Source: John Cassidy X account
Author: John Cassidy
Compiled by: BitpushNews
'With a government supportive of cryptocurrencies poised to take power + cryptocurrency investors cheering, there are some similarities to the late 1990s internet bubble.'
Last week, after Donald Trump announced his nomination of crypto advocate Paul Atkins to lead the SEC, Bitcoin's price surged past $100,000, and cryptocurrency enthusiasts cheered. The sentiment in the cryptocurrency market reminded me of the internet bubble and its inevitable burst, which I documented in a book over twenty years ago.
At the time, some long-term market participants and observers, including myself, were equally excited, equally predicting prices would rise further, and equally felt uneasy.
Certainly, cryptocurrency investors, crypto entrepreneurs, and donors supporting cryptocurrencies have ample reason to feel excited, having donated hundreds of millions to pro-crypto politicians ahead of the November elections. Investments based on Trump's victory and the defeat of some prominent crypto skeptics (including Ohio Democratic Senator Sherrod Brown) have already paid off.
The SEC is America's leading investor protection agency, and under Gary Gensler's leadership, the agency has taken a hard line against what Gensler described as an industry 'fraught with fraud and scams,' filing lawsuits against several cryptocurrency companies, including the cryptocurrency exchange Coinbase and the digital payment network Ripple.
However, under Paul Atkins' leadership, ongoing lawsuits and other cases may be shelved. Paul Atkins is a conservative lawyer who served as a commissioner of the SEC during the George W. Bush administration and is currently co-chair of the crypto lobbying group Token Alliance.
Overall, the SEC seems poised to adopt a more favorable stance toward issuers of crypto assets such as currencies and tokens—a prospect that alarms critics of the crypto industry. Dennis Kelleher, president of the Washington financial reform organization Better Markets, told me, 'For crypto assets, decades of fundamental rules protecting investors will be significantly weakened, and the industry will be allowed to expand with little regulation or accountability.' 'It will be like the 1920s—buyer beware.'
Executives in the crypto industry praised Atkins' appointment as a milestone. Michael Novogratz, founder and CEO of crypto firm Galaxy Digital, told Reuters, 'We are witnessing a paradigm shift,' 'Bitcoin and the entire digital asset ecosystem are about to enter the financial mainstream.'
In the late 1990s, the major paradigm shift supporting the internet bubble was the rise of online commerce, which gave birth to startups that went public on Nasdaq, such as Amazon, eBay, Pets.com, and Webvan.
Speculative digital assets, including Bitcoin, Dogecoin (a cryptocurrency promoted by Elon Musk), and the crypto tokens issued by the newly established World Liberty Financial of the Trump family, cannot be directly compared to the startups of the 1990s, which were expected to generate massive profits at some point, even though many ultimately went to zero. (Amazon's current market value is about $2.4 trillion. The online grocery chain Webvan, which promised quick home delivery, raised $375 million in its IPO in 1999 and filed for bankruptcy in 2001.)
But regardless of the speculative objects, I concluded back when I wrote about the internet stock bubble that large-scale speculative events rely on the 'four horsemen':
New technologies that excite investors;
Effective methods they can use to communicate;
Active participation from the financial industry;
And a supportive policy environment.
In terms of crypto assets, the invention of Bitcoin and blockchain (a secure and decentralized digital ledger) and the rise of social media met the first two requirements, but Wall Street and policymakers remained skeptical about the industry. These two factors were enough to make investment in cryptocurrencies a pursuit for a select few. During the 2022-23 crypto bubble burst, Bitcoin's price fell by over 70%, and some large cryptocurrency companies, including Sam Bankman-Fried's FTX, went bankrupt, while the overall stock market and the U.S. economy remained unscathed.
With Trump's election, it seems all four conditions are in place, laying the groundwork for a broader bubble that attracts more people. Blockchain technology is still developing, and its proponents continue to claim it will soon disrupt the banking system, completely change international payment systems, or produce other transformative impacts. On Musk's X, crypto enthusiasts have a massive social platform they can use to promote crypto assets and attack skeptics. But the key development is that policy and Wall Street are now also aligning with the crypto world.
Under Atkins' leadership, the SEC may change its stance on core legal issues about whether crypto assets are securities like stocks and bonds, meaning they must fully comply with the nation's securities laws, or whether they are more like physical commodities such as gold and silver, which are subject to less regulation partly because they are seen as fungible items that are easier to identify and assess. (If you buy a bar of gold, you know what you're buying.)
During Gensler's tenure, the SEC has classified many crypto assets as securities, subjecting their issuers to extensive registration and disclosure requirements. The agency accused Coinbase of operating an unregistered securities exchange and accused Ripple of conducting an unregistered securities offering when selling its XRP cryptocurrency. Both companies denied these charges. Earlier this year, a federal judge ruled that much of the case against Coinbase could proceed, which was widely interpreted as a victory for the SEC. However, Ripple's lawsuit ultimately concluded with a ruling that the company did not violate securities laws when selling XRP to retail investors on electronic exchanges, which Ripple called a significant victory.
