The Trump Administration and Crypto

🌐 The Trump Administration should have a positive effect

Let’s talk about what’s going to happen with a Trump administration and the effect on Bitcoin, crypto, and blockchain.

I’ll hit 4 points here:

• Bitcoin

• Stablecoins

• Tokenization / Real World Assets

• Decentralized Finance

First, we’ll talk Bitcoin

When it became evident that Donald Trump was going to be elected President, the price of bitcoin took off, showing more than 10% increase.  The market was clearly happy with the result, and for good reason.

First, there was resolution.  Markets don’t like uncertainty to ambiguity.  Even in the days leading up to the election, polls were showing both candidates with a legitimate chance to win.  If the election were close, and maybe even contested in the days and weeks after, as we saw in 2020, the bitcoin and public markets would have been down. 

Having a clear winner on election night was a boost for the markets overall.

Next, the Trump economic policies, as he has outlined, would likely lead to inflation.  As Paul Tudor Jones said “all roads lead to inflation.”  With the national deficit out of control, the only real way to offset is to continue to print money, and inflate the value of the currency.  

In addition, President-elect Trump has said he wants to institute tariffs on all imports, and will use them as a negotiating tactic with Mexico, China, etc.  Tariffs lead to higher prices and inflation overall.

Of course, when we have inflation, or expansion of monetary policy, we offset personally by holding scarce or real assets - gold, real estate (certain real estate), commodities, and now bitcoin.

President-elect Trump has also talked about building a strategic bitcoin reserve, much like we use to have a strategic gold reserve.  This has been championed by Senator Lummis of Wyoming.  The proposal is to purchase 200,000 bitcoin per year for 5 years.  This would amount to almost 5% of the total bitcoin supply.

If the US were to start this program, other countries would follow, and there would be a global race to accumulate bitcoin.  

Again, more demand for a very scarce asset should lead to growth in value.  

As the price goes up, more institutions and retail investors will be jumping in to try to capitalize on the growth.  

Speaking of Investors

The Trump administration is much more likely to be favorable for crypto regulation.  This means institutions and companies that want to hold bitcoin in their own treasury, or invest in bitcoin as part of their portfolio, will be able to do so without regulatory risk.

Regulatory risk has been holding back RIAs and broker/dealers as well, even as the spot bitcoin ETFs were approved.  There was always that worry that Gary Gensler and the Anti-Crypto army were going to come cracking down.  The SEC has been much more likely to stringently audit any RIA offering crypto advice or asset management.

The new administration and regime could ease that worry by being more pro-crypto.  More RIAs and broker/dealers will allow their advisors to advise on bitcoin, and allocate either directly or via ETFs.  

Again, more demand takes the price higher.

All this increase in demand and subsequent increase in price lowers the reputational risk for institutions, corporations, and RIAs to investing in bitcoin.

OK…that was just bitcoin.  There’s so much more.

Stablecoins

Before the election, stablecoin legislation was already on the table.  The idea from the government is to somewhat regulate the assets issuers can use as backing for the tokens, how they are held, and how they can be transmitted.

We already see issuers like Circle and PayPal, who are holding dollars or US Treasuries in custody against the stablecoins.  Offshore we see Tether, which has some regulatory issues according to the US government, but is by far the largest stablecoin issuer in the world.  They are making billions of dollars per year, with virtually no risk.

Banks and other financial institutions would love to jump into the game.

The US government should be excited as well.  Stablecoin issuers are already the 18th largest holder of US treasuries, while perpetuating the dollar across the globe.  It basically gives them a way to sell the dollar to anyone in the world.

With this administration, and this Congress, we’re likely to see stablecoin legislation passed in the next 12-24 months, which would usher in a huge growth in the market - already over $180 billion.  

Stablecoins are the gateway to everything else onchain, just as dollars are for the traditional financial system.

We’re already seeing Visa, Mastercard, PayPal, and now Stripe able to settle transactions in stablecoins, offering their users the ability to pay for their life onchain.  The next step for many people is to get paid onchain in stables.

