Crypto Crash Coming?! Impact of The Debt Ceiling Deal!!

The debt ceiling has been raised now What well in theory the markets should Pump because the US government is going To start spending trillions of dollars In practice however the US government Will start by refilling its bank account At the fed this could result in over one Trillion dollars being drained from the Markets over the next few months the Last time this happened the crypto Market crashed with eth falling below 1K So today I'm going to tell you Everything you need to know now that the Debt ceiling has been raised and explain Exactly what impact it could have on the Crypto Market this you cannot afford to Miss Let's start with a quick bit of Background governments make money in two Ways taxes and debt when the government Can't make enough money from taxes to Cover its expenses it sells debt to make Up the difference this debt is literally An IOU give me money today and I'll pay You back later with interest Governments can issue different Durations of these ious Short-term debt Investments are called Bills and long-term debt Investments are Called bonds Bills tend to offer lower interest rates Than bonds to compensate for the Difference in duration the longer you Wait to get paid the more risk you

Assume that said government bills and Bonds are considered to be the safest Investments you can have that's because The government can take money from its Citizens via taxes to pay you back in Full by contrast individuals and Businesses must earn the money they make They can't just steal it to repay their Debts topic for another time now of all The bills and bonds in existence those Issued by the US government are the Safest this is for many reasons Including the rule of law large and Liquid Capital markets and the fact that The US dollar is the world's Reserve Currency as a result U.S bills and bonds Are the Bedrock of the Global Financial System This is why the prospects of the U.S Government defaulting on its debt is so Problematic if the U.S government were To miss a payment on some of its ious it Would result in a sell-off of those ious Everyone using U.S bills and bonds to Back their own loans would get wrecked Which is well everyone Take a second to consider that even Cryptocurrency stable coins are backed By U.S government debt now the reason Why this was even a risk to begin with Is because of the debt ceiling a Self-imposed limit on U.S bill and bond Issuance that's meant to force the U.S Government to be financially responsible

As you can see the debt ceiling just Gets raised every time and the spending Continues unrestricted If you watched our video about the debt Ceiling from earlier this year you'll Know that the limit was reached back in January this meant that the U.S Government was unable to issue any new Ious forcing it to rely on tax revenues And the money it had saved in its bank Account at the Federal Reserve This bank account is called the treasury General account or TGA and you can Actually track its real-time balance Using one of the fed's websites As you can see the balance in the TGA Has been falling since last May and this Decline accelerated shortly after the Debt ceiling was reached earlier this Year The Practical effect of this was that it Supported the markets that's because the Money in the TGA was being spent into The actual economy and this money Eventually Finds Its way into assets of All kinds Because crypto is the most sensitive to Changes in liquidity it seems to have Benefited the most although BTC hit its Bottom when FTX collapsed back in November the total crypto market cap Bottomed shortly before the debt ceiling Was reached and has been rising ever Since

That was until the debt ceiling was Raised over the weekend at the time of Shooting the crypto Market isn't looking Too hot not helped of course by the Sec's decision to bring charges against Binance So this begs the question of what Happens to crypto now that the debt Ceiling has been raised well the answer Ultimately depends on what duration of Debt the U.S government sells to refill The TGA and what the FED does to support These selling activities let's unpack a Few of the possible plans and their Outcomes First you need to know that the US Government wants to add at least 700 Billion dollars to the TGA over the next Few weeks by selling debt at the same Time the FED is selling around 60 Billion dollars of U.S government debt Every month the total debt sales by both Parties could reach one trillion dollars By September Second you need to know that when bills And bonds are sold it causes the Interest rates on those bills and bonds To rise and it also causes their prices To fall To clarify these ious are always paid Back in full at the end in the interim However interest rates and prices can Fluctuate due to supply and demand And third you need to know that the

Fed's rate hikes have had a similar Effect on bills and bonds when the FED Raises interest rates the interest rates On bills and bonds go up and their value Goes down this is especially true for Bills because the fed's rate hikes Affect short-term interest rates the Most If you've watched any of our videos About the banking crisis you'll know That lots of U.S banks have lots of Unrealized losses on their U.S bonds due To the fed's rate hikes you'll also know That if they're forced to realize these Losses by selling their U.S bonds to Honor customer withdrawals they'll go Bankrupt this is why it's very unlikely That the US government will issue lots Of bonds to refill the TGA it would make The banking crisis worse because it Would increase these unrealized losses Chances are that depositors would see These increased unrealized losses and Get spooked causing more Bank runs Meanwhile non-panic depositors would see That they can earn a higher interest Rate by investing in U.S bonds this Would increase the possibility that Deposit flight continues regardless of If there's a bank run or not either way The banks would be in trouble the FED Could slow the pace of this Bank walk by Making it clear that it will continue to Raise interest rates depositors would be

