Original title: 2024 U.S. Election For Crypto: A Potential Turning Point from Tight Regulation and Ban to Support and Innovation
Original author: HTX Ventures
Original translation: zhouzhou, BlockBeats
Editor's note: This article focuses on the impact of the U.S. elections on the cryptocurrency market, particularly the potential boosts to prediction markets and BTCFi. By interpreting platforms like Polymarket, innovations in DeFi and BTCFi, it explores possible opportunities for crypto projects in terms of policy, regulation, and technology. Additionally, it discusses the incentives for developer innovation brought by Bitcoin technological upgrades (like OP_CAT) and their significance for the entire crypto market.
The following is the original content (for readability, the original content has been reorganized):
Full text summary:
Singapore / November 4, 2024—Since Bitcoin's inception, it has gone through three election cycles and has become a key issue in the 2024 U.S. presidential campaign. With the Bitcoin ideals proposed by Satoshi Nakamoto in its white paper deeply resonating, supporters have now formed a significant voter group, becoming an important force in U.S. politics.
This article analyzes various factors contributing to the increasing importance of Bitcoin and cryptocurrencies in elections, including the decline in real wages due to inflation, challenges to the global dominance of the dollar, the growing interest of American voters in cryptocurrencies, and the current administration's regulatory strategies towards the crypto industry.
The article further explores the differing positions of presidential candidates on cryptocurrency and how their attitudes shape future policies and market expectations. At the same time, it discusses the role of prediction markets, especially the role of Polymarket in elections, the potential innovative paths for prediction markets, and how elections influence the crypto market through macroeconomic liquidity.
Finally, this article predicts the potential impact of election results on crypto companies. If Trump wins, a clearer and more lenient regulatory environment is expected to support the incubation and growth of crypto startups. This environment will also provide crypto companies with a pathway to IPOs, ensuring exits for traditional investment institutions, enhancing the wealth effect, and improving the financing environment. Simultaneously, DeFi will enter mainstream financial markets more quickly, and BTCFi's innovations and development will also accelerate.
The context of cryptocurrency becoming a key election issue
The significance of Bitcoin for America
1. Growing demand to combat inflation
Forbes' survey shows that real wages in the U.S. (adjusted for inflation) have changed little since the mid-1980s. Adjusted for inflation, the purchasing power of the average hourly wage in the U.S. today is almost the same as in 1978. This exacerbates wealth inequality: the upper class becomes richer by holding large amounts of assets, while the wealth of the working class diminishes.
Since the 2008 financial crisis, an increasing number of people have viewed Bitcoin as a potential tool against inflation and economic uncertainty, especially as it offers hope for financial independence to the middle class. Bitcoin's decentralization and limited supply make it an alternative asset under government and central bank interventions. While the dollar remains the global reserve currency, the appeal of Bitcoin continues to grow as investors increasingly seek hedging assets. Particularly for the increasingly burdened working class, Bitcoin is seen as an effective tool against inflation.
Whether Trump or Harris wins the presidential election, U.S. fiscal policy may lead to greater budget deficits. The Congressional Budget Office projects that over the next decade, the federal budget deficit will account for 6.2% of GDP. If Trump restores the 2017 tax cuts and further lowers tax rates, the deficit could rise to 7.8% of GDP. In contrast, Harris plans to raise the corporate tax rate to 28%, but her other reform proposals could still push the deficit up to 6.5% of GDP.
Over the past 25 years, U.S. federal debt has surged from 40% of GDP to 100%, with this ratio potentially climbing to between 124% and 200% over the next 10 to 30 years. The upcoming presidential election could trigger a 'sensitive moment' when the bond market realizes the severity of the debt issue and may demand higher yields to offset financing risks. This moment could lead to a bond market collapse, triggering a financial crisis.
Trump's tax reduction policies and Harris's tax increase policies may further exacerbate the U.S. fiscal deficit and debt burden, increasing the risk of financial market volatility. In the face of such high debt, solutions are limited, and diluting the debt through inflation may be the only way out for the U.S. government. However, the adverse effects of inflation will erode the purchasing power of the working class and exacerbate wealth inequality.
