The inherent contradiction of Bitcoin is that, in a way, it is insurance against financial crisis, but its success is due to financial booms.
The same contradiction applies to Trump’s influence.
Inflation and the Federal Reserve
Trump's policies will lead to inflation.
I think the two most important changes he will make are not trade tariffs, but rather devaluing the dollar and exerting political control over the Federal Reserve.
He can’t abolish the Fed’s formal independence, but he can insist on being consulted.
We live in an era of fiscal dominance, where the freedom of action of central banks is restricted by their governments.
Even the most independent-minded Federal Reserve chairman cannot successfully stand up to Trump.
In any case, Jerome Powell's term as chairman will end in 2026. If elected, Trump will be able to appoint his successor.
It will be more difficult for the Federal Reserve to achieve its inflation target than many people imagine.
Trump’s protectionism, continued geopolitical divisions and aging populations in the West will continue to create inflationary pressures.
Higher tariffs would push up prices and reduce trade (other countries would retaliate), thereby affecting global productivity growth.
A different world
It would be complacent to think that a second Trump term would be a repeat of Trump’s first, both in terms of what he would do and the impact on the economy.
There was no global inflation shock during his first term.
We live in different economic environments.
If you unleashed Trumponomics in the world today, I expect the result would be an inflationary boom-bust cycle, with possible massive financial instability.
In such an environment, there is a high probability that the dollar price of Bitcoin will plummet as it did in 2021.
So far, Bitcoin is not a good tool to hedge against inflation.
I’m not saying this will always be the case, but at this point I don’t see any reason why the price of Bitcoin would respond differently to dollar inflation than it did in 2021.
The risk of financial crisis is greater than anything else.
But this observation alone cannot answer the question.
In the long run, Trump may end up being a boon to the cryptocurrency industry precisely because of his economic policies.
The rational fear of fiat currency devaluation constitutes a legitimate reason to view Bitcoin as a systemic hedge.
I personally like to think of Bitcoin as an option, an asset that gives me the right to trade if our dollar-based financial system has problems. It's hard to put a value on this option.
It is like a binary option, whose value is either close to the value of the underlying asset (i.e. the total amount of world currency) or close to zero.
Therefore, the value of this option should correspond to the perception of systemic risk.
I think the likelihood of a deep crisis in our fiat currency system is very high - but I can't predict the timing.
Trump’s policies increase this risk, which in this sense is good for Bitcoin.
If people start to worry about the future of the dollar itself, a combination of soft regulation and a devaluing dollar could push the price of Bitcoin to levels we have seen so far.
Inconsistent assessments
My seemingly inconsistent assessment of Trump's impact on Bitcoin is simply a mirror image of the fundamental contradiction between Bitcoin as a plain-vanilla risk asset and Bitcoin as insurance or an option.
Now, I think the former view prevails. During the 2021-2023 inflation period, investors believe that the rise in inflation is temporary.
This remains the consensus.
Investors are also not concerned about the impact of economic sanctions on the dollar as a global currency, nor are they concerned about the impact of the Group of Seven's recent agreement on raids on Russian assets for financing the war in Ukraine.
If this perception changes, the fundamental dynamics of the market will change.
If Bitcoin is seen as a relatively safe store of value by the time the next inflation cycle comes around, there is no reason to expect investors to react to rising inflation in the same way they did in 2021.
We’re not there yet. But we will.
Bitcoin as a hedging tool?
We will likely see one or more repetitions of the 2021-23 cycle before investors consider Bitcoin as a hedge. Even if Trump makes great progress in devaluing the dollar, it won’t change the world immediately.
There is no other currency that can replace the US dollar as the global currency now.
Bitcoin cannot replace the multiple roles of the US dollar and the Federal Reserve in the global financial system.
Some form of global financial architecture must be established, whether in the form of cryptocurrency or otherwise.
For now, the risk of a financial crisis outweighs everything. If the current asset price bubble bursts, I highly doubt Bitcoin can maintain anything close to its current valuation.
Many investors will have to withdraw from multiple risky assets to meet margin calls.
My basic view is that Trump will push us further toward a financial crisis, which is very bad for Bitcoin in the short term, but could be very good for the cryptocurrency industry in the long run.
