Author: Wolfgang Münchau, co-founder of Eurointelligence, DL News; Translated by Baishui, Golden Finance
There is an old story about an interview with Boris Yeltsin in which the interviewer asked Yeltsin to describe the prospects for the Russian economy in one word.
"Good," Yeltsin said. Unused to the idea of politicians following instructions, the interviewer went back and asked for two words to describe the prospects.
"Not good," Yeltsin retorted.
Here’s what I think about Donald Trump and Bitcoin.
It is both good and bad.
The inherent contradiction of Bitcoin is that, in a way, it is insurance against financial crisis, but its success is due to financial booms.
The same paradox applies to Trump’s influence.
Inflation and the Federal Reserve
Trump's policies will lead to inflation.
I think the two most important changes he would make would not be trade tariffs but rather a lower dollar and political control over the Federal Reserve.
He can’t abolish the Fed’s formal independence, but he can insist on being consulted.
We live in an era of fiscal dominance, where central banks’ freedom to act is constrained by their governments.
Even the most independent-minded Fed chair cannot successfully stand up to Trump.
In any case, Jerome Powell’s term as chairman ends in 2026. If elected, Trump will be able to appoint his successor.
The Fed's inflation target is more difficult to achieve than many people imagine.
Trump’s protectionism, ongoing geopolitical divisions and aging Western populations will continue to create inflationary pressures.
Higher tariffs would push up prices and reduce trade (other countries would retaliate), thus affecting global productivity growth.
A different world
It would be complacent to think that a second Trump term would be a carbon copy of Trump’s first, both in terms of what he would do and in terms of the impact on the economy.
There was no global inflation shock during his first term.
We live in a different economy.
If you unleash Trumponomics in the world today, I expect the result will be an inflationary boom-bust cycle with the potential for massive financial instability.
In such an environment, there is a good chance that the dollar price of Bitcoin will plummet as it did in 2021.
So far, Bitcoin has not been a good hedge against inflation.
I’m not saying this will always be the case, but at this point I don’t see any reason why the price of Bitcoin would react differently to USD inflation than it did in 2021.
The risk of financial crisis outweighs all else.
But this observation alone does not answer the question.
In the long run, Trump may end up being a boon for the cryptocurrency industry precisely because of his economic policies.
Rational fear of fiat currency debasement constitutes a valid reason to consider Bitcoin as a systemic hedge.
I personally like to think of Bitcoin as an option, an asset that gives me the right to trade if our dollar-based financial system has problems. It's hard to put a value on this option.
It’s like a binary option, where its value is either close to the value of the underlying asset (i.e. the world’s total currency) or close to zero.
Therefore, the value of this option should correspond to the perception of systemic risk.
I think the probability of a deep crisis in our fiat monetary system is very high — but I can’t predict the timing.
Trump’s policies increase this risk, which is good for Bitcoin in that sense.
If people start to worry about the future of the dollar itself, a combination of soft regulation and a devaluing dollar could push the price of Bitcoin to levels beyond anything we’ve seen so far.
Inconsistent assessments
My seemingly inconsistent assessment of Trump’s impact on Bitcoin is nothing more than a mirror image of the fundamental contradiction between Bitcoin as a plain vanilla risk asset and Bitcoin as insurance or an option.
Now, I think the former view prevails. During the 2021-2023 inflation period, investors believe that the rise in inflation is temporary.
This remains the consensus.
Investors are also not concerned about the impact of economic sanctions on the dollar as a global currency, or the impact of the Group of Seven's recent agreement on a raid on Russian assets for financing the war in Ukraine.
If that perception shifts, the fundamental dynamics of the market will change.
If Bitcoin is seen as a relatively safe store of value by the time the next inflation cycle comes around, there is no reason to expect investors to react to rising inflation the same way they did in 2021.
We're not there yet. But we will.
Bitcoin as a hedging tool?
We will likely see one or more repetitions of the 2021-23 cycle before investors consider Bitcoin as a hedge. Even if Trump makes great progress in devaluing the dollar, it won’t change the world immediately.
There is no other currency that can replace the US dollar as the global currency now.
Bitcoin cannot replace the multiple roles of the U.S. dollar and the Federal Reserve in the global financial system.
Some form of global financial architecture must be established, whether it is cryptocurrency or otherwise.
For now, the risk of a financial crisis outweighs everything. If the current asset price bubble bursts, I highly doubt Bitcoin can sustain anywhere near its current valuation.
Many investors will have to withdraw from multiple risk assets to meet margin calls.
My basic view is that Trump will push us further toward a financial crisis, which is very bad for Bitcoin in the short term, but could be very good for the cryptocurrency industry in the long run.