It is worth noting that the pending (Bitcoin bill) could provide a new avenue for addressing the U.S. debt problem. This bill aims to incorporate Bitcoin into a broader financial system, potentially attracting significant amounts of private and institutional capital, helping to stabilize the U.S. debt structure, and possibly bringing some stability to the global financial system.
As a decentralized and scarce asset, Bitcoin can serve as an effective tool for governments and investors to combat inflation and risks, particularly under pressure from debt and inflation, giving it potential strategic significance.
2. Strengthen the global influence of the dollar
As one of the most popular cryptocurrency products today, stablecoins have become the center of policy discussions, and the U.S. Congress is reviewing several related bills. A key factor driving these discussions is that stablecoins are seen as capable of helping to expand the international influence of the dollar, especially in the context of the dollar's declining status as a global reserve currency.
Currently, over 99% of stablecoins are denominated in dollars, far exceeding the second-ranking euro, which only accounts for 0.20%. The exponential growth of stablecoins further solidifies the dollar's dominant position in the digital asset market and provides a new way for the U.S. to maintain its advantage in the global financial system.
In addition to enhancing the international influence of the dollar, stablecoins may also solidify the domestic financial foundation of the U.S. Despite being launched only a decade ago, stablecoins have already become among the top 20 holders of U.S. Treasury bonds, surpassing countries like Germany. This indicates that stablecoins not only expand the dollar's global dominance but also become an integral part of the U.S. financial system by absorbing large amounts of Treasury bonds, thus providing additional liquidity support to the economy.
The rising interest of voters in cryptocurrencies
According to a nationwide survey commissioned by Grayscale and conducted by Harris Poll, over half of voters stated they are more inclined to support candidates who 'understand cryptocurrency' rather than those who do not.
Meanwhile, interest in cryptocurrencies among swing state voters has also significantly risen. Since the 2020 election, two key battleground states expected to be highly competitive—Pennsylvania and Wisconsin—have seen their Google search interest in cryptocurrencies rise to fourth and fifth place, respectively. Michigan ranks eighth on this metric.
Increased regulation of crypto companies by the Biden administration
Since the Biden administration took office, it has been committed to strengthening regulation of cryptocurrencies and promised to establish a stricter regulatory framework. Related measures include filing a lawsuit against Ripple for unregistered securities issuance, imposing additional tax reporting requirements on crypto companies and Bitcoin miners, and levying capital gains taxes.
Following the collapse of FTX, the government intensified its crackdown on major crypto companies, achieving several significant legal progressions. For instance, Binance's former CEO Changpeng Zhao was sentenced to four months in prison due to U.S. and international lawsuits. Subsequently, the U.S. Securities and Exchange Commission filed a lawsuit against Coinbase, accusing it of operating a cryptocurrency trading platform without being registered as an exchange. If this case succeeds, it could pose a significant threat to Coinbase's business model, with other companies sued including crypto exchange KuCoin.
The core role of crypto company donations
In 2024, crypto companies became major contributors to political donations in the United States. Coinbase and Ripple are the largest corporate political donors this year, contributing nearly 48% of the total corporate donation amount. Fairshake, a Super PAC founded by former New York Governor's aide Josh Vlasto in 2023, has raised over $200 million to support pro-crypto candidates, becoming the highest spending PAC in this election cycle.
Fairshake aims to elect pro-crypto candidates and combat skeptical opponents, gaining support from companies like Coinbase, Ripple, and Andreessen Horowitz. This funding not only influences the policies of presidential candidates but also drives congressional election strategies in favor of cryptocurrency. Thus, the crypto industry has stepped out from behind the scenes to become an important force in U.S. politics.
A typical example occurred this March when progressive Democratic star Katie Porter raised over $30 million in the California Senate election and is expected to win. However, because she adopted Elizabeth Warren's political stance and had previously aligned with Harris on banking regulation issues, Fairshake regarded her as an 'ally of the anti-crypto movement.'
