The catalyst for the ultimate decoupling of cryptocurrencies?

The US federal government’s debt default has been avoided—at least for now. On October 7, the Senate voted to increase the debt limit by US$480 billion, which is the amount required by the world’s largest borrower to continue to repay its debt before the beginning of December.

The transaction provided a temporary solution to the weeks-long partisan deadlock that disturbed investors inside and outside the United States. The once unimaginable prospect of a US default seems easier to imagine than ever.

As the system-wide uncertainty reached its peak before voting, The cryptocurrency market has been performing well, By Bitcoin (Bitcoin) The biggest bull market in months. This has led to habitual talk about the decoupling of cryptocurrencies from more traditional asset classes and Bitcoin as an imminent safe haven from financial disasters.

So, what impact may the debt ceiling crisis have on the role of digital assets in the global financial system?

Increase your credit card limit

The US government has the unique power to set its own debt limit by controlling the printing press of the world’s reserve currency.Congress first impose In 1939, a cap was placed on the total amount of national debt. Since then, this cap has been raised more than 100 times.

Although raising the debt ceiling is usually not a partisan issue, the situation is different this time. Because of the Democrats’ ambitious social and climate spending agendas, Senate Republicans have adopted a principled position, refusing to support their opponents’ attempts to resolve the upcoming deadline for raising debt limits or defaulting on federal debt.

The lack of Republican support for raising the debt ceiling, which requires 60 votes to pass the Senate, rather than the simple majority that Democrats already have, can be considered a symbolic move. Increasing the amount of funds that the Ministry of Finance can borrow does not in itself authorize new expenditures, but to pay existing debts.

Regardless of partisan politics, some critics believe that a federal debt policy that relies on continuously increasing borrowing limits is not good for ordinary Americans’ wallets. Chris Kline, co-founder and COO of cryptocurrency retirement investment provider Bitcoin IRA, pointed out to Cointelegraph:

“In the past 100 years, the government has been able to increase the credit card limit every year on average. This has had an impact on the middle class. The wallets of the middle class in the United States are under the greatest pressure from inflation and rising costs, all of which stem from the expansion of US dollar assets. Monetary policy on the balance sheet.”

Dangerous haven

The interim solution that the Senate has agreed to can only postpone the debt ceiling issue until early December, effectively perpetuating macroeconomic uncertainty. A prominent argument is that this uncertainty may affect Bitcoin in the coming weeks.

Arina Kulackovska, head of corporate payment solutions at cryptocurrency exchange CEX.IO, believes that “this uncertainty may continue to be a driver of the BTC rebound.”

At the same time, Kulackovska pointed out that cryptocurrencies are beginning to “be traded away from traditional markets,” which may lead to a decrease in their plasticity to macroeconomic dynamics, which will significantly affect more traditional asset classes.

Kay Khemani, managing director of online trading platform, believes that the suspension of debt limits on the entire financial market, including digital assets, “may be beneficial because it means more liquidity in the system (read: More debt)”, which often flows to financial assets first.

Khemani further commented: “Over time, higher debt does erode the value of the U.S. dollar, which further reinforces the claim—whether it may be misled—crypto is a safe-haven asset.”

Nevertheless, the degree of decoupling of cryptocurrencies from other assets such as stocks is still a controversial issue. Eric Bleeker, an analyst at The Motley Fool, an investment consulting firm, commented on Cointelegraph:

“As a currency that relies on pre-determined mathematics rather than political fringe policies, you would think that Bitcoin would benefit from events such as the debt ceiling deadlock. […] Although most Bitcoin fans point out that it is an asset with a limited supply and should appreciate when more debt is issued in the United States, the reality is that it is most closely related to the value of other risky assets in a short-term sell-off. “

An example cited by Bleeker is that Bitcoin briefly fell by more than 50% when the pandemic began in March last year. He also added that in the long run, the situation may be different, as events such as the debt ceiling crisis will reduce trust in the US dollar and make alternatives such as Bitcoin more attractive.

Long-term benefit

Although industry participants and analysts disagree on the short-term impact of the U.S. federal debt limit uncertainty on the cryptocurrency market, most of them sound very consistent when discussing how it affects the market in the long-term. Two concurrency trends that are frequently mentioned are the erosion of trust in the U.S. dollar and the institutions that support it, and the rising demand for cryptocurrencies.

related: Cryptocurrency and pension funds: like oil and water, or maybe not?

Haohan Xu, CEO of Apifiny, a digital asset trading platform, predicts that raising the debt ceiling “will steadily impose greater buying pressure on BTC, causing prices to rise steadily over time.” Marie, chief marketing officer of cryptocurrency exchange Tatibouet believes that “the quality of cryptocurrency as a market hedge will shine.” Tatibouet added that since the beginning of the pandemic, the growth of the cryptocurrency market has exceeded that of stocks and gold, adding: “If it is indeed due to government default Lead to a financial crisis, then in the long run, cryptocurrency will become a safe haven because it has proven to be.”

Daniel Gouldman, CEO and co-founder of financial services provider Unbanked, called the entire process around raising debt limits “absolutely absurd” because it made the U.S. credit score a hostage to partisanship:

“We welcome more people into crypto as our elected officials continue to play chicken with the full faith and credit of the US dollar and US government’s commitment to its own prior spending decisions.”

Ron Levy, CEO of The Crypto Company, a blockchain education and training company, pointed out that the debt ceiling crisis has made the contrast between the two financial systems obvious. Levy commented to Cointelegraph that this may be the time when the crypto industry finally decouples from traditional finance:

“On the traditional side, we will inevitably continue to print money, increase inflation and economic uncertainty. In terms of cryptocurrency, our industry has developed and continues to grow exponentially.”

It may not be possible to judge whether the final decoupling will be achieved, let alone when it will be achieved. However, the debt ceiling crisis has to a large extent highlighted the difference between the governance of traditional currencies and digital currencies-this comparison is not particularly favorable for fiat currencies.