What Will Happen to Bitcoin and Crypto If the US Defaults on Its Debt

Bitcoin and the broader cryptocurrency market have come under selling pressure over the last few weeks amid rising concern over the possibility of the US defaulting on its debt. The US lawmakers have been currently negotiating over raising the debt ceiling but that hasn’t come to fruition so far.

If no conclusion comes by early June, this could be the first-ever debt default by the US and could have far-reaching consequences in the global financial markets as well as the crypto market. U.S. Treasury Secretary Janet Yellen has recently warned that the US government could soon reach out of funds in the case that the debt ceiling isn’t raised as early as June 1.

Investors in the crypto space are already looking a bit jittery with trading volumes drying up considerably over the last few weeks. Ever since the comments from Treasury Secretary Janet Yellen on May 1, cryptocurrencies have dropped faster than the traditional market.

Since then, the S&P 500 is down by 1% while the Bitcoin price has dropped by 7% and Ethereum (ETH) is down by 3% in the same period. In the case that the US government defaults on its debt, risk assets like stocks and cryptocurrencies will be hit the most.

This is because a drop in the quality of government-backed debt would raise the borrowing costs while counterintuitively increasing its yield and simultaneously strengthening the dollar in comparison to other assets.

The strengthening of the USD would not be a good sign for Dollar as it would mean that people are more willing to hold paper money over risk assets. It would mean that Bitcoin, Ethereum and other digital assets would continue to slide.

However, another possible scenario could be that Bitcoin might take a contrarian move to stocks as it took during the banking crisis earlier this year in March. Thus, in the case of the US debt default, Bitcoin and Ethereum could react differently.

Analysts expect that in such a scenario, Bitcoin would be having more upside than Ethereum in the case that the government no longer meets its debt obligations. Also, analysts think that Ethereum is more likely related to tech stocks at the NASDAQ index, and thus it is likely to underperform BTC.

During the banking crisis earlier this year, Bitcoin delivered outsized gains in comparison to Ethereum.