The New Yorker: Irrational exuberance? How long will the Trump crypto boom last?

Original author: John Cassidy

Original translation: BitpushNews

“With pro-kripto governments preparing to take power + crypto investors cheering, there are some similarities to the dot-com bubble of the late 1990s.”

Last week, cryptocurrency enthusiasts cheered as the price of Bitcoin surpassed $100,000 after Donald Trump announced his nomination of cryptocurrency advocate Paul Atkins as chairman of the U.S. Securities and Menukarkan Commission (SEC). The sentiment in the cryptocurrency market reminded me of the dot-com bubble and its inevitable collapse, which I documented in a book more than two decades ago.

At the time, some long-time market participants and observers, myself included, were equally excited, equally predicting that prices would go higher, even much higher, and equally uneasy.

To be sure, cryptocurrency investors, crypto entrepreneurs and pro-crypto donors have good reason to be excited, having donated hundreds of millions of dollars to pro-crypto politicians ahead of the November election. Investing in Trump’s victory and the defeat of some prominent crypto skeptics, including Sen. Sherrod Brown, D-Ohio, has paid off.

The SEC, the leading U.S. investor protection agency, under the leadership of Gary Gensler, has cracked down on an industry that Gensler described as “rife with fraud and scams,” filing lawsuits against a number of cryptocurrency companies, including cryptocurrency exchange Coinbase and digital payments network Ripple.

But ongoing litigation and other cases at the agency may be put on hold under the leadership of Paul Atkins, a conservative lawyer who served as an SEC commissioner during the George W. Bush administration and currently serves as co-chairman of the cryptocurrency lobbying group Token Alliance.

Overall, it seems likely that the SEC will take a friendlier stance toward issuers of crypto assets such as coins and tokens—a prospect that worries critics of the crypto industry. “For crypto assets, the basic rules that have protected investors for decades will be significantly weakened, and the industry will be allowed to expand with very little regulation or accountability,” Dennis Kelleher, president of Better Pasars, a financial reform group in Washington, told me. “It will be like the 1920s—caveat emptor.”

Crypto industry executives praised Atkins selection as a milestone. Michael Novogratz, founder and CEO of crypto agency Galaxy Digital, told Reuters: We are witnessing a paradigm shift, Bitcoin and the entire digital asset ecosystem are about to enter the financial mainstream.

The major paradigm shift underpinning the dot-com bubble in the late 1990s was the rise of online commerce, which gave rise to startups that listed on NASDAQ, such as Amazon, eBay, Pets.com, and Webvan.

Speculative digital assets, including Bitcoin, Dogecoin (a cryptocurrency promoted by Elon Musk) and crypto tokens issued by the Trump family’s newly formed World Liberty Financial, cannot be directly compared to the startups of the ’90s, which were expected to generate huge profits at some point, even if many of them eventually went to zero. (Amazon is now worth about $2.4 trillion. Webvan, an online grocery chain that promised fast home delivery, raised $375 million in its 1999 IPO and filed for bankruptcy in 2001.)

Regardless of the object of speculation, when I wrote about the Internet stock bubble, I came to the conclusion that large-scale speculative events rely on four horses:

• new technologies that excite investors;

• effective methods they can use to communicate;

• Active participation of the financial sector;

• and a supportive policy environment.

In the case of crypto assets, the invention of Bitcoin and blockchain (a secure and decentralized digital ledger) and the rise of social media met the first two requirements, but Wall Street and policymakers remain skeptical of the industry, two factors that are enough to make investing in cryptocurrencies a minority pursuit. In the 2022-23 crypto bubble burst, the price of Bitcoin fell by more than 70%, some large cryptocurrency companies including Sam Bankman-Frieds FTX collapsed, and the overall stock market and the US economy remained unscathed.

With Trump’s election, it seems that all four conditions have been met, setting the stage for a broader bubble that has attracted more people. Blockchain technology is still under development, and its promoters are still claiming that it is about to upend the banking system, or revolutionize the international payment system, or have other transformative effects. In Musk’s X, crypto enthusiasts have a huge social platform that they can use to tout crypto assets and bash skeptics. But the key development is that policy and Wall Street are now aligned with the crypto world, too.

Under Atkins, the SEC could change its stance on the core legal question of whether crypto assets are securities like stocks and bonds, meaning they are fully subject to state securities laws, or whether they are more like physical commodities like gold and silver, which are less regulated in part because they are viewed as uniform items that are easier to identify and value. (If you buy a gold bar, you know what you’re buying.)

During Genslers tenure, the SEC has deemed many crypto assets to be securities, with their issuers facing extensive registration and disclosure requirements. The agency accused Coinbase of operating an unregistered securities exchange and accused Ripple of organizing an unregistered securities offering when it sold its XRP cryptocurrency. Both companies have denied the allegations. Earlier this year, a federal judge ruled that most of the case against Coinbase could proceed, which was widely interpreted as a victory for the SEC. But Ripples lawsuit ultimately ended with a ruling that the company did not violate securities laws by selling XRP to retail investors on an electronic exchange, which Ripple called an important victory.