Less likely to withdraw knowing that the Bills and bonds they plan on buying Could go down in value However this would simultaneously Increase the unrealized losses for banks The Silver Lining to this outcome is That it would cause crypto to Rally Because the FED would be forced to Intervene like it did back in March this Intervention would almost certainly Involve some expansion of its balance Sheet which would benefit crypto Remember crypto is the most sensitive to Liquidity Now obviously the U.S government wants To avoid exacerbating the banking crisis The FED also probably doesn't want its Top competition crypto to pump this is Why it's very likely that the U.S Government will refill the TGA by Selling bills multiple mainstream media Articles suggest that this is the Current plan Here's where things get very interesting But also very complicated so pay close Attention whereas banks are some of the Biggest buyers of U.S bonds money market Funds are some of the biggest buyers of U.S bills for those unfamiliar money Market funds are basically stable coins But for traditional Finance Like stable coins money market funds try To keep a stable value of one dollar and Invest in short-term debt including U.S

Bills unlike stable coins money market Funds pass on some of the interest they Earn on this debt to their investors Hence why they're so popular with Individuals and institutions As you can see the amount of money held With money market funds has gone Parabolic in recent years and continues To increase because of the bank walk This is because money market funds are Treated as high interest rate bank Accounts this makes them a part of the So-called Shadow banking system like Other Shadow banking institutions money Market funds are not insured and their Operations can sometimes be opaque Unlike other Shadow banking institutions Money market funds have access to the Feds overnight reverse repo facility and Actually make up most of the money in That facility The fence overnight reverse repo Facility is outside the scope of this Video but there's three things you need To know first the money parked at the Facility is technically outside of the Financial system and can flow back into It at any time Second the FED sets the interest rate Offered to users of the facility Third and most importantly almost half Of the more than five trillion dollars Sitting in Money Market funds is parked At the reverse repo facility 2.3

Trillion to be exact this makes sense Considering they're essentially holding That money with the FED there's no safer Place they could keep it now logically There are only two reasons why money Market funds would take money out of the Fed's facility either the FED lowers the Interest rate offered by the facility or As a similarly safe and short-term asset Offering a much higher interest rate Such as bills issued by the US Government So in case you haven't put two and two Together it's possible that money market Funds will buy up most of the bills Being sold by the US government to Refill the TGA chances are they will use The money they have at the feds facility And this is guaranteed If the Fed lowers The interest rates on the facility Because the money in the feds facility Is technically outside of the financial System the outcome would have no effect On crypto since there would be no Liquidity drain from the markets this Means that the crypto Market would Continue to chop sideways since there Would be no liquidity addition either However this assumes that money market Funds will buy up most of the bills Being sold by the US government to Refill the TGA The fed's data suggests that the money Held with money market funds decreased

In the six months after the debt ceiling Was last raised back in December 2021 Now this is significant because it Suggests that individuals and Institutions took money out of money Market funds to invest directly in the New U.S bills being issued this makes Sense because direct investment removes Counterparty risk the risk of something Going wrong with the money market funds If this happens again the outcome would Be that crypto prices go down because Liquidity would be drained from the Markets not from the feds offshore Facility in fact it's possible that the Liquidity drains after the last debt Ceiling deal may have contributed to the Crypto market crash early last year If you compare the TGA balance to the Total crypto market cap you'll notice There's an inverse correlation as the TGA balance went up crypto prices went Down as I mentioned in the introduction Eth's most recent low of roughly 900 Happened last June right after the TGA Refill was finished now to be clear the TGA wasn't the only factor in that Crypto crash nor the only reason for Eth's June Low by that point the FED had Begun raising interest rates and was Warning of many more to come Terror also collapsed in May which Likely explains why eth was hit Particularly hard

