• Congress has raised the debt ceiling to US$31.4 trillion, with President Joe Biden signing the bill to allow the government to borrow and pay the existing debts.
• The last time the US raised the debt ceiling, Ethereum fell to US$1000
• The US wants to add over US$700 billion to its TGA over the next few weeks by selling debts

Once again, the waters are murky for the crypto market, courtesy of the United States Federal Reserve. Congress has raised the debt ceiling to US$31.4 trillion, with President Joe Biden signing the bill to allow the government to borrow and pay the existing debts. This makes the US the country with the highest external debt, at 118 per cent of GDP.

What does a debt ceiling rise mean for the crypto market?

In theory, the market should pump. Why? The United States government will start spending trillions of dollars to settle debts and for pending projects. In practice, however, the United States will begin by filling its bank account at the Federal Reserve. This will result in trillions of dollars being drained from the market in the next few months.

Learning from the past

The last time the US raised the debt ceiling, Ethereum fell to US$1000. The market is worrying that it is still experiencing the 2021- 22 crypto winter. Before the dust could settle, the largest economy raises the debt ceiling.

Governments make money either in taxes or in debt. Debts are classified as either bonds or bills. Interestingly, the United States still issues debts to other countries. Most nations globally prefer to get bonds from the superpower as they are among the safest debts. This is for many reasons, including that the dollar is the World’s reserve currency.

As a result, the US bills and bonds are the bedrock of the World’s financial system. The prospects of the US defaulting on their debt are so problematic to the global economy and the crypto community.

Read: A call for a single Central African countries’ digital currency

What would happen if the US was to default on its debt

If the United States were to miss out on paying any of the debts it owes, large, second class and third-world economies would feel the hit in less than a week. Orders for electronics that come to the US from China would dry up. Swiss Treasury bonds investors would suffer losses. Countries that prefer the dollar over their currencies, such as Sri Lanka, Nigeria, Zimbabwe, and many others, would immediately go into cash shortage, halting trade in those countries. The US economy would immediately weaken, wiping out over 1.5 million jobs in less than a week. 

According to Mark Zandi, chief economist at Moody’s Analytics, If the default would prolong longer than that, 7.8 Americans would lose their jobs, borrowing rates would soar, and unemployment would jump from 3.4 per cent to 8 per cent. Additionally, there would be a stock market plunge, erasing over US$10 trillion worth of household wealth.

What would happen to crypto if the US was to default on its debt

The US dollar backs cryptocurrency stablecoins. If the dollar ceases to be stable, stablecoins would immediately plummet.

The fate of crypto now depends on what duration of debt the US government sells to refill the Treasury General Account (TGA). The TGA is the account containing tax revenues and savings in the FED. The US wants to add over US$700 billion to its TGA over the next few weeks by selling debts. At the same time, the FED is selling around US$60 billion of US government debt every month. The total debt sales by both parties could reach US$1 trillion by Q3. 

When bills and bonds are sold, it causes the interest rates of those bills and bonds to rise, inversely making the prices fall. The effect on bills and bonds is almost similar to what happens to cryptocurrency.

The waters are still quite unpredictable, with so much tension sheltering all over the crypto market.

Read: Bitcoin bull market run ignited by pressure on Federal Reserve