Traders look to crypto Trump trade to lift flagging bitcoin price

Hello and welcome to the FT Cryptofinance newsletter. This week we’re taking a look at bitcoin’s prospects for the second half of the year.

As the US presidential election draws ever closer, crypto traders and analysts are hoping a victory for Donald Trump in November will pull the bitcoin price 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 for securing the bitcoin network dropped from 900 to 450. Since then, it has dropped about 15 per cent and on Friday fell below $54,000 to its lowest point since February. That has belied many predictions that, post-halving, bitcoin would begin to rally.

Analysts have suggested the lacklustre performance is due to the number of potential sales overhanging the market: $9bn of bitcoin and bitcoin cash sales from defunct Japanese exchange Mt Gox; possible sales of bitcoin by miners; and the signal sent in the past two weeks by authorities in the US and Germany, who moved chunks of criminal seizures to crypto exchanges.

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

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

As the market looks for the next catalyst, talk is growing of a “Trump trade” — a potential bitcoin rally in the second half of the year on the prospect of a victory for the former president in November. That conviction has only grown since last week’s presidential debate.

The optimism comes down to two perceptions: that Trump is the more pro-crypto candidate and that his policies will make assets such as bitcoin more appealing to the wider world.

He has already been more open to courting the industry by hosting crypto mining executives at Mar-a-Lago, accepting contributions in crypto and generally making positive noises.

Industry executives hope a Trump White House and strong Republican showing in Congress will mean Washington is more amenable (finally) to passing clear and favourable crypto regulations.

“Crypto mining firms are set to benefit as well, particularly with Trump’s energy policy proposals, which could enable the use of other energy sources for bitcoin mining,” said Manuel Villegas, an analyst at Julius Baer. “[President Joe] Biden’s prior tax propositions on crypto miners, like a 30 per cent levy, are unlikely to take place under a Trump administration,” he added.

The second perception is a question beginning to creep into traditional finance too: what will Trump 2.0 mean for financial markets more broadly?

The market expectation currently is that tougher policies on immigration, 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 a government deficit and debt grow so large that the central bank’s main weapon, interest rate moves, has only limited impact.

This would affect the price of bitcoin, he said, because the cryptocurrency tends to have a reasonable correlation with some crucial US Treasury markers, such as the spread between 2-year and 10-year Treasuries, and break-even rates.

A steeper curve and higher break-even rates than real yields should push the price of bitcoin higher, he argues, because the coin acts as a good hedge against declining confidence in the US Treasury market.

The Trump trade is predicated in part on Biden being his opponent in November. RealClearPolitics Betting Average, a composite of prediction sites, puts Trump at 55 per cent and Biden’s odds at just 16.5 per cent, having plunged in the past week.

That suggests that if Biden remains in the race, bitcoin bulls will be energised. If he exits 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 on contact with reality.

But that misses the point. As Ben Hunt, chief investment officer of asset manager Second Foundation, eloquently wrote on his Epsilon Theory blog this week, “behaviour changes ONLY when we believe that everyone else believes the information”. If enough people think Trump will win, the crypto market will move.

The most likely outcome, says Kendrick, is that in late July it becomes clear that Biden will run, the probability of Trump winning increases further and bitcoin moves higher. “A fresh all-time [high] in August is likely, then $100,000 by US election day.”

All markets need a narrative to sustain their momentum. But bitcoin, which has no cash flows, has more need than most. As the sales overhangs are cleared by the market, expect this one to build through the summer.

What’s your take? Email me at philip.stafford@ft.com

Weekly highlights

• Defunct California bank Silvergate will pay $63mn to settle civil charges brought by federal and state regulators tied to the bank’s collapse in the wake of the massive fraud that brought down crypto exchange FTX.

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

• Bitcoin mining firm Genesis Digital Assets, in which defunct trading group Alameda Research invested $1.15bn, is considering an IPO in the US, Bloomberg reported.

Data mining: On the rebound

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

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

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