Traders look to Trump crypto trade to lift declining bitcoin price

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Hello and welcome to the FT Cryptofinance newsletter. This week we take a look at the outlook for bitcoin in the second half of the year.

As the US presidential election approaches, cryptocurrency traders and analysts are hoping that a Donald Trump victory in November will shake the price of bitcoin out of its recent stupor.

The coin, a decent proxy for all crypto activity, peaked in mid-March and has struggled to make headway since April’s so-called halving event, when the number of daily bitcoins available for miners to share to secure the bitcoin network fell from 900 to 450. It has since fallen about 15 percent and on Friday fell below $54,000 to its lowest point since February. That belied many predictions that post-halving bitcoin would begin to recover.

Analysts suggested the weak performance was due to the number of potential sell-offs looming over the market: $9 billion in bitcoin and bitcoin cash sales from the now-defunct Japanese exchange Mt Gox; possible bitcoin sales by miners; and the signal sent over the past two weeks by authorities in the US and Germany transferring portions of criminal seizures to cryptocurrency exchanges.

“Both authorities hold over $15 billion worth of bitcoin, which is enough potential selling pressure to make short-term bitcoin holders nervous,” said analysts at Ryze Labs, a cryptocurrency venture capital firm.

Traders have also noted the effect of bitcoin basis trading — in which hedge funds use borrowed money to bet on the price of bitcoin futures and spot bitcoin ETF convergence — in reducing volatility.

As the market searches for the next catalyst, talk of a “Trump trade” — a potential second-half rally in bitcoin on the back of a November victory for the former president — has grown. That belief has only grown since last week’s presidential debate.

The optimism boils down to two perceptions: that Trump is the most pro-crypto candidate and that his policies will make assets like bitcoin more attractive to the rest of the world.

He is now more open to courting the cryptocurrency hosting industry. mining executives at Mar-a-Lago, accepting cryptocurrency contributions and generally making positive comments.

Industry executives hope that a Trump White House and a strong Republican showing in Congress will mean that Washington is more receptive (finally) to passing clear and favorable regulations for cryptocurrencies.

“Cryptocurrency mining companies are also likely to benefit, particularly from Trump’s energy policy proposals, which could allow the use of other energy sources for bitcoin mining,” said Manuel Villegas, an analyst at Julius Baer.[President Joe] Biden’s previous tax proposals on cryptocurrency miners, such as a 30% tax, are unlikely to happen under a Trump administration,” he added.

The second insight is a question that is starting to filter into traditional finance as well: what will Trump 2.0 mean for financial markets more broadly?

The current market expectation is that stricter immigration policies, more tariffs on foreign goods and tax cuts would increase the US deficit and lead to higher inflation and higher US Treasury yields.

Geoff Kendrick, an analyst at Standard Chartered, argues that Trump’s policies could create “fiscal dominance,” when the government deficit and debt grow so large that the central bank’s main weapon, interest rate changes, has only limited impact.

This would affect bitcoin’s price, he said, because the cryptocurrency tends to have a reasonable correlation with some crucial U.S. Treasury benchmarks, such as the spread between 2-year and 10-year Treasury bonds and breakeven rates.

A steeper curve and higher breakeven rates than real yields should push up bitcoin’s price, he argues, because the currency acts as a good hedge against falling confidence in the U.S. Treasury market.

Trump’s trade is based in part on Biden being his opponent in November. The RealClearPolitics Betting Average, a composite of prediction sites, puts Trump at 55 percent and Biden’s chances at just 16.5 percent, having fallen in the past week.

This suggests that if Biden stays in the race, bitcoin bulls will be energized. If he leaves and the new candidate is seen as having a chance against Trump, bitcoin could remain in the doldrums.

Then again, it may not matter. Theories about bitcoin, from an inflation hedge to an alternative to the financial system, tend to disintegrate when faced with reality.

But that’s beside the point. As Ben Hunt, chief investment officer at asset manager Second Foundation, eloquently puts it: he wrote In his Epsilon Theory blog this week, “behavior changes ONLY when we believe everyone else believes the information.” If enough people think Trump will win, the cryptocurrency market will move.

The most likely outcome, Kendrick says, is that by the end of July it becomes clear that Biden will run, the probability of Trump winning increases even more, and bitcoin goes up. “A new all-time high [high] probably in August, so $100,000 by US election day.”

All markets need a narrative to sustain their momentum. But bitcoin, which has no cash flows, needs it more than most. As the market clears out excess selling, expect this to build over the summer.

What do you think? Email me at philip.stafford@ft.com

Weekly Highlights

• Defunct California Bank Silvergate go pay $63 million to resolve civil charges brought by federal and state regulators related to the bank’s collapse following the massive fraud that took down cryptocurrency exchange FTX.

• The US Marshals Service has chosen Coinbase to custody the crypto assets it seizes as part of U.S. government criminal investigations. In the past, the agency has seized assets belonging to Silk Road and Mt Gox. The five-year contract is worth $32.5 million.

• Bitcoin mining firm Genesis Digital Assets, in which now-defunct trading group Alameda Research invested $1.15 billion, is considering a U.S. IPO, Bloomberg reported.

Data Mining: On the Rebound

Here’s another indicator of the slowdown in crypto markets. Centralized crypto exchanges had a strong first half of the year, with total aggregate spot volumes up $10.6 trillion from $4.32 trillion in the second half of last year, according to CCData. March was a record high, it added. The driver was mainly the arrival of US spot bitcoin ETFs. However, the chart also shows how the post-halving lull has hit volumes.

Cryptofinance is edited by Laurence Fletcher. To view previous issues of the newsletter, click here.

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