The cryptocurrency market is abuzz with excitement as the price of Bitcoin has topped $100,000, and crypto enthusiasts are celebrating. The mood in the crypto markets reminds me of the dot-com boom of the late nineties, with its giddy excitement, predictions of prices going higher, and uneasy feelings among some longtime market participants and observers. š¤
The Four Legs of a Speculative Episode
As I wrote about the Internet stock bubble, I concluded that big speculative episodes rest on four legs: a new technology that gets investors pumped; an efficient method they can use to communicate; the active participation of the financial industry; and a supportive policy environment. š
With respect to crypto assets, the invention of Bitcoin and the blockchaināa secure and decentralized digital ledgerāand the rise of social media, satisfied the first two requirements. But Wall Street and policymakers remained suspicious of the sector. These two factors were sufficient to keep investing in crypto a minority pursuit. š
The Trump Administration: A Game-Changer for Crypto
With the election of Trump, it seems like all four conditions are now in place, laying the foundation for a broader bubble that pulls in a lot more people. Blockchain technology is still being developed, and its promoters are still claiming itās about to upend the banking system, or revolutionize the international payments system, or have some other transformative effect. š¤
The S.E.C. is the nationās leading investor-protection agency. Under the leadership of Gary Gensler, whom President Joe Biden nominated as chair in 2021, the agency had taken an aggressive approach toward an industry that Gensler described as rife with fraud and scams. But with Paul Atkins, a conservative lawyer who served as an S.E.C. commissioner during George W. Bushās Administration and who now co-chairs the Token Alliance, a crypto lobbying group, the agencyās ongoing lawsuits and other cases would presumably be put on hold. š«
The Risks of a Crypto Bubble
Eswar Prasad, an economist at Cornell University and the author of āThe Future of Money: How the Digital Revolution Is Transforming Currencies and Finance,ā said he worries that recent developments could give many ordinary Americans the impression that crypto assets represent a safe investment, rather than an extremely volatile and speculative one. š
Dennis Kelleher, the president of Better Markets, a Washington-based financial-reform group, predicted that Trump would appoint bank regulators with a more laissez-faire approach, adding, āYou are going to see crypto moving like water into the crevices of the financial system. . . . I think that, with the election of a second Trump Administration, the clock on the next financial crash has begun.ā ā°
A Worst-Case Scenario
A full-on financial blowup is a worst-case scenario, but one thing I learned in the nineties is that large speculative episodes tend to take on lives of their own. And, as Prasad pointed out, a new crypto bubble would be officially endorsed. When I asked the economist if he could think of a historical analogy, he pointed to the Chinese government encouraging its citizenry to invest in real estate. As students of China know, that hasnāt ended well, either. š¤¦āāļø
$BNB The Future of Crypto
The future of crypto is uncertain, but one thing is clear: the Trump Administration is going to be a game-changer for the industry. Whether that's a good thing or a bad thing remains to be seen. š¤
What do you think? Share your theories and speculations in the comments below! š¬
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