The greatest victory of crypto bros against the dollar.
Following the outcome of the US elections, it is now confirmed that the next leader of the free world will be Donald J. Trump. Reactions to the results of this polarizing vote have been very mixed across the world, but one global community, namely “crypto bros”, has started popping champagne bottles as their most popular alternative currency has spiked in value. The question arises: How is Trump connected to Bitcoin?
A sudden change of heart
During his first term and as recently as 2021, Donald J. Trump described Bitcoin as “the scam against the dollar” and advised the Securities and Exchange Commission to regulate it harshly. His opposition to cryptocurrency was based on the potential threat posed by Bitcoin to the US dollar’s status as the global reserve currency, so what has happened since then? First of all, the community cheering for this technology was libertarian at heart from the beginning and attracted eccentric figures such as Peter Thiel and Elon Musk. As a matter of fact, it was one of the bases of the new right-wing movement in Silicon Valley. Their political positioning was certainly accelerated by the Democrats’ scrutiny of Bitcoin’s environmental impact and its usage as a tool for tax evasion, money laundering, and other crimes. Therefore, Trump’s change of mind can be simply explained as an attempt to win over the votes of these “crypto bros” or the natural outcome of American polarization. However, this explanation would lack one important aspect, namely PACs (Political Action Committees), organizations that pool political donations. As US election campaigns are known to be extremely expensive by worldwide standards (in this year’s election, both camps spent nearly $16 bn, according to OpenSecrets), the main contributors hold immense power over any politician, and in Trump’s case, many of them were crypto-enthusiasts, such as the above-mentioned Peter Thiel and Elon Musk, who also launched his own cryptocurrency Dogecoin. Tesla’s CEO helped throughout the campaign by both advocating and using his social media platform X, which was highly appreciated by Trump, as proved by his announced appointment as commissioner of the Department of Governmental Efficiency. Therefore, Musk and other donors could potentially convince today’s president-elect to appreciate cryptocurrencies more.
What were Donald Trump’s crypto promises?
In July, Trump appeared at a Bitcoin conference, where he met a passionately supportive audience that welcomed him with cheers, which could be heard throughout Nashville. He repaid their enthusiasm by flatteringly describing them as “high-IQ individuals” and promised to make America the crypto capital of the planet. Of course, he also did not hold from making his usual remarks about his political rivals, but more importantly, he presented some outlines of the plan to fulfill his promises. According to Trump, the first step in realizing this ambition will be to fire Gary Gensler (current SEC Chair) on day one. However, he would probably not be able to do it as SEC Chairs traditionally resign after a change of administration. Nonetheless, those words can be interpreted as a declaration of appointing somebody more lenient towards cryptocurrencies. This is vital information for this market as he could resolve the ongoing debate in favor of crypto bros of whether cryptocurrency should be considered a security and, as such, be subject to SEC regulations. It is also worth mentioning that he will personally benefit from this change, as he owns nontransferable tokens from World Liberty Financial, which could become sellable after the threat of Gary Gansler’s scrutiny becomes obsolete. Moreover, he could revoke the rule implemented in 2022 that mandates public companies to classify crypto assets held on behalf of others as liabilities, which scares off banks as they are required to maintain cash (in a wider meaning) against liabilities. However, those are not his most controversial pledges because he vouched that the US government would not sell Bitcoins during his administration. What does it mean? First of all, cryptocurrencies are in this country’s coffers because they were seized from criminal organizations by federal agencies. Currently, they are usually sold by the U.S. Marshals Service via auctions; this effort often triggers drops in their value due to positive supply shock in the market. This was evident when Germany conducted a similar operation in July this year, which resulted in the price of Bitcoin falling by 15%. Therefore, creating a national crypto stockpile would surely stabilize the crypto market. However, the situation is more complex, because Republican senator Cynthia Lummis has presented a bold policy proposal, namely the “BITCOIN Act,” which expands on Trump’s pledges. This proposal doesn’t aim to sell Bitcoin but to accumulate more of it until the US government owns 5% of the total supply in the span of 20 years. As the supply of Bitcoin is finite, such additional demand will certainly drive up its value and enhance its legitimacy. A crucial factor when considering its broader economic consequences.
