Crypto Thanksgiving

by Ryan Shea

Last week was the Thanksgiving holiday in the US. For some US households (Democrats) there was probably not too much cheering going on, but for others (Republicans) there was more to cheer about given their preferred candidate is destined to be sworn in as the 47th US president in a matter of weeks. However, the group with the most to cheer about were crypto-owning Republicans because, in addition to having the political leader they wanted for the next four years, his victory also generated some pretty sizeable profits for them.

Actually, given the magnitude of the post Trump victory rally – our benchmark Top10 Crypto CTI gained around 50% in November (eat your heart out other asset classes) – this Thanksgiving holiday should have been a pleasant experience for all crypto owners regardless of their political persuasion, something that is not always true as evidenced by the rich Thanksgiving/Crypto meme culture that has evolved over the years – see images.

Source: Google

Given its superior brand recognition most eyes were drawn to Bitcoin as it blasted to a fresh all-time high above $99,000, putting it within spitting distance of becoming a six-digit asset price. In the process its market cap increased to $1.96tr, putting it in seventh spot globally ahead of Saudi Aramco and with its sights firmly set on toppling either Alphabet (AKA Google) or Amazon next (the market caps of both companies sit around the $2.1tr mark at the time of writing).

Bitcoin The Market Cap Slayer

Source: imgflip.com

A Clean Sweep Wasn’t Priced-In

Part of the reason for the strength of last month’s crypto rally was that unlike the online betting platforms, which last minute minor wobble aside had Trump firmly out in front since early October (see image below), the polls indicated the election race was “too close to call”. Consequently, when Trump’s victory materialized it not only provided validation of the usefulness of online betting platforms but it caught many investors by surprise.

US Presidential Race Online Betting Odds

Source: Polymarket

Moreover, what was certainly not priced-in was the extent of Trump’s victory. Not did he win sufficient electoral college votes to secure the title of President Elect, he also won the popular vote¹, as well as majorities in both the Senate and the House of Representatives. Such an electoral “clean sweep” should make it much easier for the Trump administration to get the legislation they want passed without too much hindrance.

Strategic Bitcoin Reserve

In terms of policies, top of the wish-list for crypto investors² is the establishment of an officially-sanctioned US Bitcoin Reserve. This idea has been floating around for several months and is championed by crypto supporter Senator Cynthia Lummis (aka Crypto Queen). If approved, her bill would see the US government purchase up to 200,000 BTC per year for five years, meaning the US strategic reserve would end up owning 1 million BTC or just under 5% of the total supply (an amount broadly similar to that held by US spot ETFs).

Obviously, politicians have form when it comes to not keeping their pre-vote promises, so it remains to be seen whether the US will set up a Bitcoin reserve. It is also pretty fair to assume that it will not be the first item on Trump’s agenda once in office. The escalation in tension between Russia and Ukraine after the US and UK governments permitted the use of their long range missiles in Russian territory means avoiding World War III is a more obvious and deserving claim on Trump’s time. Nevertheless, given he made very robust overtures to the crypto community during his campaign, and given the magnitude of his victory, failing to deliver on promises like establishing a strategic Bitcoin fund would be politically very damaging to Trump’s administration, something we strongly suspect he would wish to avoid. So even though it might take a while, we do anticipate such a reserve being established.

Meanwhile, speculation has increased that other nation states are considering a similar move. Considerable chatter has been centred on the Middle East petro states such as Saudi Arabia, the UAE and Qatar. Given these countries have large investment portfolios in overseas tradfi markets, purchasing digital assets for the purposes of diversification certainly makes a great deal of financial sense³. Encouraging such speculation is the fact that Abu Dhabi – the UAE capital – plays host to the Bitcoin MENA 2024 conference early this month and a lot of influential crypto players will be in town. Maybe, just maybe, it is the turn of governments to experience a bit of crypto FOMO.

The final icing on the crypto cake last month was the Fed delivering a follow-up 25bp rate cut, putting the target funds rate 75bp below the cycle peak. In the press conference after the FOMC meeting, Chair Powell’s tone tilted more dovishly than many central bank watchers had expected in light of the back-up in US bond yields since the first Fed cut. So, even though the interest rate reduction was fully anticipated, it nevertheless provided a welcome boost to risk appetite (and hence crypto prices) as investors anticipate a further easing in global liquidity conditions over the coming months.

Halving – Back On Track

One consequence of November’s price surge is that Bitcoin’s post-halving performance is getting back on track after several months of significant underperformance. Indeed, the rally occurred almost exactly when it should have because, as can be seen in the chart below, we are currently in the phase of the post-halving cycle where the most explosive price gains have occurred historically. It is almost as if Bitcoin was able to “predict” Trump’s election victory, something that would probably only be possible if we live in a fully deterministic universe where everything is pre-ordained and free will does not exist, but that topic is well-beyond my pay grade!

