This issue is brought to you by:

Annabeth Schott: “So this debt ceiling thing is routine? Or the end of the world?”

Toby Ziegler: “Both.”

— The West Wing

Bitcoin’s Bull Case: The End of the Financial World

In 1979, congressional wrangling over the debt ceiling, combined with a glitch in the check-printing software used by the Treasury, caused the US government to miss payments on T-bills maturing over three weeks in April and May.

The Treasury soon made good on those payments and afterward characterized the episode as a technical glitch rather than a default.

But markets were rattled: Treasury yields spiked 60 bips on the missed payments — later deemed by an academic study to have caused a “permanent” increase in yields costing the government $12 billion a year.

“The default apparently warned investors that Treasury issues were not completely riskless,” the study determined.

Congress has reiterated that warning every few years since and will do so again on Thursday, when the federal debt hits its current $31.4 trillion ceiling — up from the now-quaint-looking $830 billion that caused so much concern in 1979.

It’s our periodic reminder that “risk-free” Treasuries are not, in fact, free of risk.

The End is Nigh. Again.

The US government cannot be forced to default — there’s no limit to the money the Fed’s money printer can print.

It may, however, choose to default.

What would the consequences of a deliberate default be?

“The immediate collapse of the US economy, followed by Japan sinking into the sea, followed by a worldwide depression the likes of which no mortal can imagine,” according to Toby Ziegler. “Followed by week two.”

That fictional assessment is as good a guide as any to what a prolonged default would mean for markets and the economy.

Fortunately, that remains unlikely.

If we do stumble into default, it’s more likely we don’t stay there long: My guess is that a swift market crash would force Congress to retroactively raise the debt ceiling, much as swooning markets forced Congress to reluctantly pass the TARP bailout in 2008.

But the events of 1979 demonstrate that even a brief, accidental default can have serious consequences.

Everyone agrees that a deliberate default — even a short one — would be a dire, entirely self-inflicted wound. But that doesn’t mean it won’t happen.

Legislators respond to the incentives we give them, and we don’t always give them incentives to do the right thing: Winning a primary race in a safe congressional district will often require doing something that is very obviously the wrong thing — like voting to institute a nonsensical debt ceiling and then, when we get there, refusing to raise it.

Jean-Claude Juncker spoke for politicians everywhere when he said, "We all know what to do, we just don't know how to get re-elected after we have done it."

Getting the debt ceiling raised is less a function of whether it’s the right thing to do and more a function of how many politicians it would help. Help get reelected, that is.

Voting against a higher debt ceiling will help get some number of senators and representatives re-elected. And that number may be high enough to lead us into default.

If so, there are fallback options — emergency workarounds like minting a trillion-dollar coin or selling “premium bonds.”

Gimmicks of that sort could avert a default, but not without consequences of their own: They would not be any more gimmicky than the debt ceiling itself, but resorting to them could be a slippery slope on the way to undermining faith in the US dollar.

Faltering belief in fiat dollars is, of course, the reason we have crypto.

Putting the Risk Back in Risk-Free

Crypto is the longest of long-duration assets.

Along with every other long-duration asset, it suffered in 2022 as the “risk-free” rates on short-dated Treasurys became increasingly attractive.

Could a reminder that those rates are not actually risk-free therefore be good for crypto?

In the first instance, probably not: Crypto is a risk asset, and a US default is a risk-off event (to put it mildly).

In the second, third, and fourth instance, however, it could be.

The idea of Bitcoin as an inflation-hedge has been exposed as a meme: There’s nothing causal about the relationship between inflation and the price of bitcoin.

The new narrative is that Bitcoin is a hedge against “monetary debasement,” but that, too, is a meme: There’s nothing causal about the relationship between the supply of money and the price of bitcoin, either.

There should, however, be a causal (and inverse) relationship between belief in dollars and belief in Bitcoin: The less people believe in state-issued money, the more they should believe in non-state-issued money.

Belief is not easily quantifiable. But the events of 1979 demonstrate that a higher risk of government default leads directly to lower demand for US dollars.

In 2023, lower demand for US dollars should lead directly to higher demand for crypto.

Bitcoin is insurance against all of the tail risks to the US dollar.

