Prolonged Government Shutdown Hangs Over Wall Street; How Will This Affect Crypto?

Journalist:
December 22, 2018

The debate over President Trump’s border wall has unveiled new partisan dysfunction in Washington as the United States on Saturday faced its third government shutdown in a year. The partial shutdown, which risks extending into the holidays, presents fresh headaches for Wall Street following the worst weekly selloff in a decade. For cryptocurrency investors, the power of holding non-correlated assets could become apparent in the near future.

For more context behind the latest developments on Wall Street and in crypto-land, read Hacked.com’s Week in Review.

US Government Grinds to a Halt

A Senate impasse over the funding of President Trump’s $5.7 billion border wall triggered a partial government shutdown on Saturday, with both parties blaming each other for the lack of resolve. President Trump has referred to it as a “Democrat shutdown” that “could be a long stay,” referring to a prolonged interruption of federal government functions. Democrats, meanwhile, accused Trump of throwing another “temper tantrum.”

Trump, who has put his Christmas holiday on hold, tweeted Saturday morning that his administration was negotiating with Democrats over a new budget deal that includes the “desperately needed Border Security” wall.

Funding for the wall was approved on Thursday in the House of Representatives but was struck down in the Senate by a united Democrat front.

Investors on Edge

The impasse couldn’t have come at a worse time for stock traders, who have seen their yearly gains wither away in the last three months. Stocks are now trading at their lowest level in 16 months, with the Dow Jones Industrial Average recording its worst weekly slide in a decade. On Friday, the Nasdaq Composite Index fell to the bears for the first time since 2009, a dramatic role reversal from the tech-induced bull market that characterized the post-crisis era.

Signs of a looming government shutdown Friday wreaked havoc on Wall Street, and a prolonged impasse could have adverse effects on what’s left of the bull market for the S&P 500 and Dow Jones Industrial Average. Investors’ collective angst is well documented by the CBOE VIX, which tracks expected volatility over the next 30 days. The so-called “fear index” settled above 30 on Friday for the first time since February and is on track for a yearly gain of 173%.

Influence over Crypto

The possibility of an extended government shutdown could impact the cryptocurrency market both directly and indirectly. For starters, it threatens to further delay the proposed launch of Bakkt, Intercontinental Exchange’s forthcoming crypto trading platform. Bakkt still requires key approvals from the US Commodity Futures Trading Commission (CFTC), a federal body that is affected by the Senate impasse. As it currently stands, Bakkt is unlikely to get the approvals needed to launch by the proposed date of Jan. 24. Although the initial delay is unrelated to the government shutdown, a failure to agree on a new budget will certainly affect the CFTC’s timeline.

Once launched, Bakkt could have a dramatic influence on bitcoin futures. Read more.

In terms of indirect consequences, politically-inspired volatility on Wall Street could play into the hands of bitcoin and other digital currencies that have previously enjoyed safe-haven status among investors. Cryptos may have struggled to demonstrate their utility as spending instruments, but until now have been an excellent store of value. The value of safe-haven investments in the current climate is demonstrated by gold‘s recent six-month peak. That being said, the key selling point here is whether you believe bitcoin has reached bottom or, at the very least, is approaching the final stage of the bear market.

Or it could be that bitcoin continues to establish itself as a non-correlated asset that trades independently of broader market moves. We’ve spotted some elements of correlation recently, but otherwise, bitcoin is generally not closely influenced by stocks, monetary policy, and economic data (it is influenced by FUD/FOMO, but we don’t watch the economic calendar to play BTC).

In any case, a prolonged bear market in stocks, should it materialize, could finally test the hypotheses of bitcoin’s most ardent backers: that it is a superior store of value, better suited for periods of volatility and destined to compete with fiat on a global scale.

Featured Image from Shutterstock

Looking beyond crypto? Visit Hacked.com for the latest market analysis.

Last modified (UTC): December 22, 2018 19:50

Sam Bourgi @hsbourgi

Financial Editor to CCN Markets, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com