UST was heavily used in D5 an Alternative explanation for eth's Over-representation in last year's crash Could be that it's extremely popular With institutional investors this is Because institutions love earning Interest on assets and they can earn Interest on eth by staking The thing is that each staking comes With risks namely volatility as such It's possible that institutional Investors pivoted away from eth when They realized they could get a higher Risk-free yield on U.S bills because of The TGA refill now this seems less Likely to happen this time around Because each staking rewards are higher And the risks are also lower you can Finally unstake it's also important to Point out that the United States isn't The only source of liquidity for the Crypto Market because crypto is global It benefits from increases in liquidity In other countries too Some reports suggest that China is about To start stimulus measures to try and Wake up its sleeping economy prior to The 1st of June this money would have Had a hard time finding its way into the Crypto Market as of the 1st of June a Pathway appears to be opening via Hong Kong the city-state recently passed Regulations that allow retail investors To access crypto and you'll know this if

You watched our video about it The caveat is that there isn't a single Crypto Exchange in Hong Kong that's Received a license to service retail Investors and all but two were forced to Shutter as part of the new regulations It will reportedly take Roby 6 to 12 Months to secure its retail license it Could be a similar timeline for the Others The key takeaway is that even if the TGA Refill results in a liquidity drain that Drags down the crypto Market chances are That another source of liquidity will Emerge to prop them back up this source Of liquidity could very well come from The FED if the refill causes issues Elsewhere in the financial system after All history doesn't repeat but it does Rhyme Chances are that the TGA refill will Cause stress to show up in different Areas of the crypto Market there's of Course no shortage of candidates but I Have a gut feeling that it could affect One of the largest stable coins if you Watched our recent video about the Changes in stablecoin market cap you'll Know that tether recently revealed a Detailed breakdown of the assets backing Usdt this breakdown revealed that almost 10 percent of the usdt in circulation is Backed by money held with money market Funds presumably in the United States

And this is worrying because on the off Chance that something went wrong with These money market funds 10 of all the Assets backing usdt could be at risk This would likely result in a deepeg Similar to what we saw with Silicon Valley Bank and usdc more about what Happened there using the link in the Description now this begs the question Of what could cause something to go Wrong with money market funds the answer Is a shadow Bank Run everyone rushing to Withdraw their money apparently this has Only happened twice once during the 2008 Financial crisis and again at the start Of the pandemic Money market funds gated I.E blocked Withdrawals in both cases Given how much money market funds have Grown Regulators have started to propose Rules that would prevent them from being Able to do this notably the Securities And Exchange Commission or SEC as it so Happens SEC chairman Gary Gensler Recently warned that the SEC was still Working on a proposal to prevent money Market funds from stopping withdrawals During times of financial stress what's Odd is that this rule was supposed to Come into Force back in April but never Did I can't help but be reminded of all the New banking rules that the FED Vice Chair for supervision Michael Barr had

Been working on before Banks started Going down all Michael needed was an Excuse to introduce these rules and well Now he has it Call me crazy but I think Gary may be Looking for a similar excuse anyway Speculation aside it's very likely that The outflows from money market funds Will be larger than they were the last Time the TGA was refilled this is Because the FED is near the end of its Rate hiking cycle this means that U.S Bills have seen most of their losses There's lots of yield and gains to be Had realizing this rational investors Would remove their counterparty risk and Withdraw their assets from money market Funds to invest in U.S bills directly This could even include the likes of Tether if there are lots of outflows in Too short of a time frame money market Funds could experience issues and I'm Not the only one seeing this either Macro analyst Jeff Snyder noticed back In April that there were signs of stress In Money Market funds Specifically he noticed that interest Rates on some U.S bills were abnormal he Noted that this is almost the same thing That happened around the debt ceiling Back in 2011. if you watched our Aforementioned video about the debt Ceiling you'll know that the US Government came within hours of

Defaulting on its debt back in 2011. This caused the markets to Crash by 17 And U.S government debt was downgraded For the first time in history something That almost happened again this time Jeff argues that the 17 crash in the Markets wasn't due to the debt ceiling But because of issues in Money Market Funds if he's right then it's possible We could see the same thing happen again Soon the outcome of this would be Catastrophic for crypto because it means That the largest stable coin would depek But who knows maybe it's all just one Big nothing Burger And that's all for today's video if you Found it informative let me know by Smashing that like button if you want to Make sure you keep on learning subscribe To the channel and ping that Notification Bell be sure to share this Video with your friends and family too Now as we've seen crypto exchanges can Be unreliable that's why it's best to Stick to the best You can get trading fee discounts and Bonuses of up to forty thousand dollars On some of the exchanges listed on the Coin Bureau deals page the link to that Is down in the description Thank you all so much for watching and I'll see you next time this is Guy Bidding you goodbye Foreign

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