Traders hope Trump’s cryptocurrency trading could lift bitcoin’s falling price

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Hello and welcome to the FT Cryptofinance newsletter. This week we take a look at bitcoin’s outlook for the second half of the year.

As the U.S. presidential election approaches, cryptocurrency traders and analysts are hoping that a Donald Trump victory in November could bring the price of bitcoin out of its recent slumber.

The coin, a decent proxy for all crypto assets, peaked in mid-March and has struggled to make any headway since April’s so-called halving event, when the number of daily bitcoins available for miners to share to secure the bitcoin network fell from 900 to 450. Since then, it has fallen about 15 percent, and on Friday it fell below $54,000 to its lowest point since February. That has defied many predictions that bitcoin would start to recover after the halving.

Analysts have speculated that the lackluster performance is due to the number of potential sell-offs weighing on the market: $9 billion in bitcoin and bitcoin cash sales from the defunct Japanese exchange Mt Gox; potential bitcoin sell-offs by miners; and the signal sent over the past two weeks by authorities in the United States and Germany, who have transferred portions of criminal seizures to cryptocurrency exchanges.

“Both authorities hold more than $15 billion worth of bitcoin, which represents enough potential selling pressure to make bitcoin holders nervous in the short term,” said analysts at Ryze Labs, a cryptocurrency venture capital firm.

Traders have also noted the impact of bitcoin trading, in which hedge funds use borrowed money to bet on the convergence of the price of bitcoin futures and spot bitcoin ETFs, in dampening volatility.

As the market searches for the next catalyst, talk of a “Trump trade” is spreading, a potential rally in bitcoin in the second half of the year on the prospect of a victory for the former president in November. This belief has only grown since last week’s presidential debate.

The optimism is driven by two perceptions: that Trump is the most crypto-friendly candidate, and that his policies will make assets like Bitcoin more attractive to the rest of the world.

It has already shown itself more open to courting the industry by hosting cryptocurrencies mining executives at Mar-a-Lago, accepting cryptocurrency contributions and generally spreading positive messages.

Industry executives are hoping that the Trump White House and strong Republican presence in Congress will make Washington more willing to (finally) pass clear and favorable regulations on cryptocurrencies.

“Cryptocurrency companies are also set to benefit, especially with Trump’s energy policy proposals, which could allow the use of other energy sources for bitcoin mining,” said Manuel Villegas, an analyst at Julius Baer.[President Joe] “Biden’s previous tax proposals on cryptocurrency miners, such as a 30% tax, are unlikely to be implemented under a Trump administration,” he added.

The second perception is a question that is starting to creep into traditional finance as well: What will Trump 2.0 mean for financial markets more broadly?

Currently, the market expectation is that tougher immigration policies, higher tariffs on foreign goods, and tax cuts would increase the U.S. deficit and lead to higher inflation and higher U.S. Treasury yields.

Geoff Kendrick, an analyst at Standard Chartered, argues that Trump’s policies could create “fiscal dominance,” when deficits and government debt become so large that the central bank’s main weapon, interest rate changes, have only a limited impact.

This would impact the price of bitcoin, he said, because the cryptocurrency tends to have a reasonable correlation with some crucial U.S. Treasury indicators, such as the spread between 2- and 10-year Treasuries and breakeven rates.

A steeper curve and higher breakeven rates relative to real yields should push the price of bitcoin higher, he argues, because the coin is a good hedge against declining confidence in the U.S. Treasury market.

Trump’s trade is based in part on Biden being his opponent in November. RealClearPolitics Betting Average, a collection of prediction sites, has Trump at 55 percent and Biden’s odds at just 16.5 percent, after plummeting last week.

This suggests that if Biden stays in the race, bitcoin bulls will be energized. If he exits and the new candidate is seen as having a chance against Trump, bitcoin could remain in the doldrums.

But then again, it might not matter. Theories about bitcoin, from an inflation hedge to an alternative to the financial system, tend to disintegrate upon contact with reality.

But that misses the point. As Ben Hunt, chief investment officer of asset manager Second Foundation, eloquently put it, he wrote on his Epsilon Theory blog this week, “behavior changes ONLY when we believe everyone else believes the information.” If enough people think Trump will win, the cryptocurrency market will move.

The most likely outcome, Kendrick says, is that by late July it becomes clear that Biden will run, the likelihood of Trump winning increases further, and bitcoin soars. “A new all-time high [high] August is likely, then $100,000 by Election Day in the United States.”

All markets need a narrative to sustain their momentum. But bitcoin, which has no cash flow, needs it more than most. As the oversold is cleared from the market, expect this to play out over the summer.

What do you think? Email me at philip.stafford@ft.com

Highlights of the week

• The now defunct California bank Silvergate I’ll pay $63 million to resolve civil claims brought by federal and state regulators in connection with the bank’s collapse following the massive fraud that brought down cryptocurrency exchange FTX.

• The United States Marshals Service has chosen Coinbase for custody cryptocurrencies it seizes as part of the U.S. government’s criminal investigation. The agency has previously held assets belonging to Silk Road and Mt Gox. The five-year deal is worth $32.5 million.

• Bitcoin mining firm Genesis Digital Assets, in which the defunct Alameda Research trading group invested $1.15 billion, is considering a U.S. IPO, Bloomberg reported.

Data Mining: On the Rise

Here’s another indicator of the slowdown in crypto markets. Centralized cryptocurrency exchanges had a solid first half, with total aggregate spot volumes up $10.6 trillion from $4.32 trillion in the second half of last year, according to CCData. March was a record, it added. The main driver was the arrival of U.S. spot bitcoin ETFs. However, the chart also shows how the post-halving lull has affected volumes.

Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click Here.

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