How long will Trump’s cryptocurrency boom last?
Last week, after Donald Trump announced that he would nominate Paul Atkins, a cryptocurrency advocate, to head the Securities and Exchange Commission (SEC), the price of Bitcoin crossed $100,000, and cryptocurrency enthusiasts celebrated. The mood in the cryptocurrency markets reminded me of the dot-com boom, along with its inevitable collapse, which I chronicled in the book book More than twenty years ago. There was the same giddy excitement, the same expectations that prices might keep going higher, and much higher, and the same uneasy sentiment among some long-time market participants and observers, myself included.
There are certainly enough reasons for excitement among crypto investors, crypto entrepreneurs, and pro-crypto donors who gave hundreds of millions of dollars to pro-crypto politicians ahead of the November election. Investing in Trump’s victory and the defeat of some prominent cryptocurrency skeptics, including Democratic Sen. Sherrod Brown of Ohio, has already paid off. The Securities and Exchange Commission (SEC) is the nation’s leading investor protection agency. Under the leadership of Gary Gensler, whom President Joe Biden nominated as chair in 2021, the agency has taken an aggressive approach to an industry that Gensler has described as rife with fraud and scams. The Securities and Exchange Commission has filed lawsuits against several cryptocurrency companies, including cryptocurrency exchange Coinbase and digital payment network Ripple.
But under Atkins, a conservative lawyer who served as SEC commissioner during the George W. Bush administration and who now co-chairs the Token Alliance, a cryptocurrency lobbying group, ongoing lawsuits and other cases brought by the agency are supposed to be put on hold. Overall, the SEC seems likely to adopt a friendlier stance toward issuers of crypto assets, such as currencies and tokens, a prospect that worries critics of the cryptocurrency industry. “For crypto assets, the fundamental rules that have protected investors for decades will be greatly weakened, and the industry will be allowed to expand with very little regulation or accountability,” said Dennis Kelleher, president of Better Markets, a Washington firm. The financial reform group based on this told me. “It’s going to be like the 1920s, buyer beware.” Cryptocurrency leaders hailed Atkins’ selection as a major milestone. “We are witnessing a paradigm shift,” said Michael Novogratz, founder and CEO of cryptocurrency firm Galaxy Digital. He said Reuters. “Bitcoin and the entire digital asset ecosystem are on the verge of entering the financial mainstream.”
In the late 1990s, the major paradigm shift that fueled the dot-com boom was the emergence of online commerce, which led to the creation of startups that issued stock on the NASDAQ, such as Amazon, eBay, Bets.com, and WebFan. Speculative digital assets, including Bitcoin, Dogecoin (a cryptocurrency promoted by Elon Musk), and crypto tokens issued by the Trump family’s new World Liberty Financial venture, cannot be compared directly to startups from the 1990s, which offered the possibility. Some of them make significant profits at some point, even if many of them turn out to be worthless. (Amazon is now worth about $2.4 trillion. WebFun, an online grocery chain that promised quick home delivery, raised $375 million in an IPO in 1999, and declared bankruptcy in 2001.)
But speculative themes aside, as I wrote about the dot-com bubble, I concluded that the great speculative episodes rested on four legs: new technology galvanizing investors; An effective method they can use to communicate; Active participation of the financial industry; And a supportive political environment.
Regarding crypto assets, the invention of Bitcoin, the blockchain – a secure and decentralized digital ledger – and the emergence of social media were sufficient to meet the first two conditions, but Wall Street and policymakers remained skeptical of the sector. These two factors were enough to continue investing in cryptocurrencies as a minority. In the most recent cryptocurrency crash, in 2022-2023, the price of Bitcoin fell by more than seventy percent, and some large cryptocurrency companies collapsed, including Sam Bankman-Fried’s FTX. The broader stock market and the US economy escaped unscathed.
With Trump’s election, it appears that the four conditions are now in place, laying the foundation for a broader bubble that will attract more people. Blockchain technology is still developing, and its promoters still claim that it is about to upend the banking system, revolutionize the international payments system, or have some other transformative impact. In Musk’s But the major development is that politics and Wall Street are now also aligned with the world of cryptocurrencies.
With Atkins taking over, the SEC will likely change its position on the fundamental legal issue of whether crypto assets are securities, like stocks and bonds, meaning they are subject to the full force of the nation’s securities law, or whether I’m like physical commodities like gold and silver, which are lightly regulated in part because they are considered standardized items that are easy to identify and value. (If you buy a gold bar, you know what you’re getting.) During Gensler’s tenure, the SEC claimed that many cryptoassets were securities, and their issuers faced extensive registration and disclosure requirements. The agency accused Coinbase of running an unregistered securities exchange, and accused Ripple of organizing an unregistered security offering in the sale of its cryptocurrency, XRP. Both companies denied these accusations. Earlier this year, a federal judge ruled that most of the cases against Coinbase could move forward, which was widely interpreted as a win for the SEC. But Ripple’s lawsuit ended with a ruling that the company did not violate securities law by selling XRP to retail investors. In the electronic exchange, which Ripple hailed as an important victory.
Looking ahead, international law firm WilmerHale said in a recent client alert that the SEC, in a second Trump administration, “could propose tailored rules that take into account the differences between crypto assets and traditional securities.” This is exactly what the crypto industry wants. Meanwhile, on Capitol Hill, Republicans could pass legislation that would enable many cryptocurrency issuers to escape the attention of the SEC, at least in part, by expanding the scope of the Commodity Futures Trading Commission (CFTC), which has a much smaller budget division. And enforcement. . Earlier this year, the House passed a Republican-sponsored bill that would enable the Commodity Futures Trading Commission (CFTC) to regulate digital assets as commodities as long as the blockchain technology underlying them is decentralized. Gensler objected to the bill, saying it would weaken investor protections and allow cryptocurrency issuers to self-certify that their products are digital goods and not securities. Given Republican control of the Senate, similar legislation may be proposed there and make its way to the president’s desk.
The soon-to-be cryptocurrency CEO has promised to turn the United States into the “crypto capital of the planet.” Cryptocurrency enthusiasts will be looking forward to Trump fulfilling his campaign pledge to create a “strategic national stockpile of bitcoin.” They received further encouragement last week when venture capitalist David Sachs, one of Musk’s partners, was called the “White House’s AI and cryptocurrency czar.”
In theory, the Federal Reserve could put a disincentive on the crypto party by restricting leverage, raising interest rates, or both. But when the speculative juices are flowing and asset prices are soaring, such measures are unpopular. During the late 1990s, Alan Greenspan, then Chairman of the Federal Reserve, stood aside, after initially warning of “irrational exuberance,” and let the Nasdaq collapse. (Between January 1998 and March 2000, the technology stock index tripled.) Currently, the possibility of the Federal Reserve intervening to curtail crypto assets seems remote. The central bank is moving to lower interest rates, rather than raise them, and last week, its chairman, Jerome Powell, compared Bitcoin to gold as an investment asset — an argument made by many cryptocurrency promoters.