If U.S. Treasuries Default: Market and Bitcoin Implications
Authors: SanTi Li, & NaXi Da
U.S. Treasury yield, long considered as a risk-free rate (R0) for value computations and future valuations as per materials like the CFA curriculum, bears nearly zero risk in the financial landscape. However, what happens if this supposedly risk-free asset becomes risky? A U.S. Treasury default would have vast ramifications on the global economy and financial markets.
Let's analyze the potential impacts on liquidity, the U.S. dollar value, and Bitcoin's value:
Liquidity:
U.S. Treasuries, globally accepted as secure assets, constitute the cornerstone of the global financial system. A U.S. default could lead to a confidence crisis in U.S. Treasuries, prompting large-scale selling and potentially a liquidity crisis. This crunch could trigger a plunge in asset prices, escalate financial market volatility, and exacerbate the global financial crisis.
U.S. Dollar Value:
The U.S. dollar remains the world's primary reserve currency. A U.S. Treasury default could erode global confidence in the dollar, depreciating its value. Still, a market panic might trigger asset sell-off, driving the dollar demand up. Simultaneously, investors could seek refuge in other 'safe haven' assets such as gold or other strong currencies, mitigating dollar depreciation to some extent.
Bitcoin Value:
The secondary market value of Bitcoin is influenced by numerous factors, including market sentiment, consensus, BRC standard popularity, attitudes of governments, regulatory policies, technological developments, and application convenience and degree. If a U.S. default occurs, Bitcoin might respond in two disparate ways:
● Positive Impact: If investors look for non-traditional 'safe haven' assets like gold and silver, and the world requires a new, relaxed reservoir to absorb decompressed funds, Bitcoin's demand and value might increase in the medium to long term.
● Negative Impact: Bitcoin's high volatility and risk could drive investors away during market panic, decreasing its value. Therefore, Bitcoin's reaction would largely depend on market sentiment and investor risk appetite.
Implications on the Global Economy and Trade:
A U.S. Treasury default could precipitate a global recession, or even a deeper economic crisis. It could also impair the credit of the U.S. dollar, disrupting global trade. Exporters to the U.S. might face diminished orders, while importers of U.S. goods and services might encounter higher prices.
Potential Restructuring of the Global Financial System:
A U.S. default could lead to a reevaluation of the dollar-based global financial system, potentially allowing other currencies, especially the yuan, to play a more prominent role in the future global financial system. This could also fast-track the global acceptance of digital currencies and blockchain technology.
Risk Assets Value Volatility:
A U.S. bond default might result in significant volatility in the value of risk assets such as stocks, commodities, cryptocurrencies, and emerging market assets.
In theory, three scenarios could lead to a U.S. bond default - debt ceiling issues, government shutdown, and policy errors. However, extreme 'black swan' scenarios such as external shocks and political conflicts could also lead to default.
In conclusion, while a U.S. default is highly unlikely, if it occurs, it would have a profound impact on the global financial system. Despite initial potential negativity towards emerging digital industries like blockchain and cryptocurrencies, they may encounter new opportunities in the long run. This would especially be the case if the U.S. dollar's status as a settlement currency is challenged. This could increase demand for Bitcoin and accelerate the transformation of global trade methods.
However, it is critical to note that the thoughts expressed above are intended for long-term thinking, discussion, and learning, and should not be construed as investment advice.
However, the probability of an event with a similar magnitude happening is not necessarily low. The exact timing and suddenness of such events are difficult to predict, hence the importance of having risk control and defensive mechanisms in place to be prepared for any situation.
Twitter: @santili1021
U.S. Treasury yield, long considered as a risk-free rate (R0) for value computations and future valuations as per materials like the CFA curriculum, bears nearly zero risk in the financial landscape. However, what happens if this supposedly risk-free asset becomes risky? A U.S. Treasury default would have vast ramifications on the global economy and financial markets.
Let's analyze the potential impacts on liquidity, the U.S. dollar value, and Bitcoin's value:
Liquidity:
U.S. Treasuries, globally accepted as secure assets, constitute the cornerstone of the global financial system. A U.S. default could lead to a confidence crisis in U.S. Treasuries, prompting large-scale selling and potentially a liquidity crisis. This crunch could trigger a plunge in asset prices, escalate financial market volatility, and exacerbate the global financial crisis.
U.S. Dollar Value:
The U.S. dollar remains the world's primary reserve currency. A U.S. Treasury default could erode global confidence in the dollar, depreciating its value. Still, a market panic might trigger asset sell-off, driving the dollar demand up. Simultaneously, investors could seek refuge in other 'safe haven' assets such as gold or other strong currencies, mitigating dollar depreciation to some extent.
Bitcoin Value:
The secondary market value of Bitcoin is influenced by numerous factors, including market sentiment, consensus, BRC standard popularity, attitudes of governments, regulatory policies, technological developments, and application convenience and degree. If a U.S. default occurs, Bitcoin might respond in two disparate ways:
● Positive Impact: If investors look for non-traditional 'safe haven' assets like gold and silver, and the world requires a new, relaxed reservoir to absorb decompressed funds, Bitcoin's demand and value might increase in the medium to long term.
● Negative Impact: Bitcoin's high volatility and risk could drive investors away during market panic, decreasing its value. Therefore, Bitcoin's reaction would largely depend on market sentiment and investor risk appetite.
Implications on the Global Economy and Trade:
A U.S. Treasury default could precipitate a global recession, or even a deeper economic crisis. It could also impair the credit of the U.S. dollar, disrupting global trade. Exporters to the U.S. might face diminished orders, while importers of U.S. goods and services might encounter higher prices.
Potential Restructuring of the Global Financial System:
A U.S. default could lead to a reevaluation of the dollar-based global financial system, potentially allowing other currencies, especially the yuan, to play a more prominent role in the future global financial system. This could also fast-track the global acceptance of digital currencies and blockchain technology.
Risk Assets Value Volatility:
A U.S. bond default might result in significant volatility in the value of risk assets such as stocks, commodities, cryptocurrencies, and emerging market assets.
In theory, three scenarios could lead to a U.S. bond default - debt ceiling issues, government shutdown, and policy errors. However, extreme 'black swan' scenarios such as external shocks and political conflicts could also lead to default.
In conclusion, while a U.S. default is highly unlikely, if it occurs, it would have a profound impact on the global financial system. Despite initial potential negativity towards emerging digital industries like blockchain and cryptocurrencies, they may encounter new opportunities in the long run. This would especially be the case if the U.S. dollar's status as a settlement currency is challenged. This could increase demand for Bitcoin and accelerate the transformation of global trade methods.
However, it is critical to note that the thoughts expressed above are intended for long-term thinking, discussion, and learning, and should not be construed as investment advice.
However, the probability of an event with a similar magnitude happening is not necessarily low. The exact timing and suddenness of such events are difficult to predict, hence the importance of having risk control and defensive mechanisms in place to be prepared for any situation.
Twitter: @santili1021