What Will Happen to Bitcoin After the Debt Limit Agreement? Citigroup Warns!

Just as markets seem to be getting past the months-long problem with the US debt ceiling, holders of risky assets like cryptocurrencies may face a new challenge as the Treasury tries to rebuild its run-down cash balance.

Citigroup Analysts Expect Bitcoin Headwinds With Debt Limit Agreement

“The impending reserve run-off due to the Treasury General Account re-establishment could cause a headwind,” Citi Research strategists, including Alex Saunders, wrote in a note.

Citi analyzed the performance of risky assets during reserve declines and found that they are vulnerable to higher volatility and weaker returns.

Therefore, the near-term outlook according to analysts bitcoin and it doesn’t look so rosy for Ethereum. “Both coins average negative returns in these scenarios and BTC underperformed significantly in the median state,” strategists wrote on Thursday.

The Treasury General Account, which holds money for the Treasury, had swelled rapidly during the pandemic. It expanded again last year and is now lower than ever before.

As a result, the Treasury will have to replenish its declining cash buffer to maintain its ability to pay its obligations through bond sales estimated at over $1 trillion by the end of the third quarter.

This boom in supply could draw liquidity from the banking sector and raise short-term funding rates amid the US economy, which many say is headed for recession.

“Crypto markets have not been resilient to fears that the US will not be able to pay off its debt, depreciated on negative developments and rose thanks to headlines showing progress,” the strategists said.

Cryptocurrencies Stating that it typically “performs well” amid problems with traditional financial institutions, strategists cited the banking turmoil of March, a time when Bitcoin outperformed. But perhaps the risk of default by an institution like the US government “did not paint a positive outlook for decentralized digital assets,” according to analysts.

Analysts continued in their statements as follows:

“While, in theory, the potential default by an institution as influential as the US government bodes well for decentralized technologies and systems, this may not be the case right now given the crypto industry is still in its infancy and regulations are not yet well defined.

Another theory was that not raising the debt limit would lead to lower US government debt and a lower fiscal deficit, giving more credibility to fiat currencies, especially the dollar.”

*Not investment advice.