Bitcoin Cycle May Be Bottoming Out Amid US Debt Ceiling Worries

In a recent letter to the speaker of the House of Representatives, Mike Johnson, Treasury Secretary Janet Yellen warned that the United States is likely to hit its maximum borrowing limit between January 14th and 23rd. After this point, the Treasury will take extraordinary measures to reduce borrowing.

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The Urgent Need for Congressional Action

Yellen’s letter emphasized the importance of Congress taking immediate action to protect the full faith and credit of the United States. She wrote: "I respectfully urge Congress to act to protect the full faith and credit of the United States."

This warning comes as a result of the debt ceiling suspension that was implemented in June 2023, which will expire on January 1st, 2025. The Treasury Department has been working under this temporary arrangement, but Yellen’s letter highlights the urgent need for Congress to take action and raise the debt limit.

Market Reaction to the News

The news of the impending debt ceiling limit sent shockwaves through the markets. As the letter was made public, risk assets weakened, leading to a decline in U.S. equities. The S&P 500, Nasdaq 100, and Dow Jones Industrial Average all lost around 1% of their value.

Bitcoin also experienced a significant drop, falling by as much as 4% from its intraday high. This reaction is not surprising, given the historical correlation between debt ceiling discussions and bitcoin prices. On five previous occasions, the largest cryptocurrency has dropped or underperformed in the days following debt ceiling-related news.

The Impact on Bitcoin Prices

Bitcoin’s price performance has been under scrutiny this December, with the cryptocurrency down 3% for the month. This marks the first red month since August, adding to the already existing market uncertainty.

Moreover, President-elect Donald Trump’s inauguration date of January 20th falls between the dates highlighted by Yellen, creating an additional layer of political and economic uncertainty.

The Debt Ceiling: A Historical Perspective

Congress has a long history of raising the debt ceiling, with the first limit set at $45 billion in 1939. Since then, the limit has been raised 103 times as government spending continues to outpace tax receipts. The U.S. national debt now stands at over $36.2 trillion.

A Parallel to Previous Cycles

Bitcoin’s price behavior is also worthy of attention. Since the cycle low in November 2022, the cryptocurrency has followed a similar trajectory to two previous cycles. It is currently just shy of a 500% return, mirroring the returns seen at this point in the 2015-2018 and 2018-2022 cycles.

However, this parallel is not a positive sign for the bulls. Both previous cycles saw significant drawdowns at this point, highlighted by the red box in the chart below:

A Possible Bottom for Bitcoin?

While it is too early to tell whether Trump’s inauguration date of January 20th will signal a bottom for bitcoin, it is an interesting coincidence. Historically, significant events have been known to trigger price bottoms in the cryptocurrency market.

In conclusion, the impending debt ceiling limit and its potential impact on the U.S. economy and markets cannot be ignored. The Treasury Department’s extraordinary measures to reduce borrowing are a clear indication of the urgency of the situation. As Congress works to raise the debt limit, investors will be closely watching the developments and their effect on risk assets, including bitcoin.

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