US Elections, Trump, and Macro: Impact on Crypto

With the elections approaching in the US Markets see the potential victory of pro crypto candidate Donald Trump as a bullish scenario.

Trump victory is basically increases the odds of those tax cuts remaining in effect or becoming permanent, which can be stimulatory for parts of the market.

But elections in the US are just one variable and perhaps not even the most crucial. To uncover the key macro factors that will determine the price of crypto and other assets in the upcoming months, we sat down with macroeconomist Lyn Alden. Before we get started, please remember this video does not constitute financial advice and is for educational purposes only. I'm Giovanni. Let's get started. We saw attempted assassination of would be president Donald Trump and we saw that that had quite a significant impact on the markets. We saw that bitcoin registered a spike. Would you say that Trump can really be defined as the pro crypto candidate?

I think at least that's what's happening right now. In the past, his remarks were less favorable toward it. More recently he's become explicitly pro in favor of it. It's always possible things could change after election outcomes when you're no longer kind of in vote gathering mode. But I think at least directionally, he's clearly at the current time, the more bitcoin and crypto friendly candidate. And if we do try to make a connection to broader traditional markets, one thing we can keep an eye on is the fact that there are some tax cuts that were enacted under Trump's prior administration and some of them are set to expire. And so that'll basically they either would come back into effect, some of those tax cuts like they, they basically tax hikes, they'd go back to where they were before the cuts, or they could be extended or made permanent. And so the election outcome can affect that, which can affect say the size of the deficits, the tax burden, things like that, which, which can influence markets. So I guess all else being equal, the market might be saying that a Trump victory is basically increases the odds of those tax cuts remaining in effect or becoming permanent, which means all else being potentially larger deficits, which can be stimulatory for parts of the market.

Okay, so broadly speaking we can say that the more, the higher the chance of a Trump's victory in the months ahead, the more bullish sentiment around cryptocurrency we can expect. Do you think it's a correct thing to say?

I think as a variable, yeah. I wouldn't judge my view on price action from any one variable, but I do think that as a variable that's important. I think another one is just overall liquidity. That's one of the most important variables in this space, as well as just what broader markets are doing.

You define global liquidity as one of the most important factors impacting Bitcoin, if not the most important one. Throughout the whole 2023. Looking at the chart of M2, which is global liquidity, the chart remained pretty much flat. But now in 2024, there is a little bit of a curve pointing upward in this chart. Can we say that in terms of global liquidity, the situation is improving for risk on asset like Bitcoin?

I would say gradually, yeah. So if you back up a second, basically when you look at the historical correlation with liquidity and Bitcoin over, say, the last 10 years, so the first five years, there wasn't really much of a correlation because Bitcoin was too small and idiosyncratic. But in the last 10 years was big enough and liquid enough that it became somewhat of a macro asset. And in that time, it's had rather high correlation with measures of global liquidity. I would say it correlates with global liquidity more than any other asset that I found. And when I look at things that affect Bitcoin pricing, liquidity is either the top one or at least one of the top two or three things that seems to affect it. And so ever since central banks entered this tightening cycle that they've been in for a couple years now, where they're hiking interest rates, they're in many cases reducing their balance sheet or holding their balance sheet flat, depending on the central bank, and trying to slow down private sector credit creation, we've gone under this consolidated period of liquidity. And when you look at global liquidity, basically what we're looking in that context is global money supply, denominated dollars. And the reason dollar denomination is important is because so much global debt is denominated dollars. And so money supply in dollar terms relative to the debts are relevant and can affect liquidity conditions. So a strong or weak dollar relative to a basket of other currencies also affects effective measures of liquidity. And so we've been in this consolidation. You know, The S&P 500 has done probably a little better than I would expect in that liquidity environment. Bitcoin did about what we would expect in that liquidity environment being more correlated with it. I do think that we are probably breaking out now, and if not, then I would expect a breakout either later this year or. Or through 2025. Generally, there's only so long liquidity tends to stay flat. If we look at New York Fed projections around what they're going to do with their balance sheet, there's a good chance we'd see resumption in balance sheet growth or at least no longer shrinking of the balance sheet by 2025. And so I do think that overall there's probably more things going positive for liquidity than negative, which all of us being equal, should be good for Bitcoin.

Okay. And that kind of leads me to the next question, which is about your general outlook for crypto and bitcoin. So in your recent newsletter you said that you don't have a very strong view or prediction for the price of bitcoin in the upcoming months, but you have a bullish position on bitcoin for the next two years. Can you perhaps expand on that?

