In the event of a US government shutdown on October 1st, some analysts and experts are predicting a Bitcoin rally. This article aims to analyze whether this scenario is likely based on historical reactions of the Bitcoin price during past shutdowns and the 2023 banking crisis.
The Approach of a Government Shutdown
If the US Congress fails to reach an agreement soon, a government shutdown is imminent. While government shutdowns do not have a long-term impact on stock markets or cryptocurrencies, they do introduce short-term uncertainty and volatility.
For instance, during the government shutdown in December 2018, the stock market experienced a nearly 20% drop. Let’s examine the price movements of Bitcoin during previous government shutdowns to gain some insights.
Graph 1: Bitcoin price (logarithmic) over the last 10 years (2013 is not included due to the unavailability of data)
During the three government shutdowns that occurred while Bitcoin existed, its price reaction was inconclusive. In 2013, Bitcoin gained around 8%, but its price change was relatively insignificant compared to its subsequent skyrocketing. In early 2018, Bitcoin had just experienced an all-time high of over $12,000, which explains the significant drop of over 15% during that shutdown. During the December 2018 to January 2019 shutdown, Bitcoin dropped by almost 10%. However, when compared to its previous 50% crash in November 2018, this drop appears to be within the realm of regular volatility.
Table 1: Performance of Bitcoin during government shutdowns (source: calculated by author)
|Dates of shutdown
|Price change of Bitcoin during the shutdown
|1 – 16 October 2013
|20 – 23 January 2018
|22 December 2018 – 25 January 2019
Based on this data, it seems unlikely that Bitcoin’s price was directly influenced by government shutdowns.
Comparisons with the 2023 Banking Crisis
Some argue that the 2023 US banking crisis could be a better comparison for predicting Bitcoin’s response during a government shutdown. In recent years, Bitcoin has been increasingly considered a safe haven asset by certain investors. Let’s examine whether the banking crisis earlier this year can provide meaningful insights.
Graph 3: Bitcoin price during 2023
The banking crisis unfolded from March 8th to late April 2023. After a rapid rise in the early months, Bitcoin reached a value of over $20,000 on March 10th and exceeded $30,000 about a month later, marking a strong 50% increase. However, this rise may not necessarily be attributed to Bitcoin being perceived as a safe haven amid the crisis.
Graph 4: Bitcoin price during March 2023
A closer examination of the events leading up to the banking crisis reveals that the high uncertainty surrounding the crisis resulted in a drop in Bitcoin’s price. Only after comprehensive measures, including a backstop from the Federal Reserve and the US Treasury Department, were introduced on March 12th, did Bitcoin’s price begin to rally.
Graph 5: Bitcoin price compared with Invesco KBW Bank ETF (KBWB) during the last year
Furthermore, as shown in Graph 5, while the banking sector suffered and has not yet fully recovered, Bitcoin has performed strongly since then. This suggests that some investors viewed Bitcoin as an alternative to the traditional banking system.
Based on these graphs and events, the following conclusions can be drawn:
- Bitcoin, like other financial assets, experienced a drop during times of high uncertainty, such as the bank run
- Bitcoin quickly rebounded after the 2023 banking crisis
- Banks were severely impacted, while Bitcoin, seen as an alternative to traditional banking, performed well
- Given Bitcoin’s volatility, the exact impact of the banking crisis on its price is difficult to determine
What to Expect from Bitcoin During a Shutdown?
Based on our analysis of previous government shutdowns and the 2023 banking crisis, it is unlikely that a government shutdown will trigger a rally in Bitcoin’s price. While Bitcoin may act as an alternative to traditional banking during a banking crisis, this dynamic does not apply to government shutdowns. Therefore, it is not reasonable to expect the same effect on Bitcoin’s price.
In the short term, Bitcoin will likely remain a relatively volatile asset. Throughout its existence, Bitcoin has primarily functioned as a trading instrument rather than a stable store of value. However, in the long term, Bitcoin and other cryptocurrencies are likely to become significant stores of value alongside traditional assets like gold (GLD). One advantage cryptocurrencies have over gold is their simultaneous functionality as a liquid means of payment.
Graph 1 at the beginning of this article indicates a decreasing trend in Bitcoin’s volatility over the past decade, suggesting this pattern is likely to continue. While it is uncertain whether Bitcoin serves as an effective inflation hedge, it is evident that cryptocurrencies will play a substantial role in the future of payments and as stores of value.
It is important to note that investing in cryptocurrencies is inherently risky. Only invest what you can afford to lose.