Looking ahead, the international law firm WilmerHale stated in a recent client alert that during Trump's second term, the U.S. Securities and Exchange Commission 'may propose tailored rules considering the differences between crypto assets and traditional securities,' which is exactly what the crypto industry wants. Meanwhile, on Capitol Hill, Republicans could legislate to free many crypto issuers from at least some scrutiny by the SEC by expanding the jurisdiction of the Commodity Futures Trading Commission (CFTC), which has a much smaller budget and enforcement capacity. Earlier this year, the House passed a Republican-backed bill that would authorize the CFTC to regulate digital assets as commodities, as long as the blockchain they rely on is decentralized. Gensler opposed the bill, saying it would weaken protections for investors and allow crypto issuers to self-certify their products as digital commodities rather than securities. Given that Republicans gained control of the Senate, similar legislation may be introduced there and sent to the president's desk.
The incoming crypto advocate has already promised to turn the U.S. into the 'crypto capital of the world.' Crypto enthusiasts will expect Trump to deliver on his campaign promise to establish a 'national strategic Bitcoin reserve.' Last week, Trump appointed Musk's partner, venture capitalist David Sacks, as his 'White House AI and crypto czar,' which further energized crypto enthusiasts.
In theory, the Federal Reserve could curb the prevalence of cryptocurrencies by limiting financial leverage, raising interest rates, or both. However, such measures are not popular when speculative activities are emerging and asset prices are soaring.
In the late 1990s, then-Federal Reserve Chairman Alan Greenspan initially warned of 'irrational exuberance' but then stood by as the Nasdaq collapsed. (From January 1998 to March 2000, the tech stock index rose twofold.) Currently, the likelihood of the Fed intervening to depress crypto assets seems low. The central bank is acting to lower interest rates rather than raise them, and last week, Fed Chair Jerome Powell compared Bitcoin to gold, referring to it as an investment asset—an argument many in the crypto space have made.
Finally, Wall Street is beginning to embrace cryptocurrencies. After losing a key lawsuit in 2023, the SEC approved the launch of Bitcoin exchange-traded funds (ETFs) at the beginning of this year, which track the value of cryptocurrencies and can be purchased by retail investors. Major financial firms like BlackRock, Fidelity, and Franklin Templeton have already offered these products, while Charles Schwab offers a 'crypto-themed ETF,' an index fund designed to track the prices of various crypto assets and companies. Since the election, the value of Bitcoin ETFs has risen by about 45%, certainly stimulating other financial firms to launch similar products.
Taking all these factors into account, it's not surprising that the value of crypto assets is rising or that some observers feel nervous. Cornell University economist Eswar Prasad, author of 'The Future of Money: How the Digital Revolution Is Transforming Currency and Finance,' expressed concern that recent developments may lead many ordinary Americans to view crypto assets as a safe investment rather than a highly volatile and speculative one.
Eswar Prasad told me, 'The U.S. government seems poised to approve a range of crypto products and will implicitly endorse crypto as an asset class. This could really exacerbate the crypto bubble. And if something happens to burst the bubble, we could end up with very bad results.'
How bad could it get? That may depend on how interconnected crypto assets are with the rest of the financial system. The internet bubble swept away hundreds of startups and many large companies' stocks. After the bubble burst in 2000, many startups failed, and the Nasdaq index fell by over 70%; the economy experienced a relatively mild recession lasting less than a year. The bursting of the real estate bubble in the late 2000s had more catastrophic effects, as it turned out the banking system was heavily reliant on subprime mortgage assets. When the value of these assets evaporated, it nearly destroyed the entire financial system, plunging the economy into one of the worst recessions since the 1930s.
So far, federal banking regulators have struggled to keep cryptocurrencies confined to their own world, encouraging banks to adopt a cautious approach to dealing with crypto-related businesses and preventing them from holding any crypto assets on their balance sheets. The Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency wrote in a joint statement last year, 'It is important that risks associated with the crypto asset sector that cannot be mitigated or controlled do not migrate to the banking system.' Powell reiterated the Fed's goal last week of ensuring that any interaction between cryptocurrencies and banks does not threaten the banking system.
But Dennis Kelleher reminded me that recent history is not entirely reassuring. During the 2022-23 cryptocurrency bubble burst, coinciding with soaring interest rates, three banks linked to the cryptocurrency industry collapsed: Silvergate, Silicon Valley, and Signature. Kelleher predicts that Trump will appoint bank regulators in a more laissez-faire manner, adding, 'You will see cryptocurrencies flooding into the cracks of the financial system like water... I think the bell has begun to toll for the next financial crisis with the election of a second Trump administration.'
The worst-case scenario is a complete financial collapse, something I have seen many times in the 90s when people went crazy promoting something, often resulting in a bubble. Prasad believes a similar situation could occur with cryptocurrencies, and the government might even condone or support such speculation. When I asked this economist if he could think of a historical analogy, he pointed out that the Chinese government once encouraged citizens to invest in real estate, which, as we all know, did not end well.
