US stocks could fall by 45% if the US defaults. What does this mean for the crypto?

The situation with the US government debt is becoming increasingly tense, as the deadline for raising the debt limit expires in early June. If lawmakers fail to reach an agreement, this could lead to serious consequences for the American and global economy.

The White House Council of Economic Advisers (CEA) warned that in the event of a default on US debt, the stock market could collapse by 45%, and unemployment could rise by 5 percentage points. In addition, millions of Americans may lose Social Security payments, Medicare and Medicaid, as well as other government services. This could trigger a deep recession comparable to the Great Financial Crisis of 2008.

A debt default will also affect holders of US bonds, including foreign investors and governments. According to JPMorgan, failure to reach a debt ceiling agreement in a timely manner could lead to a more serious stock sell-off than in 2011, when the S&P 500 index fell 17% in two weeks. In addition, the yield on one-month US Treasury bonds jumped to 5.56% from a low of 3.31% last month.

US President Joe Biden expressed confidence that default can be avoided if Republicans and Democrats can find a compromise. He also called on Congress to pass his plans to expand social programs and infrastructure investments worth more than $4 trillion.

What does this mean for the cryptocurrency market?

The cryptocurrency market is traditionally considered an alternative to traditional finance and a hedge against inflation and instability. However, it also depends on investor sentiment, demand and regulation. In the event of a default on the US debt, the cryptocurrency market may experience both growth and decline.

On the one hand, a debt default could undermine confidence in the dollar and increase interest in alternative assets such as bitcoin and other cryptocurrencies. This may lead to an increase in demand and prices for crypto assets. In addition, a debt default can trigger inflation and depreciation of the dollar, which can also be a favorable factor for cryptocurrencies.

On the other hand, a debt default could cause panic and risk aversion among investors who would prefer to withdraw their funds from volatile and unregulated cryptocurrency markets. This may lead to a decrease in demand and prices for crypto assets. In addition, a debt default may complicate the availability of financing and liquidity for cryptocurrency market participants, which may also be an unfavorable factor for cryptocurrencies.

Thus, the cryptocurrency market may react to a potential default in different ways, depending on which forces will prevail: demand for alternative assets or fear of uncertainty. Most likely, in the event of a default, bitcoin will first begin to fall amid panic and a stock market collapse, and then a V-shaped recovery will occur, as it was during the coronavirus crisis in March 2020.