Author: Alex Thorn, Galaxy; Translated by: Deng Tong, Jinse Finance
This report was originally sent privately to Galaxy clients and counterparties on November 7, 2024.
The digital asset industry is on the verge of a golden age. U.S. cryptocurrencies may experience a new regulatory approach while new supporters will emerge in both houses of Congress and the White House. The industry has demonstrated its political power, sending a strong warning to its adversaries, whose methods will reverberate throughout the political arena. The oppressive headwinds that hindered the industry's development and increased legal costs over the past four years have weakened, and the cryptocurrency industry is now on a downward trend in the world's largest capital markets.
Election Night - eerily similar history
President-elect Donald J. Trump made history—becoming only the second president ever to win a second non-consecutive term. Grover Cleveland is the only former president to achieve this feat when he defeated Benjamin Harrison in 1892 to win a second term. Then, the anti-tariff, pro-gold Democrats regained power in 1892 to win a second non-consecutive term, and today, the pro-tariff, pro-Bitcoin Republicans won a second non-consecutive term in 2024. History is often astonishing.
Trump's victory is also historically significant in modern times. He will expand his electoral vote count from 306 votes in 2016 to over 310. He becomes the first Republican to win a national majority of the popular vote since George W. Bush in 2004. Trump swept the 'blue wall' states of Pennsylvania, Michigan, and Wisconsin just like in 2016, but he also has the potential to win Nevada, which Clinton won in 2016. In Florida, Trump won by an astonishing 13%, although this performance can largely be attributed to demographic shifts in the state over recent election cycles. Bloomberg's heat map shows the changes in Republican and Democratic presidential candidates in 2020 and 2024, with over 95% of counties reporting. There is too much red.
The Senate has shifted to the Republicans, and the likely outcome is Republican control of 54 seats. The House will take longer to determine the results, but Republicans are slightly favored to maintain control of the House.
Other key points from the election:
Cryptocurrency has shown its political power. In addition to publicly working to gain a broad and deep cryptocurrency agenda from elected President Trump, the industry has also garnered widespread support in both the House and Senate. The most notable victory was Bernie Moreno (R-OH) defeating Sherrod Brown (D-OH). The cryptocurrency PAC spent tens of millions of dollars to defeat Brown, who is the current chairman of the key Senate Banking Committee. Defeating Brown, an ally of Elizabeth Warren, sends a strong message that opposing cryptocurrency is a politically losing position.
Trump enters a second term. It is well known that presidents address more complex and distant issues during their second terms. His victory also provides him with greater power than in 2016, as Trump takes office with support from one of the most diverse coalitions of Republican voters in decades. This increases the likelihood that Trump will commit to big ideas, which may include significant modernization of the financial system.
Trump's team is very supportive of the digital asset industry. Trump's inner circle is very supportive of digital assets, with many having already disclosed their ownership of Bitcoin. Vice Presidential candidate J.D. Vance has disclosed ownership of Bitcoin, and Vivek Ramaswamy has been a vocal supporter of the industry throughout the campaign cycle. Robert Kennedy (RFK Jr.) owns Bitcoin and has been a strong supporter of Bitcoin for at least two years. Transition team co-chair Howard Lutnick stated that he and others at Cantor Fitzgerald own a 'substantial' amount of Bitcoin (Cantor Bank holds Tether), and many other major donors are either directly involved in cryptocurrency or have shown a clearly positive attitude toward the asset class and industry. Let's not forget that Trump himself has launched NFTs and introduced his own affiliated DeFi protocol, World Liberty Financial. The affinity of his team, family, and donors for cryptocurrencies increases the likelihood that Trump will fulfill his campaign promises to the industry.
What to expect in Washington
Let me sketch out what might happen with crypto policy:
Banking regulators. Trump immediately appointed the new acting Comptroller of the Currency and the new acting chair of the Federal Deposit Insurance Corporation. These agencies have prudential and supervisory authority over banks and insured deposit institutions. Banking regulators may be able to issue guidance within days clearly prohibiting unfair targeting of specific industries (Chokepoint 2.0), just as Trump did when he first took office; they can certainly withdraw existing unfavorable interpretive guidance or letters regarding the industry—namely the joint letter dated January 3, 2023. Within weeks or months, the OCC may issue guidance clearly allowing banks to custody digital assets and interact with public blockchains and stablecoins. (Recall that Trump's former acting comptroller Brian Brooks issued such interpretive guidance in 2020.)