The Consequences
It is important to note that even if the US implements everything promptly—which is unlikely—it will not be the first country to romance with Bitcoin. This honor goes to El Salvador, which, under President Nayib Bukele, who is also a vivid supporter of Donald J. Trump, adopted Bitcoin as a legal tender three years ago. What were the consequences? They were mixed at best, as this solution was not enthusiastically embraced by the local population. Therefore, the goals of decreasing the remittance cost and wider financial inclusion were not achieved. However, it must be said that El Salvador gained international recognition, and tourism has increased due to this legislation. Can we imply that a similar impact (small or minimal) will have Trump’s crypto revolution? Not really, because first of all, he does not plan to adopt Bitcoin as a legal tender. What’s more, Bukele’s goals, such as reducing remittance costs, do not stand ground in the US case, as it does not rally on such transfers. Moreover, the main reason for distrust of this solution by Salvadorians was their low digital literacy, which will not probably be the case for Trump’s homeland. The same applies to the listed accomplishments of this solution, as the US is just a far different country. Why have I even mentioned this example? I have done it to discuss one characteristic of Bitcoin, which nearly collapsed the whole Salvadorian project and will probably have the same implications for the American one, namely its high volatility. The Bukele government bought nearly USD 90 million’s worth of this cryptocurrency as reserve assets at the end of 2021, which unfortunately crashed in the same period, which led to lowering credit ratings and rising fears of potential default. Thanks to the bull market, it seems that this was just a slight hiccup, and after all, the whole gamble made a substantial profit for the El Salvadoran economy, but in the case of the US, such a “slight hiccup” can lead to the global recession. American debt is worth over USD 36 trillion, and any small threat of a decline in the economy’s health can lead to global panic. This negative aspect is supercharged by the fact that Bitcoin, contrary to gold, usually tracks the stock market and also regularly halves and then rebounce in the four-year period. This means that during any financial crisis, the balance sheet of the Fed will be negatively affected, which certainly will not help with recovery from it. Moreover, embracing Bitcoin by the wider public will strengthen the relationship between its price and the “real economy”, which will result in an overall higher volatility of the US economy. However, an argument can be made that the consequence of treating this cryptocurrency as a reserve asset would make it more stable because investors will maintain confidence that the central banks will always demand it. Even if we fully agree with this statement, it does not mean that the situation will not be problematic for the US, as central banks will not buy as many dollars when a recognized alternative exists. As a consequence, such legitimization of Bitcoin would weaken the position of the US dollar. Therefore, Trump’s description of it as “the scam against the dollar” from 2021 will become more truthful through his own actions. Especially considering that Bitcoin was designed to replace traditional currencies, so FED, whose aim is to defend and uphold credibility to the most influential currency in the world, will be at least quite ironic. However, as we know, Trump plans to lower the value of the dollar in order to reduce the trade deficit, which is something to be discussed in another article, and by creating more competition, this can be achieved, but it is well known that the world reserve currency status enables the US to operate without caring about its massive debt levels. Even considering the depreciation of its currency as something positive, such a situation will not have a positive outlook for its economy.
What are the pros of such policies? First of all, it will indeed make the US cryptocurrency capital of the world, as its greatest economic rival,China, is cracking down on this market. Such a show of support will encourage Americans to completely dominate this sector. Moreover, it is argued that they will benefit from a sort of “first-mover advantage”, as other countries’ central banks will start buying Bitcoin as a reserve asset; the US will already have it, so its further appreciation will benefit it. Therefore, it is argued by Senator Cynthia Lummis that the revenues from such an operation could be used to pay off the national debt and, by that, shore up the dollar as the world reserve currency. However, it will mean that the leadership of the biggest economy in the world will act as a speculator, which is not safe. Another possible pro is that Bitcoin will be used as a hedge against inflation, as it is negatively correlated with it. Moreover, on average, its appreciation is far higher than that of traditionally used gold. Still, it’s also more volatile, so it can be described as just a more aggressive measure, which can be very advantageous if we expect a more inflationary future.
The Grand Finale
As you may conclude from my text, I’m not supporting the BITCOIN Act, but it does not mean that I’m suggesting a “doomsday scenario” because there are small chances for this bill to get a 60% majority in both houses of Congress, even with a big Republican majority. Not all GOP senators and members of Congress are as crypto-friendly as Trump and his associates. What’s more possible is a further liberalization of rules connected to cryptocurrencies and a more favorable SEC, which will result in further acceptance of Bitcoin in traditional financial institutions. This will cause more volatility in the whole sector and will make it easier to launder money by using it. On the other hand, it will bring more prosperity to the American cryptocurrency sector, and it will result in the possible complete domination of this country in this market, so there is more risk for the whole economy, but in exchange for some potential growth. However, the impact of such policies will be the biggest on Bitcoin itself as the whole market might boom further if its participant’s expectations are met. One takeaway from this article could be that it may be the best time for all of us to get interested in this topic.