The Ripple Effect: Consequences of a US Debt Default on Bitcoin

Cointelegraph analyst and writer Marcel Pechman explains how a U.S. debt default could impact Bitcoin and the larger cryptocurrency market.

In this week's episode of Macro Markets, the primary topic of discussion is the risks associated with a potential US debt default, prompted by a warning from Treasury Secretary Janet Yellen. Yellen cautions that mass unemployment, payment failures, and widespread economic weakness could result if the US fails to fulfill its debt obligations. This issue arises every few years, causing tension in Congress, but ultimately, an agreement to raise the debt limit is reached, preventing any significant damage.

While this is partially accurate, the situation becomes more complex when the government lacks a majority, as is currently the case. In such instances, the opposition party gains leverage to negotiate their demands. Presently, Republicans are urging President Joe Biden to abandon $4.5 trillion in what they consider imprudent projects, such as forgiving a portion of student debt or employing thousands of additional Internal Revenue Service staff.

During the show, Pechman elucidates why, regardless of the outcome, the situation is bullish for Bitcoin. He also examines the likelihood of a government debt default and explains how increasing the debt ceiling drives liquidity into the markets, benefiting scarce assets.

The following segment of Macro Markets concentrates on Tesla, the electric vehicle manufacturer led by Elon Musk. The discussion starts by addressing Tesla's significance for Bitcoin holders and the cryptocurrency industry, and then provides an overview of the company's financial health, explaining why the 9,200 BTC held by Tesla does not threaten Bitcoin's price.

The episode wraps up with an exploration of short-selling. Unlike futures contracts, selling a stock on margin requires borrowing it from a holder. Generally, the associated rates are negligible, ranging between 0.3% and 3% annually. However, when there is significant betting against a stock price and the demand for shorts increases, the rate can skyrocket to as much as 50% per year or even become unavailable.

Using the example of the struggling First Republic Bank, which experienced net redemptions of $100 billion in the previous quarter, short sellers face difficulties borrowing the stock.

Nevertheless, Pechman clarifies that this issue doesn't pose a problem for those looking to bet on the bank's stock price decline. According to Marcel, a bailout for First Republic Bank could further boost Bitcoin above $30,000.

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How would a Bitcoin be affected by a US debt default?