Hiltzik: Despite Trump, it’s been a bad year for crypto

With the election of Donald Trump as president, the cryptocurrency community saw blue skies ahead.

The election sent the price of Bitcoin to a record high, over $75,000. However, during the campaign Trump promised to make the United States the “crypto capital” of the planet and a “strategic reserve” of Bitcoin. He and his family members founded the global crypto trading company Liberty Financial.

Within three days of his inauguration, Trump issued an executive order promoting crypto development in the U.S. He strongly rejected efforts to implement it by the Biden administration as reflecting a “cryptocurrency war.”

On the second day of his presidency, he pardoned Ross Ulbricht, the head of a notorious online black market in which transactions were conducted in crypto. Ulbricht, who became a champion for crypto promoters, was serving two life sentences at the time. In July, Trump signed the GENIUS Act, which reduces consumer banking protections involving stablecoins, a cryptocurrency.

Last year, the FBI labeled crypto a “vast” crime syndicate. Under Trump, things are likely to get worse. Since Trump took office, the Securities and Exchange Commission has closed or suspended 18 cases or investigations related to cryptocurrency companies.

Yet despite all these hopes from the White House, federal agencies and a compliant Congress, cryptocurrencies are having a rough year. Bitcoin price closed at a record high of $124,752 on October 10 but has since fallen to around $87,845. That’s almost a 30% stomach wash loss in just six weeks.

Since Trump’s inauguration on January 20, Bitcoin has lost more than 11% of its value. Over the same period, the stock market, as measured by the S&P 500 index, has grown nearly 12%. To the question of who is getting rich in crypto in the Trump era, the answer so far is: Trump, his family and their friends. All others have been taken to the woodshed.

Why did this happen?

To some extent, it is a combination of factors, not all of which can be blamed on Trump. But his economic policies, including his on-again, off-again tariff announcements, have actually accounted for some of the most significant crypto declines of the past 11 months. Other geopolitical developments are not friendly to crypto.

Another important factor is the growth of leverage in crypto accounts – users borrow against their crypto holdings like stock investors buy on margin, a practice that can increase gains on rising assets – but also magnify losses.

Let’s take a closer look at the horrible, horrible, no good, very bad year of crypto.

The first slap in the face for crypto exchanges on February 21st came for crypto with a wet fish. That’s when crypto exchange Bybit, sometimes ranked as the world’s second largest crypto exchange, lost $1.5 billion in crypto tokens to hackers — the “biggest cryptocurrency heist in history” by the International Center for St. Washington think tank. The FBI immediately went into North Korea looking for an exploit.

Trump can’t be blamed for the Bybit hack, but Trump’s weakening of America’s cyber defenses doesn’t bode well for the future.

According to the Cyberspace Solarium Commission, a congressionally-created agency tasked with overseeing cyber defense, Trump’s “reductions in cyber diplomacy and science programs and the lack of stable leadership in key agencies such as the Cyber ​​Security and Infrastructure Administration (CISA), the State Department and the Department of Commerce” have led to the nation’s ability to protect and cyberspace against threats. Several areas have collapsed.”

This is especially important when North Korea is involved. According to many experts, the rogue state has prepared to isolate itself from the global economy by developing a dangerously effective cyber-hacking program.

Since 2017, North Korean hackers have stolen more than $5 billion worth of cryptocurrency, as calculated by cybersecurity firm TRM Labs. North Korea has not only made its theft more efficient, but has also improved its money laundering techniques so that stolen goods can disappear into the darkness of cyberspace within days.

This has undermined the crypto camp’s claim to offer users secure access to their funds. Crypto’s reaction to Trump’s economic policies has undermined promoters’ claims that their asset class is a panacea for economic turmoil in the outside world.

“Bitcoin and other cryptoassets are once again showing that they are among the first assets to decline amid broader economic uncertainty,” wrote Crypto Essentials observer Molly White in March, after Trump’s tariff threats and fears of high inflation fueled a three-day slide in bitcoin — 1 to 6%. FTX bankruptcy in 2022. Bitcoin fell nearly 10% in the four days after Trump announced his “reciprocal tariffs” on April 2.