During the California primary, Fairshake spent over $10 million opposing Porter, undermining her support among young voters. Through Hollywood billboards and remarks against her, Fairshake claimed Porter misled voters into supporting pro-business legislation. As a result, her campaign funding was affected, and she ultimately failed to advance to the fall election.
As a result, many Democratic candidates have added sections supporting cryptocurrency on their campaign pages to seek funding from crypto PACs, which now significantly influence candidates' positions.
The impact of elections
Candidates' policy proposals
Harris
Harris has made limited statements on cryptocurrency policy, merely stating that her administration will 'encourage innovative technologies such as AI and digital assets while protecting our consumers and investors.' Recently, in response to lower-than-expected approval ratings among Black voters, she proposed a series of economic security plans, including a commitment to establish a cryptocurrency regulatory framework aimed at protecting Black male crypto investors.
However, this framework is only targeted at Black voters and lacks clear regulatory details or specific policy positions, leading to criticism from the cryptocurrency community as hypocritical, seen merely as a means to win votes by exploiting cryptocurrency. The current Biden-Harris administration has taken a more adversarial regulatory approach towards the crypto industry, involving multiple lawsuits, restrictions on traditional banking services, and vetoing bipartisan legislation.
The government is also considering imposing capital gains taxes on cryptocurrencies. Although Harris's crypto policies may be friendlier than Biden's and could improve the regulatory environment for the industry, she remains cautious on key issues such as taxation, Bitcoin mining, and self-custody, far less pro-crypto than Trump.
Trump
The Republican Party has consistently emphasized individual freedom, aligning its values more closely with the principles of decentralization in cryptocurrency. The Republican National Committee promises in its platform that Trump will defend Bitcoin mining rights and 'ensure every American has the right to self-custody digital assets and trade freely without government surveillance.' In contrast, the Democratic Party typically advocates for increased government power and regulation, which may ideologically clash with the cryptocurrency community.
Trump has shown a strong interest in the digital asset industry, claiming his goal is to make America the 'global crypto center and Bitcoin superpower.' He supports Bitcoin mining and pledges to protect self-custody rights. Additionally, during his campaign, Trump used Bitcoin to purchase burgers for restaurant patrons and criticized the SEC's tough stance on cryptocurrencies, vowing to appoint a pro-crypto chairman if reelected. Trump even initiated his own DeFi project—World Liberty Financial.
Trump proposed a series of crypto policies, including:
· Establish a strategic Bitcoin reserve:
Trump stated that the government will "retain all Bitcoin currently held or future acquired by the U.S. government" as the "core of the strategic national Bitcoin reserve." As of October 2023, the U.S. government holds over $5 billion worth of Bitcoin, mainly through seizures from criminal investigations. However, it remains unclear how these Bitcoin reserves will be utilized, their feasibility, and whether the crypto industry will broadly accept this initiative.
· Establish a Presidential Advisory Council on Cryptocurrency:
Trump pledged in Nashville to establish a 'Bitcoin and Cryptocurrency Presidential Advisory Council', stating that the council will be comprised of 'industry supporters' rather than 'crypto skeptics' to set the rules.
· Prohibit the Federal Reserve from issuing digital currency:
Although many countries are advancing central bank digital currencies, this trend has faced resistance in the U.S. cryptocurrency community. While the Federal Reserve has yet to decide whether to issue a digital dollar, a report released in January 2022 detailed the potential costs and benefits of a CBDC.
Trump has repeatedly publicly opposed this proposal, calling it a 'dangerous threat to freedom.' In May 2024, the House passed a bill prohibiting the Federal Reserve from issuing CBDCs, although the bill still needs further progress to become law. It is noteworthy that while Trump supports cryptocurrencies, his tariff policies may trigger economic uncertainty. The long-term impact of his policies on the market and the crypto industry remains to be seen.
