The New Yorker: Irrational Exuberance? How Long Will the "Trump Crypto Craze" Last

Source: John Cassidy X account

Author: John Cassidy

Compiled by: BitpushNews

"As governments that support cryptocurrencies prepare to take power + cryptocurrency investors cheer, there are some similarities to the internet bubble of the late 1990s."

Last week, after Donald Trump announced the nomination of cryptocurrency advocate Paul Atkins as the chairman of the U.S. Securities and Exchange Commission (SEC), the price of Bitcoin surged past $100,000, and cryptocurrency enthusiasts celebrated. The sentiment in the cryptocurrency market reminds me of the internet bubble and its inevitable collapse, which I documented in a book over twenty years ago.

At that time, some long-term market participants and observers, including myself, were equally excited, predicting that prices would rise even higher, while also feeling uneasy.

There is no doubt that cryptocurrency investors, cryptocurrency entrepreneurs, and donors supporting cryptocurrencies have ample reason to feel excited; they donated hundreds of millions of dollars to pro-cryptocurrency politicians ahead of the November elections. Investments betting on Trump's victory and the defeat of some prominent cryptocurrency skeptics (including Ohio Democratic Senator Sherrod Brown) have already paid off.

The SEC is the leading investor protection agency in the U.S., and under Gary Gensler's leadership, the agency has taken a tough stance against an industry that Gensler described as "rife 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 put on hold. Paul Atkins is a conservative lawyer who served as an SEC commissioner during the George W. Bush administration and currently co-chairs the cryptocurrency lobbying group Token Alliance.

Overall, the SEC seems poised to take a more favorable stance towards issuers of crypto assets such as currencies and tokens—this prospect worries critics of the cryptocurrency industry. Dennis Kelleher, president of the Washington financial reform organization Better Markets, told me, "The fundamental rules that have protected investors for decades will be significantly weakened for crypto assets, allowing the industry to expand with little regulation or accountability." "It will be like the 1920s—buyer beware."

Cryptocurrency executives hailed Atkins' selection as a milestone. Michael Novogratz, founder and CEO of cryptocurrency firm Galaxy Digital, told Reuters, "We are witnessing a paradigm shift," adding that "Bitcoin and the entire digital asset ecosystem are about to enter the financial mainstream."

In the late 1990s, the major paradigm shift that supported 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 formed World Liberty Financial of the Trump family, cannot be directly compared to the startups of the 1990s, which were expected to generate huge profits at some point, even though many of them ultimately went to zero. (Amazon's current market capitalization is about $2.4 trillion. The online grocery chain Webvan, which promised fast delivery, raised $375 million in its 1999 IPO and filed for bankruptcy in 2001.)

But regardless of the speculative objects, when I wrote about the internet stock bubble back then, I concluded that large-scale speculative events rely on the "four horsemen":

• New technologies that excite investors;
• Effective methods for them to communicate;
• Active participation from the financial industry;
• And a supportive policy environment.

For crypto assets, the invention of Bitcoin and blockchain (a secure and decentralized digital ledger) and the rise of social media meet the first two requirements, but Wall Street and policymakers remain skeptical of the industry, which is enough to make investments in cryptocurrencies a pursuit for a select few. During the 2022-23 crypto bubble burst, Bitcoin's price fell by more than 70%, and several large cryptocurrency companies, including Sam Bankman-Fried's FTX, collapsed, while the overall stock market and the U.S. economy remained unscathed.

With Trump's election, it seems that all four conditions are now in place, laying the groundwork for a broader bubble that attracts more participants. Blockchain technology is still being developed, and its proponents continue to claim it will soon disrupt the banking system, completely change international payment systems, or create other transformative impacts. On Musk's X, cryptocurrency enthusiasts have a massive social platform they can use to promote crypto assets and attack skeptics. But the key development is that policymakers and Wall Street are now also aligning with the crypto world.

Under Atkins' leadership, the SEC may change its stance on the core legal issue of whether crypto assets are securities like stocks and bonds, meaning they must fully comply with national 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 uniform items that are easier to identify and assess. (If you buy a gold bar, you know what you are buying.)

During Gensler's tenure, the SEC has viewed 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 claimed Ripple organized an unregistered securities offering when selling its XRP cryptocurrency. Both companies denied these allegations. 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 SEC "may propose tailored rules that take into account the differences between crypto assets and traditional securities," which is precisely what the crypto industry wants. Meanwhile, on Capitol Hill, Republicans could legislate to free many cryptocurrency 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 division. 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, claiming it would weaken protections for investors and allow cryptocurrency issuers to self-certify their products as digital commodities rather than securities. Given that Republicans have gained control of the Senate, similar legislation could be proposed there and sent to the president's desk.

The incoming crypto advocate has already pledged to make the U.S. "the crypto capital of the world." Crypto enthusiasts will expect Trump to fulfill 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," further energizing crypto enthusiasts.

In theory, the Federal Reserve could curb the prevalence of cryptocurrencies by restricting financial leverage, raising interest rates, or both. However, such measures are not welcomed when speculative activity surges and asset prices skyrocket.

In the late 1990s, then-Federal Reserve Chairman Alan Greenspan initially warned of "irrational exuberance" but then stood by as Nasdaq plummeted. (From January 1998 to March 2000, the tech stock index doubled.) Currently, the likelihood of the Fed intervening to suppress crypto assets seems low. The central bank is taking action to lower interest rates rather than raise them; last week, Fed Chair Jerome Powell compared Bitcoin to gold as an investment asset—an argument many crypto proponents 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) earlier this year, which track the value of the cryptocurrency and can be purchased by retail investors. Large financial firms such as BlackRock, Fidelity, and Franklin Templeton have already offered these products, while Charles Schwab has introduced 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%, which is sure to spur other financial firms to launch similar products.

Considering all these factors, it is not surprising that the value of crypto assets is rising or that some observers feel nervous. Eswar Prasad, an economist at Cornell University and author of "The Future of Money: How the Digital Revolution is Transforming Currencies and Finance," expressed concern that recent developments might 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 outcomes."

How bad? It may depend on the extent to which crypto assets are interconnected with other parts 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 went under, and the Nasdaq index fell by more than 70%; the economy entered a relatively mild recession that lasted less than a year. The bursting of the housing bubble in the late 2000s had more catastrophic effects, as it turned out that 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 worked to keep cryptocurrencies confined to their own world, encouraging banks to take a cautious approach when dealing with crypto business and preventing them from holding any crypto assets on their balance sheets. The Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency wrote in a joint statement last year, "It is important that the unmanageable or uncontrollable risks associated with the crypto asset space do not transfer to the banking system." Powell reiterated the Fed's goal last week, stating that no interaction between cryptocurrencies and banks should 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 rising interest rates, three banks connected to the cryptocurrency industry collapsed: Silvergate, Silicon Valley, and Signature. Kelleher predicts that Trump will appoint banking regulators in a more laissez-faire manner, adding, "You will see cryptocurrencies flooding into the cracks of the financial system like water… I think with the election of a second Trump administration, the bell for the next financial crisis has already begun to toll."

The worst-case scenario is a complete financial collapse, something I witnessed many times in the 1990s when people frantically speculated on certain things, often resulting in bubbles. Prasad believes that cryptocurrencies could experience a similar fate, and the government might even condone or support such speculation. When I asked the economist if he could think of a historical analogy, he pointed to the Chinese government once encouraging citizens to invest in real estate, which we all know did not turn out well.