Bitcoin Faces Selling Pressure as Dollar Liquidity Declines and Debt Ceiling Fears Return

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Bitcoin has experienced its biggest weekly loss in five months as the US dollar liquidity declines and debt ceiling fears resurface. The price of insuring against a potential US government default in the next 12 months surged to record highs last week, causing Bitcoin to face selling pressure. The leading cryptocurrency dropped by 9% to $27,600, marking its largest single-week percentage loss since early November. As the yield on the 10-year US Treasury note rose by six basis points to 3.58%, the appeal of risk assets, including cryptocurrencies, waned. Bitcoin and the wider crypto market have closely followed local peaks and troughs in the dollar liquidity index since 2021.

According to Dessislava Laneva, a macro analyst at Paris-based crypto data provider Kaiko, bitcoin and financial markets, in general, may experience heightened price turbulence in the near term due to the U.S. debt ceiling issue. The U.S. government reached its statutory debt limit of $31.4 trillion in January, and since then, the debt ceiling negotiations have been in a deadlock. Last week, the cost of insuring against a potential US government default in the next 12 months reached a record high. The current pricing in the CDS market shows a 2% probability of a default. Observers are concerned that the Treasury may run out of money in June, adding uncertainty to the market and increasing short-term volatility.

While bitcoin is considered an 'insurance' asset, it may still be heavily impacted by the overall macro mood, which is largely driven by monetary liquidity expectations, says Noelle Acheson, the author of the Crypto Is Macro Now newsletter. According to Tom Dunleavy, a macro analyst at Messari, a potential default might see bitcoin pick up a haven bid like it did during the recent banking crisis in March. As the debt ceiling negotiations continue, bitcoin and financial markets, in general, may face increased price turbulence, prompting the Federal Reserve to cut rates and ultimately benefit risk assets.

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