Possible 'Divided Government'
Currently, unless one party can control both houses of Congress and the presidency, a period of political instability seems almost inevitable.
As of October 25, Polymarket data shows significant differences in odds for presidential, Senate, and House elections across parties. The only relatively likely outcome currently is that the Republicans will control the Senate. At the same time, the possibility of a 'divided government' is also high—meaning the presidency and the Senate will be controlled by different parties. The last occurrence of a divided government was during Obama's administration, while both Biden and Trump governed without a divided government.
This political landscape often leads to policy deadlock, as the president and the Senate must compromise on major legislation and appointments. If the Republican Party wins comprehensively, they may introduce new laws within three to six months, which would be a favorable outcome for the cryptocurrency market, as the Republican Party typically advocates for a more lenient regulatory framework for cryptocurrencies.
On Wednesday, September 25, 2024, the U.S. Congress passed a temporary government spending bill ensuring that government agencies' funding continues until December to avoid a government shutdown. The bill postpones the final spending decisions until after the presidential election on November 5. In other words, from December to the inauguration of the new Congress on January 3, the government's fiscal budget will be somewhat restricted. This means that during this transition period, the president's influence on fiscal policy may be limited, and the formal budget can only be passed after the new House of Representatives assumes office.
Possible changes in SEC leadership
Since Gary Gensler became SEC Chairman, his tough regulatory stance has sparked opposition from the cryptocurrency community. While he has achieved some success in combating illegal securities issuance, his strict enforcement has met protests from many crypto companies.
Trump has publicly stated that if he is reelected, he will 'fire' Gensler and push the SEC to adopt a more pro-crypto stance. Traditionally, SEC chairs usually resign when a new president takes office. If the Harris administration takes office, it would not be surprising if it adopts a similar stance to the opposing camp to garner industry support. Therefore, whether Harris or Trump is elected, significant changes in SEC leadership are likely.
Macroeconomic liquidity: Inevitable fluctuations and the decisive role of quantitative easing levels
When the Federal Reserve lowers interest rates and global capital liquidity significantly increases, Bitcoin's price often tends to rise, indicating that macroeconomic liquidity still has a decisive impact on the cryptocurrency market.
In 2020, in response to the COVID-19 pandemic, the Trump administration initiated unlimited quantitative easing, injecting vast amounts of funds into the cryptocurrency market. On March 15, 2020, the Federal Reserve lowered the federal funds rate by 1 percentage point to between 0% and 0.25% and started a $700 billion quantitative easing program. Subsequently, the Fed further announced the removal of QE limits and pledged to purchase assets as needed, thereby launching unlimited quantitative easing. This move brought immense liquidity to the crypto market.
On October 21, 2024, during a town hall meeting in Lancaster, Pennsylvania, Trump reiterated that if he is reelected on November 5, he will significantly lower U.S. interest rates. This promise could again drive up the prices of cryptocurrencies like Bitcoin, especially with increased liquidity.
How elections affect cryptocurrency startups
Web3 prediction markets surpass Web2 competitors
Since its launch in 2020, Polymarket has rapidly risen to become a leader in the field. It accounts for 80% of the trading volume generated by betting on the U.S. presidential election. As an application developed in an on-chain environment, Polymarket competes with traditional markets and holds the largest market share, which is quite rare in the industry. Polymarket allows users to speculate and bet on the outcomes of future events related to sports, politics, business, science, and more. The platform gained its first significant attention during the 2021 U.S. presidential election, handling 91% of the total betting volume, equivalent to $3.5 million in bets.
Polymarket has faced many challenges, including reaching a $1.4 million civil monetary penalty and settlement agreement with the U.S. Commodity Futures Trading Commission (CFTC), after which it ceased official operations in the U.S. and geo-fenced access to its site for U.S. users. CFTC Chairman Rostin Behnam warned that if its 'footprint' in the U.S. is large enough, it must register its derivatives contracts or face enforcement actions.
