So much for a Trumpian brave new world of crypto. Donald J Trump’s election victory in November was meant to usher in a new chapter of deregulation and irrational exuberance for cryptocurrencies. Instead, reality has hit home.
Bitcoin (BTC), the benchmark indicator of the asset class, plunged on Tuesday, 25 November more than 5% to levels last seen in mid-November. Bitcoin had momentarily peaked just before the inauguration of Trump, touching $107,000. However, anyone brave enough to buy at that lofty valuation would now be nursing losses of more than 16%.
What is perhaps even more curious is that Bitcoin, often touted as the “electronic gold”, given its supply is capped at 21 million, has underperformed actual gold so far this year. As Trump’s White House return and heightened geopolitical instability have sparked a rush for safe-haven investments, gold has been the greatest beneficiary, up almost 11%. Bitcoin, year to date, is down almost 6%. And fair enough, when faced with uncertainty, why buy the supposedly safe electronic alternative when you could just buy the real thing?
Triggers for crypto uncertainty
What has caused the market sentiment to shift? First, risks have crept back into the asset class with several scams and crashes that have reminded investors about the embedded uncertainties. Last week, Dubai-based crypto exchange Bybit was hacked and almost $1.5-billion stolen. According to Bloomberg analysts it was the largest crypto theft yet. Bitcoin and Ether prices duly sold off while riskier smaller coins experienced heavier losses.
There are also signs of froth in the “sh*tcoin” space, to use a popular phrase. Argentina’s charismatic libertarian president, Javier Milei, has been a high-profile victim over his promotion of a memecoin called Libra that soared in value before collapsing, triggering impeachment calls and lawsuits.
All these are reminders that deregulation in the crypto space, as promised by Trump, is not a free lunch. The history of finance proves that when regulations designed to protect investors are cut, the end losers are those investors themselves. It is surely only likely that crypto and crypto-related fraud will proliferate.
Second are more general macro factors. There is no doubt that the steam has gone out of markets since the beginning of this year, particularly in the US due to weakness in the tech mega cap stocks, which are all either flat or down. Bitcoin, for months, has been trading with high correlation to such tech bellwethers.
Spooking investors has been a confluence of bad data. First, inflation in the US earlier this month came out substantially higher than estimates, putting on hold any meaningful interest rate cuts this year. Bitcoin, as a security that needs abundant liquidity to thrive, duly sold off.
But worse is that the macroeconomic outlook has also dimmed. Promised tariffs in the US are only likely to raise inflation, further limiting the Fed’s room to cut. And uncertainty from Trump’s hyperactive first month in power has crept into general economic concerns.
Late last week a build-up of mediocre-to-negative data cast serious doubts on the US economy and by implication the US equity market over the rest of the year. On Friday, preliminary PMI survey readings showed that US business growth is close to stalling. There was also more negative housing data, with new housing starts and existing home sales down by a worrying 9.8%.
Then there was the Michigan consumer sentiment survey, also out on Friday. It was overwhelmingly negative. The US benchmark S&P 500 dropped 1.7%, with BTC crashing almost 5%. The combination of high inflation and weak economic growth, or stagflation, is a terrifying one for investors, particularly those in yield-free markets like crypto.
Finally, there are broader concerns around the future of the asset class and what the consequences could be for broader financial markets. These sentiments are perhaps best expressed by the warning late last month by the hedge fund Elliott Investors, which warned in its letter to investors that the Trump administration’s embrace of cryptocurrencies is helping to fuel a speculative mania that could cause “havoc” when prices collapse.
The $70-billion-in-assets firm took aim at the US government’s apparent enthusiasm for assets that have soared in price but have “no substance”, and also at politicians who are supportive of cryptocurrencies.
“We have never seen a market like this,” wrote Elliott, referring to the speculative investor frenzy it believes is gripping financial markets. “Crypto is ground zero” for the speculative surge, not only because of the size it has grown to but also because of its “perceived proximity to the White House”, it added. The “inevitable collapse” of the crypto bubble “could wreak havoc in ways we cannot yet anticipate”.
While the bubble has not burst, and Bitcoin prices remain stuck in their trading band, momentum has clearly drained from the asset class. The naysayers in November have so far been right. The questions now are: If Bitcoin and other cryptocurrencies do not resume their supposedly inexorable march higher and instead continue plunging, how far could they fall? And if so, what broader damage could they wreak? DM