Can Bitcoin Become a "Safe-Haven Asset" as Historic Default on U.S. Debt Looms?

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May 16, Reuters - President Joe Biden and Republican House Speaker John McCarthy are preparing for crucial debt ceiling consultations, now a little more than two weeks before the U.S. government could default on its debt in an unprecedented manner. Biden, McCarthy and three other congressional chiefs are scheduled to hold consultations on Tuesday. Republicans say raising the $31.4 trillion debt ceiling would have to be tied to setting an annual federal spending cap, an option the White House has not ruled out.

The U.S. Treasury said it still expects to pay U.S. government bills only through June 1 without raising the debt limit. Treasury Secretary Yellen sent a letter to Congress for the second time in two weeks, confirming that by early June at the latest the Treasury would be unlikely to meet all U.S. government payment obligations, which would trigger the first-ever U.S. default.

As the world's most advanced capitalist economy, U.S. Treasuries will have a huge impact on the global economy if they fall into default. The New York Times published the views of Robert Hockett, a professor of law at Cornell University, who believes that U.S. Treasuries, as the world's largest asset market and the primary safe asset in the portfolios of banks and other institutions, will cause violent turmoil in the U.S. banking industry, financial markets and even global capital markets once the U.S. debt defaults, and the severity of the crisis will even dwarf the recent U.S. bank failure crisis.

Secondly, Robert Hockett believes that after the U.S. debt default, the value of the U.S. dollar as a global reserve asset will fall to pieces. Due to the large number of bonds issued by the U.S. Treasury, the depreciation of U.S. debt will inevitably lead to a depreciation of the dollar, which in turn will lead to a surge in the price of U.S. domestic imports and a soaring inflation rate.

In the background based on the U.S. debt may fall into the first default in history, for investors, in addition to the oldest hedging tool gold, it is difficult to find a safer than the U.S. debt other investment underlying. So will bitcoin, known as "digital gold," become the anti-inflation "safe-haven asset" investors need?

A recent Bloomberg survey of investors showed that bitcoin also emerged as one of the three most popular alternative assets for investors, with nearly 10% of respondents saying they would be willing to buy bitcoin as a hedge asset.

According to its Markets Live Pulse survey, the precious metal is the top choice for those seeking protection in case Washington ends in a crash over the debt ceiling. More than half of financial professionals said they would buy gold if the U.S. government did not meet its obligations.

The survey results show that gold, U.S. Treasuries and bitcoin would be the top three preferred assets for investors if the U.S. hits the debt ceiling, more popular than the dollar, yen, Swiss franc and other assets. 51.7 percent of professional investors and 45.7 percent of retail investors would prefer to buy gold, 14 percent of professional investors and 15.1 percent of retail investors would prefer to buy Treasuries, 7.8 percent of professional investors and 11.3% of retail investors would prefer to buy bitcoin. The survey covered the period from May 8 to May 12 and was conducted among 637 respondents worldwide.

On a Blockworks podcast, Avi Felman, head of digital asset trading at GoldenTree, and Jonah Van Bourg, head of global trading at Cumberland, talked about the market's likely reaction to a technical default on the U.S. dollar. They argue that the combination of debt ceiling fears and the argument for bitcoin as a hard asset could lead to a surge in bitcoin buying sentiment if the U.S. delays interest payments, even if it is a short-lived technical default - in other words, they believe the price of bitcoin could rise sharply after a U.S. debt default, possibly even breaking new all-time highs.

There is an ongoing discussion about whether bitcoin can be a safe-haven asset. But as of today, bitcoin's market cap is about $520 billion, a far cry from gold's already over $10 trillion market cap, while in terms of volatility, bitcoin has a significantly higher correlation to the U.S. tech sector than to gold. As of press time, bitcoin was last quoted at $27,273, a 24-hour gain of 1.34%.

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