Bitcoin Rally Cools as Trump Trades Present Hurdles for Crypto
In recent weeks, Bitcoin’s rally, which has largely been seen as a key indicator of growing investor interest in digital assets, has slowed down. The primary reason for this shift can be traced back to rising bond yields and a stronger US dollar, trends that have been partially attributed to former President Donald Trump’s increasing influence on market sentiment. These developments have created hurdles for the crypto sector, despite the optimism surrounding Trump’s pro-crypto stance during his ongoing political campaign.
Bitcoin's classification as a so-called “Trump trade” has come under scrutiny. With Trump leading prediction markets over Vice President Kamala Harris, speculation has increased regarding potential policy changes, should he return to the White House. Investors are increasingly pulling back on expectations of looser monetary policy, as Trump’s likely agenda is pro-growth, which could further boost an already strong US economy. However, this shift is affecting the broader market, including cryptocurrencies like Bitcoin.
Tony Sycamore, a market analyst at IG Australia Pty, notes, “Absolutely, yes, the selloff in stocks, higher US dollar, and higher yields all equal a tightening in financial conditions. Not good for crypto at the pointy end of the spectrum.” This is a concerning trend for digital asset investors, as tightening conditions tend to affect risk assets more severely, including Bitcoin, which has seen its first weekly loss in three weeks.
Tightening Financial Conditions
The recent moves in global financial markets are largely the result of expectations that Trump, if victorious, will implement policies that drive economic growth. The likelihood of a Trump presidency is leading investors to reconsider their positions, especially in risk assets like Bitcoin. As the US dollar strengthens and bond yields rise, market conditions tighten, creating a less favorable environment for speculative investments like cryptocurrencies.
Bitcoin, which had been riding high for much of 2024, has cooled significantly. As of Thursday morning in London, the cryptocurrency was trading at $67,127, paring its weekly decline to roughly 2%. This decline comes after the digital asset reached a record high of $73,798 in March, buoyed by demand for US spot-Bitcoin exchange-traded funds.
However, the outlook for Bitcoin remains uncertain. Trump’s pro-crypto rhetoric has energized parts of the market, as he promises to make the US the “crypto capital of the planet.” In contrast, his opponent, Kamala Harris, has advocated for a more measured approach, emphasizing the need for a regulatory framework that would provide clarity and consumer protection in the digital asset space.
According to Bloomberg News/Morning Consult polls, the two candidates are in a statistical tie among likely voters in seven swing states. This suggests that the upcoming presidential election could hinge on a few critical battlegrounds, with the final result having significant implications for financial markets, particularly in the cryptocurrency space.
Trump’s Pro-Crypto Stance vs. Market Reality
While Trump’s embrace of the digital asset industry has been a boost for crypto sentiment, the market’s reaction to tightening financial conditions shows that the broader economic environment may present more formidable challenges. Financial conditions were already relatively loose prior to the recent selloff, but the speed with which they are tightening is creating a headwind for risk assets like Bitcoin.
Caroline Mauron, co-founder of Orbit Markets, explains, “If Trump emerges victorious, that may lead to higher yields and ultimately a negative impact for risk assets.” However, she adds that the expected “regulatory softening” under a Trump administration could still be a net positive for the crypto industry, as it would likely usher in a more favorable regulatory environment for digital assets.
The recent cooling of Bitcoin’s rally may also reflect broader concerns about the sustainability of the digital asset’s rapid growth. With Bitcoin rising more than 60% this year, some analysts have expressed caution about the potential for a correction, especially in the face of shifting financial conditions.
Trump’s pro-growth policies could lead to higher interest rates and a stronger dollar, which would further tighten financial conditions. This would make it more difficult for speculative assets, including Bitcoin, to sustain their upward momentum. The cryptocurrency market, which thrives on liquidity and risk appetite, may find itself under increasing pressure as the broader economic outlook becomes less favorable.
Yet, the crypto industry remains optimistic about the potential for regulatory changes under a Trump administration. As the former president promises to make the US a hub for digital assets, there is hope that a lighter regulatory touch could lead to increased innovation and investment in the sector. Trump’s rhetoric has already helped to boost market sentiment, but whether this will translate into sustained gains for Bitcoin remains to be seen.
While Trump's policies may bolster the broader US economy, the potential negative effects on financial conditions could dampen investor enthusiasm for riskier assets like cryptocurrencies. The interplay between Trump’s political future, economic policy, and the fate of Bitcoin will be closely watched as the 2024 election approaches. For now, Bitcoin’s rally has cooled, and investors are bracing for what could be a period of increased volatility and uncertainty in the months ahead.