Market regulators. Trump elevated the current commissioners of the SEC and CFTC to acting chairs. While Trump has promised to 'fire Gary Gensler,' most constitutional scholars believe that the president cannot dismiss formally appointed commissioners of independent agencies. However, the president can immediately designate current commissioners to serve as acting heads of the agency. In the short term after such personnel changes, some cryptocurrency enforcement will pause, some lawsuits will be put on hold or withdrawn, and no action letters will be issued on specific subjects or specific projects, allowing the industry and regulators to discuss a reasonable path forward. More comprehensive rulemaking will take longer, but the cryptocurrency industry may quickly gain exemptions, mainly regarding easing the SEC's stance on 'securities' and 'exchanges.' The CFTC's stance is similar, but we will note that due to the lack of comprehensive market structure legislation defining clear jurisdictions between the SEC and CFTC, it will be very important for both market regulators to have a chair who can coordinate and develop progressive policies.
Legislation by Congress. The largest known crypto policy agenda item in Congress is market structure (clarifying the regulatory status and oversight agency for digital assets) and stablecoins (legalizing and permitting the issuance of stablecoins). In May of this year, FIT21 passed in the House with bipartisan support and will at least outline the future legislative work on market structure. Currently, both parties are relatively close in their stance on stablecoin legislation, with the main contention between Democrats and Republicans in the House Financial Services being 1) whether only national banks can issue them or if there are also state pathways, and 2) which agency (or multiple agencies) will have prudential and supervisory authority over these issuers.
Crucially, if the Republicans control the House, we believe the likelihood of these bills moving quickly in 2025 is low. A unified Republican Congress may utilize the first 100 days of 2025 to focus on tax reform, trade, and other issues—using budget reconciliation to push Republican priorities. This does not mean that crypto legislation is unlikely to make progress in the next Congress, but in a unified Congress, we do believe it will give way to other priorities—which requires close coordination between Congress and regulators on crypto policy. Our baseline scenario is that crypto legislation will shift to the second half of the 119th Congress, allowing cabinet officials and independent regulatory agencies to solidify their positions before engaging with Congress on policy issues.
Energy policy. Trump's election as president, especially if the Republicans control both houses of Congress, will be extremely favorable for domestic energy and electricity production. This will benefit Bitcoin miners, data centers, anyone able to utilize large amounts of electricity, and of course, the energy producers themselves.
What this means for market participants
Easing regulatory resistance, combined with specific interpretive letters, non-action letters, or regulatory guidance, could significantly expand U.S. institutional investors' access to cryptocurrencies.
The SEC relaxed the applicability of SAB 121 in September or completely withdrew that guidance, paving the way for the world's largest custodian bank to enter the cryptocurrency space. BNY Mellon received an exemption from stringent account guidelines as its primary prudential regulator (NYDFS) did not oppose it, but the OCC is the primary prudential regulator for national banks like Citigroup and JPMorgan. Given that we are likely to see a significant shift in the OCC's attitude toward banks directly interacting with cryptocurrencies, these large banks will ultimately have the opportunity to participate more.
Further institutionalization will, in turn, increase financing options for crypto assets, making it easier for spot cryptocurrencies to be accessed through existing institutional trading platforms and relationships, and enhance the maturity of the institutional cryptocurrency market.
Relaxing the SEC's Howey Test applicability to digital assets, or expanding the 'crypto asset securities' that can be traded internally by brokers/dealers, will allow more participants to enter the exchange space, possibly including traditional financial institutions like banks, exchanges, or brokerage firms. Additionally, relaxing the SEC's applicability of the Howey Test may lead to more spot-based crypto ETFs in the U.S.
Clarity and tolerance from regulators may allow traditional financial service firms and investors to operate on-chain for the first time, creating new opportunities for returns and other strategies.
Expanding access to public blockchains may also fundamentally change transaction efficiency, transparency, issuance, and other aspects of finance. Depending on the regulatory environment and any legislation enacted, the merging of traditional finance and decentralized finance may ultimately come.