Looking ahead, international law firm WilmerHale said in a recent client alert that under a second Trump administration, the SEC will likely propose tailored rules that take into account the differences between crypto assets and traditional securities, which is exactly what the crypto industry wants.Meanwhile, on Capitol Hill, Republicans could pass legislation that would at least partially shield many cryptocurrency issuers from the SECs attention by expanding the jurisdiction of the Commodity Futures Trading Commission (CFTC), which has a much smaller budget and enforcement arm.Earlier this year, the House of Representatives 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, saying it would weaken investor protections and allow cryptocurrency issuers to self-certify that their products are digital commodities rather than securities.Now that Republicans have won control of the Senate, similar legislation could be introduced there and make its way to the presidents desk.

The incoming crypto advocate has pledged to turn the United States into the crypto capital of the planet. Crypto enthusiasts will be looking forward to Trump making good on his campaign promise to establish a national strategic mata uang kripto reserve. Crypto enthusiasts were further encouraged last week when Trump named Musks partner, venture capitalist David Sacks, as his White House AI and crypto czar.

In theory, the Fed could curb the popularity of cryptocurrencies by limiting financial leverage, raising interest rates, or both. But such measures are unpopular when speculation is surging and asset prices are soaring.

In the late 1990s, then-Fed Chairman Alan Greenspan stood by and let the Nasdaq plummet after initially warning of “irrational exuberance.” (The tech index tripled between January 1998 and March 2000.) At this point, the likelihood of the Fed intervening to drive crypto assets down seems remote. The central bank is acting to lower interest rates, not raise them, and last week, central bank Chairman Jerome Powell compared Bitcoin to gold as an investment asset — an argument many crypto types have made.

Finally, Wall Street is embracing cryptocurrencies. After losing a key lawsuit in 2023, the SEC approved the launch of a Bitcoin exchange-traded fund (ETF) earlier this year that tracks the value of the cryptocurrency and can be purchased by retail investors. Large financial firms such as BlackRock, Fidelity and Franklin Templeton already offer these products, while Charles Schwab offers a crypto-themed ETF, an index fund designed to track the prices of multiple crypto assets and companies. The value of the Bitcoin ETF has risen by about 45% since the election, which will surely spur other financial firms to launch similar products.

Taking all of these factors into account, it’s no surprise that crypto assets are rising in value or that some observers are nervous. Eswar Prasad, an economist at Cornell University and author of “The Future of Money: How the Digital Revolution Is Transforming Money and Finance,” said he worries that recent developments may have led many ordinary Americans to feel that crypto assets are a safe investment, rather than an extremely volatile and speculative one.

“It looks like the U.S. government is going to approve a bunch of crypto products and will implicitly endorse crypto as an asset class,” Eswar Prasad told me. “That could really exacerbate the crypto bubble. And if something happens to prick the bubble, we could end up with a very bad outcome.”

How bad? That may depend on how interconnected crypto assets are with the rest of the financial system. The dot-com bubble swept up hundreds of startups and stocks of many large companies. After the bubble burst in 2000, many startups went out of business and the Nasdaq fell 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 a more disastrous effect because it turned out that the banking system was heavily dependent on subprime mortgage assets. When the value of these assets evaporated, it nearly destroyed the entire financial system and the economy fell into one of the worst recessions since the 1930s.

Federal bank regulators have so far sought to keep cryptocurrencies within their own universe, encouraging banks to be cautious when dealing with them and discouraging them from holding any crypto assets on their balance sheets. “It is important that unmitigated or uncontrolled risks associated with the crypto-asset space do not transfer to the banking system,” the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency wrote in a joint statement last year. In comments last week, Powell reiterated the Fed’s goal of not letting any interaction between cryptocurrencies and banks threaten the banking system.

But recent history, Dennis Kelleher reminds me, isn’t entirely reassuring. During the 2022-23 crypto bubble burst, coinciding with a spike in interest rates, three banks with ties to the crypto industry collapsed: Silvergate, Silicon Valley, and Signature. Kelleher predicts that Trump will appoint bank regulators with a more laissez-faire approach, adding: “You’re going to see crypto pouring into the cracks of the financial system like water… I think the bells have already begun for the next financial crisis with the election of a second Trump administration.”

The worst-case scenario is a total financial collapse, which I saw many times in the 90s, when people hype something up and it often results in a bubble. Prasad believes that a similar situation could happen with cryptocurrencies, and that the government could be acquiescent or even supportive of the hype. When I asked the economist if he could think of a historical analogy, he pointed out that the Chinese government once encouraged citizens to invest in real estate, which, as we all know, did not seem to have good results.

This article is sourced from the internet: The New Yorker: Irrational exuberance? How long will the Trump crypto boom last?

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