The Trump Administration's Stance on Cryptocurrency: Unprecedented Support and Inherent Risks

The Trump Administration's Stance on Cryptocurrency: Unprecedented Support and Inherent RisksSince the US election, Bitcoin's price has surged approximately 40%, and the total market capitalization of cryptocurrencies has breached $3.2 trillion

The Trump Administration's Stance on Cryptocurrency: Unprecedented Support and Inherent Risks

Since the US election, Bitcoin's price has surged approximately 40%, and the total market capitalization of cryptocurrencies has breached $3.2 trillion. This surge is strongly correlated with the unprecedented support expressed by the Trump administration towards cryptocurrencies. The rumored cryptocurrency holdings and positive attitudes of Trump and his cabinet members have ignited market speculation, with Bitcoin even being touted by some as a potential mainstream investment asset in the US. However, this optimism masks significant risks, and investors must carefully weigh the pros and cons before participating in the cryptocurrency investment boom.

The Trump Administration: A Strong Supporter of Cryptocurrency

Unlike previous administrations, which adopted a cautious or even negative stance towards cryptocurrencies, the Trump administration has shown unparalleled support for their development. This is not coincidental but stems from a confluence of factors:

• Trump's Shifting Stance: Initially skeptical, Trump reportedly altered his strategy during his campaign after receiving substantial financial support from digital asset companies. He publicly pledged to make the US the "crypto capital" and a "Bitcoin superpower." Publicly available information suggests Trump personally holds between $1 million and $5 million worth of Ethereum. Furthermore, the Trump family established a partnership with the cryptocurrency project WorldLibertyFinancial, acquiring 22.5% of its WLFI-USD cryptocurrency and 75% of future net revenue, demonstrating tangible action in cryptocurrency investment.

• Cabinet Members' Cryptocurrency Holdings and Positive Attitudes: Nominees for Trump's cabinet also displayed widespread acceptance of cryptocurrencies. The nomination of Elon Musk (referred to as the "Crypto Godfather") as head of a US government efficiency department was highly symbolic. Furthermore, several cabinet members, including Vice President-elect Vance, openly disclosed or discussed their holdings or exposure to cryptocurrencies like Bitcoin. This includes nominee Robert F. Kennedy Jr. for Secretary of Health and Human Services, nominee Howard Lutnick for Secretary of Commerce, nominee Pete Hegseth for Secretary of Defense, and nominee Tulsi Gabbard for Director of National Intelligence. Vance reportedly holds $250,000-$500,000 in Bitcoin; Kennedy Jr. $100,000-$250,000; Lutnick divested from Cantor Fitzgerald to comply with ethics rules; Hegseth publicly acknowledged Bitcoin ownership after Trump's victory; and Gabbard, a self-described cryptocurrency enthusiast, spoke at a Miami Bitcoin conference. CapitalAlphaPartners managing director Katz noted that many core members of this administration were interested in cryptocurrencies before joining the government, and they desire the flourishing of Bitcoin and similar assets.

• Potential Regulatory Reform: With SEC Chair Gensler's term ending January 20th of next year, the market anticipates Trump might appoint a pro-cryptocurrency financial professional, paving the way for more crypto ETF approvals and potentially relaxed regulations. Additionally, the Trump team is reportedly discussing the creation of a dedicated cryptocurrency policy position within the White House, a "crypto tsar" overseeing federal policies and industry regulation.

Market Reaction: Bitcoin Price Surge and ETF Investment Boom

The Trump administration's positive stance significantly boosted market confidence. Since the US election, Bitcoin's price has risen approximately 40%, and the cryptocurrency market's total value has increased by nearly a trillion dollars. Investors are betting on Bitcoin reaching $100,000 again and even believe cryptocurrencies could become a mainstream asset class in the US. Bitcoin futures prices briefly approached $97,550, with a total market cap hovering near $1.8 trillion.

Cryptocurrency exchange-traded funds (ETFs) have also seen massive investment. Twelve US Bitcoin ETFs, including those from BlackRock and Fidelity, recorded a record-high $6.2 billion in net inflows in November. The SEC approved nearly a dozen spot Bitcoin ETFs in January, allowing investors easier and safer access to Bitcoin. Furthermore, market rumors of Trump Media & Technology Group (DJT.US) negotiating to acquire the digital asset platform Bakkt and Nasdaq's planned listing of a $43 billion iShares Bitcoin Trust further fueled market optimism. Trump's promise of a strategic Bitcoin reserve remains uncertain in its timeline and feasibility.

Risks and Warnings: Speculative Nature, Volatility, and Increased Correlation

Despite market enthusiasm for the Trump administration's support and the future of cryptocurrencies, numerous analysts and academics warn investors to proceed with caution. They highlight several risks:

• High Speculative Nature: Cryptocurrencies, especially Bitcoin, are inherently speculative assets, their value driven by market sentiment and price volatility rather than tangible production or earnings. Unlike stocks, cryptocurrencies don't generate interest, dividends, or any other income; investors rely solely on price appreciation. Professor Fink, of the American College of Financial Services, notes that cryptocurrencies like Bitcoin lack the function of providing capital and generating profits for companies, with their valuation purely speculative. Hartford Funds research indicates that a significant part of long-term stock market returns comes from dividend reinvestment and compounding, a mechanism absent in cryptocurrencies.

• Extreme Volatility: Cryptocurrency prices are highly volatile, posing far greater risk than other asset classes. In 2022, global stock markets fell approximately 19%, while Bitcoin plummeted over 60%. This volatility exposes investors to substantial loss.

• Lack of Real-World Utility: Cryptocurrencies currently lack widespread practical applications. While used as a payment method to some extent, their usage remains limited. Their value isn't reflected in the production or provision of goods or services.

• Increased Correlation with Stock Markets: Research from the IMF and Georgetown University indicates a growing correlation between Bitcoin and stock prices, particularly during crises like the COVID-19 pandemic and the Russo-Ukrainian war, where Bitcoin failed to act as a hedge asset. This diminishes Bitcoin's ability to diversify and mitigate risk within an investment portfolio.

• Lack of Public Confidence: A Pew Research Center survey revealed that 75% of Americans who have heard of cryptocurrencies lack confidence in their security or reliability.

Conclusion: Cautious Optimism, Rational Investment

The Trump administration's unprecedented support for cryptocurrencies has undoubtedly injected significant energy into the market, driving Bitcoin's price surge and ETF investment boom. However, investors must remain clear-headed and acknowledge the high inherent risks. High speculation, extreme volatility, lack of real-world utility, and increased correlation with stock markets can lead to substantial investment losses. Thorough research and risk assessment are crucial before investing, aligning investment decisions with individual risk tolerance. Avoid blind following of trends to prevent irreversible losses. Cryptocurrency investment should be considered a high-risk, high-reward option, not a stable investment strategy. Only with a full understanding of these risks can informed investment decisions be made.