Similarly, based on the SEC's stance on Howey and token disclosures, we may see a wave of new types of tokens, potentially even stock securities, while existing tokens may gain more stock-like features to enhance their value proposition. An expanded and improved asset ecosystem will support the liquidity of the crypto hedge fund industry, which will continuously mature and expand its investable scope. The improvement in the U.S. token disclosure and issuance capability will ultimately challenge or even overturn the existing SAFT-low float high FDV regime, which favors venture capital rather than liquidity capital.
In terms of venture capital, the IPO market may more meaningfully open up to crypto-native companies, ultimately providing pathways for investment returns through exits. Today, the only publicly listed venture-backed crypto startup (besides a few SPACs) is Coinbase. We estimate that if conditions are right and regulators are open, dozens of crypto companies may seek to go public in the U.S.
Bitcoin market analysis
On Monday, November 4, Bitcoin traded as low as $66,700 but then rose 15%, setting a new all-time high. As Trump's victory odds rose on November 5, Bitcoin surged to a new all-time high, lingering in the $75,000 to $76,000 range since. Despite significant price volatility—up 15% since Monday and 26% since October 1—the market does not seem overheated fundamentally. Tuesday night, the 'Coinbase Premium' rebounded significantly as Bitcoin rose due to election news, turning positive for the first time in at least a month.
Bitcoin ETFs have been thriving, with the largest net inflow in history occurring on Thursday, November 7, reaching $1.375 billion, driving BTC to a new all-time high. This figure surpassed the previous largest net inflow day on March 12, 2024, when net inflows amounted to $1 billion.
The cyclicality of Bitcoin
Looking back, Bitcoin is on track with the previous two bull markets. From the cyclical lows (2011: $2, 2015: $152, 2018: $3,122, 2022: $15,460), Bitcoin is on track with the 2017 bull market, slightly lagging behind the 2021 bull market.
Looking back at previous bull market corrections, the correction in 2024 is milder than those during the 2021 and 2017 bull markets.
Futures and financing
While the open interest for futures on cryptocurrency exchanges has slightly risen to an annual high, financing rates have remained essentially unchanged, indicating that these trends are primarily driven by spot markets.
Bitcoin options market
The net short gamma of Bitcoin options traders is between $54,000 and $84,000, which will accelerate any trends. It is important to note that when traders short gamma, they typically hedge by buying spot as prices rise or selling spot as prices fall. This impact can accelerate trends in either direction and increase volatility. Alternatively, when traders short gamma, they do the opposite—selling as prices rise and buying as prices fall, thus reducing volatility. Our analysis shows that the current peak of short gamma is at $70,000, so as BTCUSD slowly rises, this impact is decreasing. That said, many current high-range call option holders are profitable, so these investors may decide to roll at higher strike prices, pulling short gamma into higher strike price ranges. The chart below shows our view of the net dealer gamma positions across all BTC expiry dates between November 7, 2025, and September 26.
Basics of Bitcoin
The realized HODL ratio is a metric used to gauge the ratio between the realized market cap HODL range of 1 week and 1-2 years (the realized value of tokens that last moved during these time frames). A higher ratio indicates that the market is overheated, and peaks often coincide with market tops. The horizontal movement of the 2024 RHODL is reminiscent of the horizontal movement seen in 2019-2020, suggesting that there is still more upside potential in the near and medium term.
The MVRV Z score is the ratio of market value to realized value and the standard deviation of market value, which helps identify the difference between the asset's trading value and total cost basis. Historically, this metric has been very effective in identifying market peaks, and its current value indicates that BTCUSD is not yet close to overheating or peak territory.
Bitcoin and global M2
Bitcoin has historically reacted to changes in the global money supply. While this correlation is not unique to Bitcoin, it is still worth noting, especially if Bitcoin begins to be used more as a hedge asset, as Larry Fink has called for.
Outlook
The incoming Trump administration, combined with a strong Republican Senate, can confirm its nominee agencies, which is favorable for regulatory relief for the U.S. cryptocurrency industry. We expect various forms of exemption relief to be introduced soon, while a stronger supportive regulatory framework will take more time to develop. A relaxed enforcement environment, along with progressive policy thinking, will pave the way for traditional financial service firms and institutional investors to deepen their involvement in the asset class. This will challenge the moats of existing crypto infrastructure participants but will also broadly support the expansion and maturation of the asset class. In this environment, we expect the trading prices of Bitcoin and other digital assets to be far higher than today's historical highs within the next 12-18 months.