Our politicians' habit of routinely risking the end of the financial world should make more people interested in taking out a policy.

— Byron Gilliam

P.S. — Find this newsletter helpful? Share it!

Was this newsletter forwarded to you? Sign up here.

Top Stories

Q&A: Does the Next Generation of Gaming Actually Need Blockchain? [Sponsored] — Blockworks
5 Charts Showing How Brutal 2022 Was for Public Bitcoin Miners
— Blockworks
DOJ Busts Crypto Exchange No One Has Heard Of — Blockworks
Why Central Banks and the Unbanked Are Both Looking at Blockchain [Sponsored] — Blockworks
A Web3 Survival Guide to Crypto Winter [Sponsored] — Blockworks
Coinbase Follows Kraken to Japan Exit — Blockworks
SEC Crypto-related Fines Hit $2.6B Through 2022 — Blockworks
Ethereum Has Most Developers, But These Newer Chains Are Growing Fast — Blockworks
HashKey Has ‘Weathered at Least Three Cycles.’ $500M Fund Is Latest Proof — Blockworks
MiCA Delay Until April Gives EU Crypto Firms Ample ‘Breathing Room’ — Blockworks
Bitcoin Price Rally to $21.5K Takes Pause — Blockworks

This issue is brought to you by:

Ever wish you could automatically convert cashback rewards into crypto?

Brace yourself because Curve just made this passive investing hack a reality.

How you ask? Their app consolidates select credit and debit cards into a single wallet app and links them to the Curve Smart Credit Card.

They supercharge those rewards with an additional 1% in cashback and let you decide how much Curve Cashback is converted to crypto.

And very soon you'll be able to self custody your rewards straight from the Curve app!

The Curve Card is Powered by Hatch Bank. Cash back rewards can be converted into select cryptocurrencies which are provided by our partner, Zero Hash. Terms and conditions apply.

We're Hosting

Webinar: Optimizing for The Next Crypto Summer

Date: Thursday, January 26

Permissionless '23 Speakers Announced

The first wave of Permissionless '23 speakers has been released! Featured speakers include:

Mary-Catherine Lader, Uniswap
Kevin Owocki, Gitcoin
Jim Bianco, Bianco Research
Hasu, Flashbots

And more! View the full line up & register today.

Blockworks Research Alpha

Velodrome, Optimism’s flagship DEX, has once again reached $100M TVL. Given the spike in Optimism transactions, Velodrome has been a key destination for many market participants. By vote-locking the DEX’s VELO token, stakers can control gauge emissions and receive bribe awards, similar to Curve. The platform saw $300,000 (more than Aura’s most recent round :0) in bribes this past epoch and has earned a total of $4.6M in bribes since inception. With the market’s recent focus on L2s, Velodrome is just one of many cornerstone dApps on Optimism, including Synthetix, Kwenta, and Lyra.

This issue is brought to you by:

The next frontier of GameFi is here…

And Polemos is the go-to source for navigating this rich new landscape. They are the first decentralized GameFi platform to combine an asset lending library, educational hub, and gaming community all within the Polemos Forge.

Enhance your skills with their focused courses, GameFi news and analytics dashboard, and explore new in-game asset staking/lending opportunities through their upcoming Armory.

Be an early adopter and join Polemos Forge Beta today!

What's Trending

A complete overview of the GMX Ecosystem (Thread) — The DeFi Investor
It's time for the 2023 shopping list (Thread) — Adam Cochran
Will we see TradFi finally adopting DeFi options? (Thread) — Blockworks Research
7 of the strongest signs I’ve seen that inflation has peaked (Thread) — Genevieve Roch-Decter
Yuga Labs just launched their first NFT collection since the Otherside deeds (Thread) — cygaar

We're Watching

On today's episode of On the Margin, Michel Kao joins the show for a discussion on the U.S Dollar and its role in the great power competition.

Watch and listen to On The Margin on Youtube, Spotify, and Apple Podcasts.

Written byByron Gilliam

Produced by Kat Dittmeier

Follow Blockworks on Twitter, LinkedIn, YouTube, Telegram and Instagram.

Was this email forwarded to you? Sign up for free to join over 180,000 investors who read Blockworks newsletter daily.

Update your email subscription preferences here.