Prediction markets are gradually evolving into a broader financial tool, transcending mere speculation. As Polymarket expands, the influence of prediction markets has extended into various fields such as public opinion, financial hedging, and business decision-making.
How prediction markets work
Prediction markets are a type of derivatives market where participants bet on the outcomes of events. These markets typically use binary options. For example, in a binary market, a question like 'Will the Bitcoin spot ETF be approved?' can be answered with 'Yes' or 'No.' The price distribution of 'Yes' or 'No' is determined by market participants' predictions and bets, with the total price of both being one dollar or slightly above one dollar.
On the expiration date, when the event result is revealed, the stock price converges to either $0 or $1. Participants who predicted correctly will receive a $1 payout, while those who predicted incorrectly will receive $0. This is how profits and losses are determined.
In addition to cryptocurrencies, offshore centralized providers often restrict the amount that can be bet on specific outcomes, similar to sports betting. This limits individuals from fully leveraging their insights, while the final outcome is often controlled by centralized operators. On-chain prediction markets eliminate these barriers, as smart contracts and decentralized ledgers create transparent global markets, ensuring these platforms are fair and tamper-proof.
Polymarket's order book adopts a hybrid decentralized model. Orders submitted by users are sent to Polymarket's operators, who match them and perform order execution off-chain. The foundation of this trading system is a custom trading contract that facilitates atomic swaps (settlements) between binary outcome tokens and collateral assets (ERC20) based on signed limit orders.
In addition to the aforementioned binary markets, Polymarket also offers categorical markets and scalar markets. Categorical markets allow betting on multiple options, with each option being determined as $1 or $0 based on the outcome. For example, a market predicting the 2025 NBA champion may include options like the Celtics, Thunder, Knicks, and Nuggets.
As the regular season has just begun, everything is still uncertain, and users can choose to bet on multiple teams. Scalar markets differ from the previous two types, with profits and settlements based on the position of the final result within predefined ranges.
Product iterations in prediction markets
Augur is one of the earliest blockchain prediction markets. By 2018, it had achieved a trading volume of $400,000, which was quite significant given the on-chain activity at the time, showcasing the market demand for on-chain prediction markets. However, Augur failed to maintain a stable user base mainly due to its complex mechanisms and vulnerability to malicious attacks.
Unlike Polymarket, Augur allows anyone to create markets by staking its governance token REP. Augur's system is designed to invalidate markets if errors are detected in their fundamental components (market definition, expiration time, or decision conditions) during the market creation process.
Therefore, attackers may intentionally create flawed markets with the intent to render the market ineffective and profit from it. At the same time, Augur's permissionless market creation has also led to several controversial incidents, such as creating markets like 'When will a certain singer die?'.
To attract users during the early application development process, Polymarket internalized the market creation process and selectively centralized operations. By providing a user-friendly market and avoiding ethical controversies as much as possible, Polymarket established a stable initial user base. This selective centralization strategy aims to help successfully attract early users while ensuring transparency and traceability of core trading activities.
Prediction markets break boundaries and enter the mainstream
According to the efficient market hypothesis, asset prices in capital markets quickly and fully reflect all the information available to market participants. Therefore, prediction markets are always efficient, and they have the potential to solve the problem of inaccurate predictions, i.e., market inefficiency, and achieve accurate forecasts.
Polymarket's founders noted that the platform was launched to address the widespread misinformation during the pandemic. In fact, Polymarket effectively transforms the speculative demands of market participants into a tool for collecting public sentiment data. For example, it accurately predicted Kamala Harris would become the Democratic nominee and that J.D. Vance would be Trump's running mate before their official announcements.
As a result, Polymarket has been widely adopted by multiple mainstream media outlets (even by crypto-skeptical media in mainland China) as an alternative news source. The widely purchased and used Bloomberg terminal even began incorporating Polymarket's data into its panels starting in August 2024.
Polymarket is also integrating with content platforms. On July 30, 2023, the renowned content subscription platform Substack announced the embedding of Polymarket's prediction markets, launching the new 'Substack The Oracle by Polymarket'.
