reduce yields.
With lower yields, the authorities would have easier financial oversight, which will help boost the value of risk assets, said Noelle Acheson, author of the famous “Crypto is Macro Now.” Furthermore, bond yields depict the cost of borrowing in an economy, and the accessibility of cheaper credits impacts investors’ risk appetite.
In this case, when yields are low, risk appetites become stronger. It is worth noting that at the start of 2020, US yields from government bonds involving crypto, stocks, and other risky assets swayed in the opposite direction.
Last year, after the Federal Reserve’s rapid interest rate hike to 153 basis points, BTC recorded a 60% drop in price. Meanwhile, according to reports, the Treasury General Account (TGA) has a whopping $400 billion, which it is expected to use to offset the standstill in the debt ceiling.
Also read:The TGA serves as the government’s working account under the custody of the Federal Reserve, which it uses to gather tax revenues, proceeds from securities sales, customs duties, and others. Therefore, the TGA is a liability on the Fed’s balance sheet, which the government expects to tie with assets.
Whenever the Treasury initiates payments, the cash is taken from the TGA and transferred to the entities’ bank accounts. In return, this increases commercial banks’ reserves and boosts the lending rate in the broader market.
Complicated Moves
The United States debt ceiling argument is not a new thing. According to the Treasury, Congress has countless times attempted to permanently raise the debt limit during the administration of both Republican and Democratic presidents.
However, at the moment, the agreement is that the looming debt challenges will likely be the most intense since 2011, which has already agitated investors to demote the US sovereign ratings. It is reported that before 2011, the debt ceiling was never an issue in the United States.
Then in 2011, the topic became an issue such that the economy took a significant hit with the Federal credit rating equally downgraded. According to CNN, opposition lawmakers in the US are trying to implement a spending cap in place of temporarily increasing the debt ceiling.
There is a state of fear about this, which may spread to the digital asset market, triggering intense selling pressure on BTC and other crypto assets.
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