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Your guide to what the 2024 US elections mean for Washington and the world
The writer is a professor at Cornell University, a senior fellow at the Brookings Institution, and the author of “The Future of Money.”‘
Cryptocurrency supporters celebrated Donald Trump’s presidential victory, seeing him as a kindred spirit. The price of Bitcoin, the original and most prominent cryptocurrency, has risen since his re-election in November. In the era of Trump, the cryptocurrency industry appears poised to get what it wants — legitimacy provided by government oversight and light regulation. It’s a toxic mix for both the financial system and investors.
The shift in Trump’s views on cryptocurrencies — from skeptic to outspoken defender — doesn’t hide the fact that nothing has changed in the fundamentals of this asset class, including its lack of intrinsic value. But his management ethos aligns well with the libertarian aspects of Bitcoin.
Shortly before his inauguration this week, both Trump and his wife, Melania, released meme coins. It is remarkable that a government official, let alone a leader of the free world, would create and promote a purely speculative financial product that he could profit from. The financial takeover has left some cryptocurrency investors concerned that Trump may undermine even the mainstream acceptability of cryptocurrencies by reinforcing perceptions that they are all… Basically scams.
Since then, Trump has righted the ship somewhat. issued Executive order Support the cryptocurrency industry and direct government agencies to develop a regulatory framework to enhance its activities.
The new president wants America to become the cryptocurrency capital of the planet, and for it to float an offer To create an official Bitcoin reserve in the United States. Creating such a reserve would give Bitcoin an official pass. But this makes no sense. Instead, it will result in the government bearing the risks associated with Bitcoin price volatility. Even if it made paper profits, selling a large stake would cause the price of Bitcoin to fall, depreciating the value of the rest of the government’s holdings.
However, it is clear in which direction the wind is blowing. Watch the nominations of crypto enthusiasts Scott Besent as Treasury Secretary and Paul Atkins as Chairman of the Securities and Exchange Commission. David Sachs, now the cryptocurrency czar in the White House, will be a strong advocate for the industry.
True believers in Bitcoin’s blockchain-based DeFi must be in awe. The idea that the government should be involved in the creation, dissemination, and use of Bitcoin goes against the very principles under which it was created.
At the very least, their digital wallets are becoming fatter, which may soften the blow.
There is no doubt that financial regulatory bodies will now ease restrictions on the issuance, use and trading of cryptocurrencies and associated financial products. Cryptocurrency creators, promoters and exchanges will be able to operate more freely, while banks and investment managers will face fewer restrictions in handling assets. These changes will promote widespread adoption of cryptocurrencies by individual and institutional investors.
The popularization of cryptocurrencies and the benign stance of regulators will also stimulate closer links between the industry and traditional financial institutions such as commercial banks and investment management companies. These linkages will expose the traditional financial system to risks of spillover effects.
Meanwhile, regulators and senior administrators are working to legitimize cryptoassets, despite their highly speculative nature and the risks of exposing unsophisticated retail investors to their volatility.
Investors should have the freedom to invest as they please, regardless of how risky the asset class. But when the President of the United States and his top officials speak favorably about an industry, investors can let their guard down. History shows that such government support often ends badly, with individual investors and taxpayers bearing the financial burden.
China’s housing market bubble, which is now deflating with painful consequences, provides an interesting parallel.
For many years the Chinese government relied on Real estate sector To drive its economy while promoting it as a way for families to build their own wealth. State-owned banks provided loans to real estate developers and mortgages to families. Local governments depend on it Land sales As a main source of income, which increased the real estate boom. Now that the real estate bubble has burst, the burden has fallen heavily on low-income families who have kept much of their savings in real estate or collected down payments that are now stuck in the hands of failed developers.
China’s housing boom was at least linked to real physical assets. By contrast, Bitcoin has no intrinsic value. Price fluctuations make it an unviable medium of exchange and its value depends solely on scarcity, a characteristic arguably shared by gold.
There’s nothing wrong with digital gold or with investors willing to roll the dice, unless the president and government officials are the ones promoting it.
Trump and his government’s implicit endorsement of bitcoin and other cryptocurrencies means that the ultimate losers — if and when the bubble bursts — will be American taxpayers.