We’ll have the ultimate onramp and ultimate offramp all onchain.

That will be the catalyst…when I don’t have to send my dollars to an exchange to get onchain, but I can do so by simply earning.

So, we’ll see more people and businesses choosing to hold their digital dollars onchain.  Meaning they will need safe and easy digital wallets, as well as wallet management applications.  

Now we’re getting warmed up.

Tokenized Real World Assets

I’ve already mentioned the recent regulatory climate, and how that will likely change with the new administration and Congress.  This will translate to the so-called Tokenized Real World Assets (RWA) market.

RWAs are more commonly known as traditional assets.  They can range from publicly traded stock to real estate to commodities to shares in private companies.  We use tokens on public blockchains like Ethereum to denote shares or interest in these assets, which can then be held in digital wallets, or with qualified custodians.

The tokenization makes the assets more liquid, and more transparent.  It also makes the ownership and transfer of the assets more efficient, since they are all held on the same platform.

We’ve already seen BlackRock and Franklin Templeton tokenizing funds.  We will see many more in the coming year.  The transparency and efficiency will save hundreds of millions of dollars, and provide more customized portfolios.

And remember, stablecoins are tokenized real world assets as well.  So if we add the earlier point, I’ll have a dollar on a public blockchain that I earned from my job, or through investment.  I’ll then be able to trade those digital dollars for public or private investments, straight from my wallet.  

Less reliance on centralized custodians and gatekeepers.  Lower fees.  More personalized portfolios.

More assets will be onchain, which means more investors, institutions, and businesses will be operating onchain.  

Decentralized Finance

Now we get to the end of the positive flow…for now.  And this is the most exciting part for me.

All of the above thoughts bring us to more onchain assets, whether that’s bitcoin, other cryptoassets, stablecoins, or tokenized RWAs.  Now, all those assets can participate in the decentralized finance ecosystem.

I talked at length about DeFi a few weeks ago.

The crux of the DeFi system is currently about a more efficient and decentralized version of traditional financial structures.  You can borrow and lend onchain, using your crypto or digitally denoted assets as collateral.

It makes it easier and more efficient to get a loan using your crypto as collateral.  You can pledge your ETH, or your tokenized BlackRock fund as collateral, and borrow stablecoins.  This isn’t to say you’ll use it to invest more, putting your assets at risk of liquidation.

This means you’ll have more options to earn - by placing your assets in pools that are then loaned - or borrow in case you need or want cash.

Imagine the scenario where you have several investments, including crypto, gold, real estate, funds.  If you need to pay for something like a wedding, you’re currently limited in your options.  You can sell assets, or save in dollars for several months or years to pay for it.

When those assets are tokenized, you likely have access to onchain lending pools.  This means you can borrow from a smart contract, using the tokenized assets as collateral.

These protocols already exist, and have been operating effectively for several years, but with a relatively niche market of customers.  The regulations that push more assets onchain are going to open up the addressable customer base, and even bring borrowing rates down.

If I’m earning my income in stablecoins, I already have my assets onchain.  Without them hitting a bank, I can start earning some yield, or even invest in the latest BlackRock tokenized fund.  I can then use that fund as collateral for a loan if I need it.  

We’ll even see some novel uses cases like streaming money and tokenized income streams.

Many of the DeFi protocols have issued tokens for their project, but those tokens are usually simply governance tokens.  Their main value is in the ability to vote on proposals for the protocol.

A new SEC administration might allow these protocols to turn on the “fee switch.”  This is the ability of the protocol to share some of the fees generated with the token holders.  At that point, we’ll more easily be able to assess the value of the tokens using more fundamental methods.

Summary

Whether you voted for him or not, and whether you agree with the overall direction of the administration and policies, it is best to understand the impact the Trump administration will have on bitcoin, crypto, and blockchain.

You can prepare by learning more, determining where to invest for yourself or clients, and trying the new decentralized systems.  We were already moving these directions, and it looks like this administration and Congress will accelerate that growth through more favorable regulation.

Get ready to go onchain.

Have a great week

Adam