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A guide to what the 2024 US election means for Washington and the world.
The author is a professor at Cornell University, a senior fellow at Brookings University, and the author of The Future of Money.
Cryptocurrency supporters celebrated Donald Trump’s presidential victory and saw a kindred spirit in him. The price of Bitcoin, the original and most prominent cryptocurrency, has soared since his re-election in November. Under the Trump administration, the crypto industry appears to be getting what it wants, with government oversight and light regulation providing legitimacy. This is a harmful combination for both the financial system and investors.
President Trump’s shift in views on cryptocurrencies (from skeptic to active supporter) does not obscure the reality that nothing has changed in the fundamentals of this asset class, including its lack of intrinsic value. However, the ethos of his administration aligns well with the liberal aspects of Bitcoin.
Shortly before this week’s inauguration, President Trump and first lady Melania Trump launched a memecoin. It is noteworthy that government officials, not to mention leaders of the free world, develop and promote purely speculative financial products from which they can profit. This financial heist has some crypto investors worried that President Trump will reinforce the perception that cryptocurrencies are inherently fraudulent and may even undermine their mainstream acceptance. I am doing it.
Since then, Trump has somewhat rectified the situation. He issued an executive order to support the crypto industry and directed government agencies to create a regulatory framework to facilitate its activities.
The new president wants America to become the crypto capital of the planet and has floated a proposal to create an official US Bitcoin reserve. Once such a reserve is established, Bitcoin will be given official approval. But that makes little sense. Rather, the government will bear the risks associated with Bitcoin price fluctuations. Even if there is a paper profit, selling a significant amount of stock would cause the price of Bitcoin to plummet, reducing the value of the government’s remaining assets.
Still, it’s clear which way the wind is blowing. See crypto enthusiast Scott Bessent nominated as Secretary of the Treasury and Paul Atkins nominated as Chairman of the Securities and Exchange Commission. David Sachs, the current White House cryptocurrency czar, will also be a strong advocate for the industry.
Those who truly believe in decentralized finance built on Bitcoin blockchain technology must be distraught. The idea that governments should be involved in the creation, dissemination, and use of Bitcoin goes against the principles for which Bitcoin was created.
At least their digital wallets are bloated, which may soften the blow.
Financial regulators will no doubt ease restrictions on the issuance, use, and trading of virtual currencies and virtual currency-related financial products in the future. Cryptocurrency creators, promoters, and exchanges will be able to operate more freely, and banks and investment managers will face fewer constraints when handling the assets. These changes will facilitate widespread adoption of cryptocurrencies by both retail and institutional investors.
The mainstreaming of cryptocurrencies and the benign attitude of regulators will also encourage closer ties between the industry and traditional financial institutions such as commercial banks and investment management companies. These connections expose the traditional financial system to spillover risks.
Meanwhile, regulators and government officials are legalizing crypto assets, despite their highly speculative nature and the risk of exposing unskilled retail investors to volatility.
Investors should be free to invest as they wish, no matter how risky the asset class. But when the U.S. president and his top officials speak favorably about the industry, there’s a good chance investors will let their guard down. History has shown that such government support often ends badly, leaving individual investors and taxpayers with the financial burden.
China’s housing market bubble, which has deflated with painful consequences, presents an interesting parallel.
China’s government has long relied on the real estate sector to drive its economy, touting it as a way for households to build their own wealth. State-owned banks provided loans to real estate developers and mortgages to households. Local governments that rely on land sales as their main source of income further fueled the real estate boom. Now that the real estate bubble is bursting, it’s putting a huge burden on low-income families who parked most of their savings in real estate or scraped together missed down payments from failed developers.
China’s housing boom was at least related to real assets. In contrast, Bitcoin has no intrinsic value. Price fluctuations make gold an unviable medium of exchange, and its value is based purely on scarcity, a property it undoubtedly shares with gold.
There’s nothing wrong with digital gold or investors willing to roll the dice, unless the president or other government officials are selling it.
Trump and his government’s tacit support for Bitcoin and other cryptocurrencies means that if the bubble bursts, the ultimate losers will be American taxpayers.
