The Impact of Trump's Crypto Support and Powell's Stance on Bitcoin
Dec 19, 2024 at 4:45 PM
A tiny glimmer of significance was shed from bitcoin when Federal Reserve Chair Jerome Powell dampened the notion of the U.S. government establishing a cryptocurrency reserve. However, bitcoin has remained on an upward trajectory ever since Donald Trump secured the White House. Trump has openly expressed support for crypto and has appointed crypto advocates to crucial positions within his administration. On Election Day, bitcoin was valued at approximately $69,000. In the weeks following Trump's victory, it surged above $100,000. This summer, at the Bitcoin 2024 industry conference, Trump addressed the attendees, stating his aspiration to make America the "crypto capital of the planet and the bitcoin superpower of the world." Some of his selections for key jobs within his administration, such as the treasury secretary and the Securities and Exchange Commission chair, seem to reinforce his pro-crypto stance.But the Fed's Stance and Its Implications
On Wednesday, Powell, the Fed chair, declared that the central bank is not permitted to own bitcoin and is not seeking a legal amendment to enable the government to hold a crypto reserve. A day later, according to CoinDesk, the largest and oldest cryptocurrency was trading around 5% lower than its 24-hour peak. Leonard Kostovetsky, an associate professor of finance at Baruch College, stated via email, "I'm not astonished that the Fed chair says they will not hold a central reserve of bitcoin. It is not part of the Federal Reserve's mandate to keep inflation and unemployment low, and there is no evident benefit to the economy from the Fed holding it. Additionally, it is a decentralized currency, so the Federal Reserve does not play a significant role in its regulation." Kostovetsky, a cryptocurrency expert, also expressed uncertainty about whether Trump's support for crypto has a substantial impact on its legitimacy. He said, "But crypto market participants are undoubtedly betting that his appointees will reduce crypto regulations, which will enhance its value."The Complexity of Crypto Regulations
The question of crypto regulations is far from straightforward, as stated by Roger Nober, the director of the George Washington University Regulatory Studies Center. It commences with the fundamental task of "determining what it is." Nober explained, "Is crypto a security? Is it a commodity? Is it nothing, similar to who won the coin flip at the Super Bowl, merely a prop bet? Or is it a combination of these? Therefore, the first step is to decide what crypto is and how to regulate it." The current SEC believed that cryptocurrencies were securities, akin to stocks, and continuously attempted to exert control over them through lawsuits against exchanges or tokens. Currently, many aspects of crypto are left to the interpretation of the observer. Nober believes that the Trump administration will bring more clarity to crypto assets, but the approach remains ambiguous. He said, "There are numerous ideas being proposed by people, and it is difficult to ascertain how many of them represent the administration's views or what they do not. I'm not sure if the administration even knows what it thinks. I think different individuals involved in the administration may think they know what it thinks or want to speak on its behalf."The Asymmetry of Information in Crypto
Peter Whitehead, a senior engineer at RAND, compared cryptocurrencies to "lemon" used cars due to the inherent asymmetry of information between crypto sellers and buyers. In the multibillion-dollar realm of cryptocurrencies, information asymmetry is an unavoidable and unchecked phenomenon. Unlike in the market for used cars, consumers currently have limited options to address this issue. Cryptocurrencies operate through blockchains, or decentralized digital ledgers. Kostovetsky noted that a recent Motley Fool poll revealed that only 18% of Americans felt they had a good understanding of how crypto works. He emphasized that crypto is an extremely volatile investment. It can frequently lose or gain as much as 10% of its value in a single day. Moreover, he stated that it is impossible to predict crypto prices. Unlike normal financial assets like stocks and bonds, the entire value of crypto depends on what people are willing to pay for it at a particular time based on their expectations of what others will pay in the future. It is not backed by anything else, such as gold, tax revenue, or corporate earnings. Kostovetsky advised, "The American public should approach crypto with extreme caution. If people want to gamble, they can go to a casino or purchase lottery tickets or bet on sports. Considering crypto as an investment should be regarded more similar to these activities rather than similar to investing one's savings in stocks, bonds, or real estate."The Deterrent of Crypto's Instability
Nober stated that crypto's instability acts as a deterrent for those who wish to make long-term investments. He said, "You need to have a tolerance for risk that many more mainstream (investors) may not necessarily possess." The U.S. government holding a bitcoin reserve would serve as a means of demonstrating confidence in crypto. Nober said, "I think the individuals advocating for a bitcoin reserve were perhaps seeking that market signal." The Trump administration can promote the adoption of crypto by providing regulatory clarity for digital currencies. However, he emphasized that congressional legislation would be more favorable for the clarity and durability of the market. He stated, "Getting Congress to act on a statutory framework, especially for something as controversial as crypto, is a challenge."