Bitcoin Halvings – Index Price

Source: Ecoinometrics

Meme-tastic

Leaving aside such deep philosophical topics, while the normies and maxis were fixated on the performance of Satoshi’s invention, those with a more complete understanding of the crypto landscape instead focused on the higher beta Meme coins, whose performance last month was nothing short of spectacular. The Trakx Meme CTI, whose performance is driven by ten of the top meme coins, jumped over 60%.

The meme coin rally received a major boost after Trump announced that Elon Musk together with business entrepreneur and early presidential candidate, Vivek Ramaswarmy, would jointly head up the newly created Department of Government Efficiency. While the name is entirely appropriate it was clearly a non-too-subtle nod to Elon’s favourite dog-themed crypto token. Crypto investors celebrated the news by ramping up the price of DOGE by over a third, meaning the token has tripled in value in the space of barely a month. Of course, in memecoin land, such moves are contagious and other dog-themed meme coins like Shiba Inu and Dogwifhat also rallied hard, moves captured via our Meme CTI.

A Cautionary Counterfactual

The crypto market’s initial reaction to pump DOGE on the creation of a Department of Government Efficiency is perfectly understandable; it is what meme coins are all about. However, while watching the price surge, a thought occurred to me about the longer-term impact from the creation of such a department.

For the avoidance of doubt, this is not a fully formed thought process, more a case of me thinking out loud (to the extent that such a thing is possible in print) but I thought it worth sharing because it is not on anyone else’s radar as far as I can tell. And, although it shouldn’t have any bearing on the near-term evolution of crypto prices, it is worth spending some time on because it runs contrary to the current market direction and my usual bullish take on the asset class.

Let me explain.

In their role Musk and Ramaswamy intend to “slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies”, very laudable goals and a distinct break from the current administration. Given what Musk achieved at Twitter (80% headcount reduction / same output – a process he clearly warned the company about given how he arrived at the head office on day 1 – see image) I think it is safe to assume that slashing unproductive public sector jobs will be a critical component of their efficiency drive.

Source: X

This is great for the bottom line and good at the macro level when said companies are relatively small (this process is the lifeblood of a capitalist system). But what about the macro impact when we are talking about a huge employer like the US government, which has over 23 million citizens on its payroll? If Musk and Ramaswamy are serious about improving government efficiency then millions of US jobs are at risk of being lost, potentially over a fairly short period of time.

At this scale the private sector cannot instantly mop up those fired public employees, especially if there is a widespread perception that those job hunting were fired for being unproductive. As a result, there would be a significant hit to aggregate household income and consumption and economic growth given household spending accounts for almost 70% of GDP in the US! Hence, the cyclical impact of this efficiency drive would be to greatly increase the risk of (probably guarantee) a US recession.

As I have outlined in previous commentary , because the asset class is too young there is a lack of precedent for such a macroeconomic out-turn, but economic logic strongly suggests a US recession would weigh significantly on the price of crypto assets. That said, rather than focus on the negative cyclical impact, I am more interested in the longer-term impact.

Assuming Musk and Ramaswamy are successful at cutting the fat out of the $6.5tr the US government spends every year doesn’t this imply that the US fiscal position should begin to show sustained improvement as laid off government employees eventually get absorbed into the private sector? I say eventually because being unable to put food on the table motivates even the laziest of people, plus with the passage of time the “unproductive” stigma probably decays. As a result, what was previously an input in the cost column of the government’s balance sheet shifts to the revenue column. There is even an added kicker in the form of lower debt servicing costs because the implied reduction in government bond issuance should, ceteris paribus⁴, exert downward pressure on yields.

And, to the extent that fiscal incontinence – both now, but especially in the future – is fueling inflation fears, and these fears are a key factor driving Bitcoin/crypto buying due to fiat hedge / digital gold motives, doesn’t that imply a Trump win will be eventually negative for Bitcoin and crypto?

I know this makes me sound crazy, dare I say heretical, in the current bull-run but if anyone has got any good counter arguments I would love to hear them. About the best counter argument I have come across so far was from Lynn Alden who tweeted the following:

Source: X

She has a point certainly. But, these Congress members are not going up against some run-of-the-mill bureaucrats, rather they are facing two very successive entrepreneurs who not only have a history of getting things done, but one of them has a very influential social media platform he can leverage to get his message across and who has dreams that make streamlining the government of even the world’s largest economy look like a walk in the park. (Hint: check out the t-shirt he wore on his last appearance on the Joe Rogan podcast.)

Source: X (via Joe Rogan podcast)

In that battle I know who my money is on, and it isn’t anyone who sits in the House of Representatives.

1 The last time the Republicans won the popular vote was two decades ago with Bush in 2004.

2 The sacking of Gary Gensler as chair of the SEC was strong competition for top spot, but last month he announced his intention to step-down on January 20 – the day of Trump’s inauguration – so as to avoid Trump firing him as he promised to do on Day 1 of his presidency.

3 Having worked for the largest sovereign wealth fund in the region I know they understand Bitcoin and are aware of its potential to serve as a fiat hedge because I pitched this idea to them over a decade ago.

4 Meaning all things being equal – apologies, once an economist, always an economist.