On 'The Oracle', readers can find insights and analyses from thousands of active markets on the Polymarket trading platform. Polymarket's 'The Oracle' regularly aggregates significant markets and key statistics, providing in-depth analysis of some of today's hottest topics.
The future development direction of prediction markets
Currently, Backpack Exchange has launched prediction tokens related to the U.S. presidential election. SynFutures and dYdX have introduced election-related leveraged trading products and advanced order features (such as limit orders and stop-loss orders) to help users manage risk. This leveraged trading allows users to operate larger positions with smaller initial investments, thereby amplifying potential returns.
dYdX specifically focuses on permanent contracts for Trump prediction markets, allowing traders to participate with 20x leverage and engage in long or short trades. This flexible trading structure enables users to capitalize on every market fluctuation and potentially achieve considerable returns in the short term. Overall, the combination of leveraged trading and prediction markets remains relatively complex for ordinary users and is more suitable for professional traders.
Trump's victory may encourage crypto companies to go public in the U.S.
Under the Trump administration, there will be a clearer regulatory framework and a more lenient regulatory environment, reversing the current trend of crypto companies fleeing the U.S. and blocking U.S. IP addresses. Meanwhile, several crypto-related companies, such as Circle Internet Financial, Kraken, Fireblocks, Chainalysis, and eToro, are expected to go public in the coming years, with other eligible crypto companies also likely to follow standard IPO procedures.
Reflecting on the Biden administration, only a few crypto companies have completed IPOs in recent years due to the hardline regulatory stance taken by current SEC Chairman Gary Gensler. Consequently, it has become increasingly difficult for crypto companies to obtain mainstream institutional funding. While the wealth effect from Coinbase's 2021 IPO attracted many traditional funds to establish crypto departments, Coinbase remains the only crypto project on the 2024 Forbes Midas List.
DeFi and BTCFi will be the first to benefit
Although Trump's own DeFi project—World Liberty Financial (WLFI) has only sold 4.3% of its tokens and has been criticized for lack of utility, it reflects his attention to DeFi.
In DeFi, BTCFi stands out due to its ease of establishing consensus and gaining legitimacy, providing a stronger foundation to ensure sustainable development.
Bitcoin remains the largest common ground among the cryptocurrency industry, Wall Street, and the U.S. Securities and Exchange Commission. The core of BTCFi is to utilize BTC through various businesses (such as staking, lending, trading, and derivatives). Over time, the value of BTCFi will grow to multiple times that of BTC, reflecting trends seen in other major asset classes. However, this development requires a favorable external environment over a relatively long period. If Trump wins the election, this process may accelerate.
Crypto companies developing BTC financial tools will be incentivized and able to obtain a more lenient regulatory environment, thereby solidifying BTC's status as a foundational asset. On the other hand, BTCFi's innovations will be led by developers, driving various groundbreaking applications based on Bitcoin programmability. For example, Bitcoin's upgrade in 2025, which follows the 2021 Taproot upgrade, is expected to realize OP_CAT.
Once OP_CAT is enabled, developers will be able to use advanced Bitcoin-native programming languages like sCrypt to directly develop decentralized and transparent smart contracts on the Bitcoin mainnet. sCrypt is a TypeScript framework for writing smart contracts on Bitcoin, allowing developers to write smart contracts directly in TypeScript, one of the most popular high-level programming languages.
Additionally, Bitcoin's current second-layer solutions may also transition to zk-rollups, with the total market potential of BTCFi expected to exceed ten times Bitcoin's current market value.
Many projects are exploring how to leverage sCrypt to develop around OP_CAT. For example, Bitcoin's parallel chain Fractal Bitcoin has already supported OP_CAT and launched the CAT protocol.
Currently, re-staking projects developed using Bitcoin scripts, such as Babylon, and stablecoin lending platform Shell Finance are also considering related developments post-OP_CAT launch for fully decentralized and more complex on-chain functionalities, relying on Bitcoin's consensus mechanism to ensure security.
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