Another sell-off began on October 10, the day Trump unexpectedly announced new tariffs on China. The day was marked “Crypto Black Friday,” as crypto exchanges forced liquidation of $19 billion in leveraged assets in 24 hours. Bitcoin lost $10,000 in value within minutes.

As White observed, the downward draft was crazy in part because the crypto market lacks the circuit breakers installed in the stock and bond markets, which automatically stop trading before the sell-off can gain steam, allowing traders and market makers to take a breather. Nothing like this gets in the way of a tsunami of account liquidity from low-regulated crypto brokers.

Since then, sales have continued almost unabated. By Wednesday afternoon, bitcoin had recovered about 2.8%, but it was still significantly lower than its price on January 1, or the opening day.

Market watchers say institutional investors and small retail investors are all bailing on crypto. In the past year, banks and other financial services companies have made it easier for small investors to buy crypto — exchange-traded funds and companies that have set themselves up as crypto treasuries have proliferated.

But these tools also make selling easier. Investors have pulled about $3.5 billion out of crypto ETFs so far this month. The publicly traded company’s strategy, the business model of which is to collect bitcoins, has lost about 60% of its value since mid-July.

Historical patterns suggest that the biggest victims of crypto selling are small investors. They tend to buy stocks or other assets when they go up, and sell them in the market (as opposed to the buy-low, sell-high principle favored by experts). To the extent that they have been exposed to the fall in crypto prices, they might as well grab the bag now.

This points us to the potential winners in the current crypto era: Trump and his circle. Trump called bitcoin a “scam” in 2021, and posted in 2019 that the cryptocurrency’s valuations were “based on thin air,” but he “now warmly embraces its supposed virtues,” as federal judge Jed S. Rickoff, who has recently presided over cases involving crypto claims, wrote.

Consider Global Freedom Finance, which was co-founded by Trump and his sons Eric, Barron and Don Jr. (Trump himself is listed by the company as a “co-founder emeritus,” a position he assumed after taking office as president.)

The fate of world freedom has benefited from the actions reported by Binance, the largest crypto exchange in the world. Earlier this year, Binance accepted a $2 billion investment from an Abu Dhabi-based investment firm to be paid in USD1, a dollar-pegged “stablecoin” marketed by Global Liberty. The adoption of USD1 as a crypto token boosted its value, and therefore the financial benefits received by the Trump family.

On October 23, Trump pardoned Binance founder Chengpeng Zhao, who served four months in a US prison and was fined $50 million after pleading guilty to violating US anti-money laundering regulations. Binance also pleaded guilty and paid more than $4.3 billion in a criminal settlement.

Asked in a Nov. 2 interview on “60 Minutes” why he pardoned Zhao, Trump replied: “I don’t know anything about that guy, other than I heard he was a victim of a gun by the government. When you say government, you’re talking about the Biden government.”

I asked the White House if Trump’s involvement in crypto while he had authority over crypto regulation was a conflict of interest.

I received an email response from Carolyn Leavitt, Trump’s spokeswoman, who wrote, “The media’s continued efforts to create conflicts of interest are irresponsible and reinforce the distrust of the public who read them. Neither the president nor his family have ever been, or will be, involved in a conflict of interest.”

The reality is that bitcoin investors may be less afraid of Trump’s plunge into crypto than the downsides of crypto as an asset class itself. As I previously reported, unlike almost any other asset, crypto tokens are devoid of any concrete value. This doesn’t mean that crypto will go higher from time to time, just that when the keepers are running for the exits, there may not be a discernible floor to how low it will go.

Crypto tokens do not yield interest or dividends. Their prices are not even based on the theoretical value of the issuance of enterprises such as corporations, municipalities or federal agencies. As commodities, they are similar to collectibles like Beanie Babies, with values ​​derived from the “big fool” theory – that someone is willing to pay more than your acquisition cost to get your hands on one. This is the path painted red.