Bitcoin Plummets As Dollar Liquidity Shrinks Amid Debt Ceiling Fears

Key Points:

• Bitcoin faced selling pressure as bond yields rose and USD liquidity declined.
• USD Liquidity Conditions Index slipped to $6.13 trillion, reaching the lowest in over a month.
• Yield on the 10-year US Treasury note rose by six basis points (bps) to 3.58%, its second straight weekly gain.

Bitcoin (BTC) has been facing selling pressure in recent weeks due to the rise in bond yields and the decline in U.S. dollar liquidity. As a result, the leading cryptocurrency by market value fell by 9% to $27,600 in the week ended April 23, marking its largest single-week percentage loss since early November.

The yield on the 10-year U.S. Treasury note rose by six basis points (bps) to 3.58%, representing its second straight weekly gain. This trend has affected the appeal of risk assets, including cryptocurrencies. At the same time, the USD Liquidity Conditions Index, which tracks the greenback’s supply in the monetary system, slipped to $6.13 trillion, representing the lowest value in over a month.

Furthermore, traders have priced in a higher probability of the Federal Reserve (Fed) continuing its tightening cycle with a 25 basis point rate hike in May. This has led to increased uncertainty and volatility in the market.

Since 2021, Bitcoin and the wider crypto market have closely tracked local peaks and troughs in the dollar liquidity index. In the first half of March, Bitcoin rose to its then-high of $28,000 as the Federal Reserve (Fed) opened liquidity taps to contain the banking crisis, pushing the dollar liquidity index higher from $5.82 trillion to $6.35 trillion.

However, in the absence of encouraging signs on the monetary liquidity front, BTC has continued to drift down over the week after its sharp drop on Monday, dragging other large-cap crypto assets with it. Despite being an ‘insurance’ asset that should outperform when other asset groups are suffering, BTC is still heavily impacted by the overall macro mood, which will largely be driven by monetary liquidity expectations.

According to Dessislava Laneva, macro analyst at Paris-based crypto data provider Kaiko, bitcoin and financial markets generally may see increased price turbulence in the near term, thanks to the U.S. debt ceiling issue. The U.S. government reached its statutory debt limit, which is the self-imposed cap on borrowing, of $31.4 trillion in January, forcing the Treasury to implement extraordinary measures to help the government meet its obligations for at least five months. Since then, the debt ceiling negotiations have been in a deadlock, and last week, one-year credit default swaps, which measure the cost of insuring against government default in the next 12 months, rose to a record high.

The current pricing in the CDS market shows a 2% probability of a default, which is uncomfortably high for something that could be a financial calamity. Observers are worried the Treasury may run out of money in June. The debt ceiling drama is a source of short-term volatility and adds uncertainty to the market.

Bitcoin is still seen as a risk asset and may face selling pressure if equities throw a fit at some point. Risk assets took a beating during the 2011 debt ceiling drama when a deadlock in Washington led to the country losing its top-notch triple-A sovereign credit rating.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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