The promise of a crypto-friendly America is not necessarily good for Bitcoin. Bitcoin's new high comes from the naive belief: "The new president supports crypto, buy it."
Since the US presidential election, Bitcoin has hit a record high, surpassing its Covid-19 peak and pushing the total cryptocurrency market capitalization to a staggering $2.6 trillion, a level that dwarfs that of any US company except the six largest.
Even Dogecoin, once created purely for satirical purposes, is now a top 200 company by value.
Bitcoin doesn't need anyone to "untie" it
It all hinges on expectations that President-elect Donald Trump will lift strict regulations on the cryptocurrency industry, starting with replacing the chairman of the US Securities and Exchange Commission (SEC) Gary Gensler - a notoriously unfriendly figure towards crypto.
If he is removed, regulations will become more relaxed for cryptocurrency companies and exchanges, and open up new avenues for finance and cryptocurrency mining in the U.S. In theory, a country with a friendly regulatory environment will be more attractive to investors.
Without any fundamentals with cryptocurrencies, they are purely driven by emotional supply and demand. More buyers means higher prices.
However, according to the Wall Street Journal, Bitcoin actually does not need this "unleashing" like other cryptocurrencies. Bitcoin and Ethereum are largely immune to current regulatory pressure. As a commodity, Bitcoin has avoided direct oversight from the SEC and has both futures contracts and ETFs - exchange-traded funds that the SEC itself has lost legal battles over.
Meanwhile, many other cryptocurrencies would benefit more if they were also exempted from the SEC's strict rules. Ethereum could also benefit from loosening regulations regarding decentralized finance.
However, this change has little impact on Bitcoin. In fact, loosening regulations could pull buyers and capital away from Bitcoin as they pour into other coins in the altcoin ecosystem.
“Any loosening of regulations for the crypto industry is more beneficial for altcoins than for Bitcoin because there are no business regulations for Bitcoin,” said Alex Thorn, head of research at Galaxy Digital, a financial services firm specializing in cryptocurrencies.
So why has Bitcoin rallied 30% since election night, adding nearly $500 billion to its market capitalization in less than two weeks, while altcoins and Ethereum appear to have lagged?
Donald Trump won the election, why did Bitcoin hit a new high?
The simplest and most common argument is that “the new president is pro-crypto, so buy Bitcoin.” Indeed, Trump has changed his stance on crypto and has surrounded himself with advisors who are friendly to the sector. For many, that means Bitcoin, the largest cryptocurrency, will also benefit, although this in itself has no solid theoretical basis.
In reality, Bitcoin’s value is entirely driven by sentiment and market sentiment. There is no fundamental factor driving its value. Many people equate “Bitcoin” with “cryptocurrency,” so they assume that anything that is good for cryptocurrencies is good for Bitcoin, even if it is not.
The second reason why many in the crypto community are excited is Trump's promise to create a "strategic national reserve of Bitcoin." The idea involves preventing the sale of Bitcoins that have been seized by law enforcement agencies.
For the cryptocurrency community, this is a positive sign, with the possibility that the US government will hoard Bitcoin and turn it into a reserve asset to support the USD, an idea that was previously proposed by Senator Cynthia Lummis.
Rumors also suggest that many countries may quickly buy Bitcoin to “get ahead” of the new US policy. However, this sounds absurd.
Countries only need foreign currency reserves when their national currencies are unstable or when they need to regulate their money supply due to trade surpluses. Given the position and stability of the US dollar, the US has no need to hold Bitcoin reserves. Even if it did, Trump probably wouldn't want to spend national resources on buying Bitcoin instead of spending it on public spending or tax cuts, the Wall Street Journal noted.
“If the Treasury or the Federal Reserve (FED) announced that they would buy Bitcoin to support the USD, it would be a negative sign for the USD. The USD is backed by the credit and solvency of the United States. If the government backed it with Bitcoin, it would be like backing the USD with lollipops or toothpaste,” Alex Thorn analyzed.
The third reason is related to the risk of inflation. Some investors in Bitcoin still believe that it is a hedge against inflation, especially when Trump's policies could cause inflation through taxes and tax cuts.
But Bitcoin has never been an effective hedge against inflation. It resembles speculative stocks more than traditional hedges against inflation like gold or inflation-protected bonds.
In other words, Bitcoin is “herd mentality,” not a tool for economic analysis, the Wall Street Journal concluded.
