Citi reveals gloomy predictions for near-term cryptocurrencies

After months of US debt ceiling drama, markets appear to be recovering. However, holders of risky assets such as cryptocurrencies may face a new challenge as the US Treasury tries to rebuild its depleted cash balance.

With an estimated $1 trillion worth of government bonds being issued, this stream of supply could have a significant impact on the cryptocurrency market.

Strategists at Citi Research have warned that the impending drawdown of US Treasury reserves could create a headwind for high-risk assets like Bitcoin and other cryptocurrencies.

New challenges for Bitcoin

Citi analyzed the performance of cryptocurrencies in previous periods and found that they are vulnerable to higher volatility and weaker returns. Therefore, the short-term outlook for cryptocurrencies does not look very optimistic.

The Treasury General Account (TGA), responsible for holding money for the US Treasury, rose during the pandemic and is now at its lowest level.

To meet its obligations, the Treasury will have to replenish its dwindling cash reserves through the sale of bonds.

That oversupply could lead to reduced liquidity in the banking sector and higher short-term interest rates in an economy that many believe could slide into recession.

The short-term outlook does not look very optimistic

The situation is not favorable for cryptocurrency investors, who are reeling with fear around the US debt ceiling. While Bitcoin has seen a recent surge, the price is still stagnant around $27,000, having failed to break the $30,000 mark for several weeks.

Citi strategists point out that the cryptocurrency market will also be impacted by concerns about US government default.

While Bitcoin has performed well amid issues at traditional financial institutions, such as the banking industry turmoil in March, the default risks of a high-impact institution like the US government may not favor decentralized digital assets.

While investors wait for the resolution of this situation, Bitcoin continues to operate in a limited trading range. Short-term volatility is low, but implied option volatility is down.

Falling bitcoin volume

Products traded on Bitcoin exchanges are seeing steady outflows and Bitcoin volumes are declining, both in the spot and futures markets.

However, the US Senate recently passed legislation to lift the country’s debt ceiling and impose limits on government spending until the 2024 election.

This measure, if signed by President Joe Biden, could ease some of the pressure on the markets and give new impetus to Bitcoin and other cryptocurrencies.

Despite the current challenges, Bitcoin has performed positively throughout the year, recovering about 60% since early 2023.

However, the uncertain macroeconomic scenario and recession fears continue to influence the market. Investors are waiting for signals from the US central bank to boost Bitcoin again and lead to a further price increase.

Meanwhile, cryptocurrency holders remain vigilant about upcoming economic decisions and developments that could impact the market. Regulation and clear definition of cryptocurrency markets are also important factors to consider going forward.