Yeah, basically when you go a little bit further out, you give yourself a little bit more Runway, because any quarter could be affected by a couple hot economic prints or things like that that could keep the Fed tight for another quarter, for example. So trying to predict any sort of three month outcome is tricky. But I, I do think there's a pretty high conviction view that by the end of 2025, we'd probably be a lot north here in terms of liquidity, which should be good for Bitcoin. Another key thing I look at for bitcoin is you can call them HODL waves, for example, which is when you look at how tightly held the coins are. So during bear markets, the fast money leaves, people sell their coins and those coins, you know, at lower prices rotate into stronger, longer term hands that don't really want to sell except for very large price increases. So when you do get the next bull market, as the price kind of approaches prior highs and then kind of goes over prior highs, you know, there are plenty of people that are, you know, they've been sitting on bitcoin for years. They might be up 5x or 10x, they might want to rebalance, they might want to consume. You know, for example, they might want to buy a house or start a family. And so you do generally see some selling pressure from those stronger hands into those bull markets. And that is one of the contributing factors for why the bull market eventually ends, basically that, that enough supply mobilizes to meet the incoming demand until that demand is saturated. And so in addition to correlating with liquidity, I also generally watch those HODL ways to see how tightly or loosely bitcoin is held. Overall, we did see some, you know, Kind of like selling pressure from those strong hands during the bullish action this year. But it's still fairly small relative to what you see in other bull markets, which, you know, among other factors leads me to believe that this bull market is, is not over, that we will likely see notably higher highs. And you know, I don't try to predict again on a quarter by quarter basis, but when I, when, when we look out, you know, over the next two plus years, I'd be very surprised not to see another kind of say bull run in liquidity. And I would expect to see probably Bitcoin do well in that environment Still.

In a recent interview you pointed out a risk which investors should take into account. And that is a scenario where with people moving more and more into Bitcoin in order to sort of escape fiat currency, governments could implement heavy taxes on crypto and Bitcoin. And in such a scenario, the asset Bitcoin as an asset could do very well, but investors may not doing as well because of this heavy taxation. So you are essentially saying that people should not account too much solely on Bitcoin as a hedge against the devaluation occurrence, but they should also look at other assets. Maybe. Can you expand on that and maybe pointing at the main assets that you are bullish on for the upcoming months?

Sure, Good question. I think basically with any asset, one, there's a risk of the asset itself and then there's the kind of the next risk of what could happen to the asset holders. So because Bitcoin is challenging from certain government perspective, you could have a case where Bitcoin does well, but Bitcoin is in a certain jurisdiction, get kind of isolated for, for problematic tax treatment, for example. Another example would be that if you hold energy stocks and there's a big energy shortage and bull market, you could have windfall taxes on energy companies so that you basically that your thesis played out as expected, but you still face some kind of idiosyncratic damage to your investment outlook. So depending on someone's jurisdiction, depending on someone's volatility tolerance, depending on someone's overall conviction of the asset, generally speaking, you know, diversification is one of the free lunches that you have. You can use it to reduce volatility or reduce tail risk, sleep better at night, that kind of thing. So I, you know, I've generally been using the three pillar portfolio concept, which is basically one pillar is just owning a bunch of profitable equities. Another pillar is owning some cash equivalents, short term bonds, basically assets that kind of meet whatever Your liabilities are lower volatility. They benefit from periods of, say, liquidity, crisis or recession. And then the third pillar would be hard assets and hard money. So things like energy producers, gold, Bitcoin. And of course, you know, if someone's particularly high conviction on, on say Bitcoin, they can dial that up. Whereas there are other people that, that don't have any conviction on Bitcoin. So they either leave it as a small amount or they might just exclude it entirely in favor of gold, which I wouldn't particularly advise. And, and so that's kind of the framework that I'm mainly approaching investing from. And for me, bitcoin fits into that third pillar as a kind of an individual investor. I prefer to be pretty overweight Bitcoin. But obviously someone has to take into account their own volatility tolerance and how much they research the asset.

That was an interesting take because people tend to think about the asset in a sort of vacuum and that they don't think about all the jurisdiction related risk that a certain asset can present. Lyn, maybe you have any final thoughts for our viewers on investors that are looking at us right now how they should better navigate the macroeconomic environment in the next few months and years?

Yes, I would say the background, it's kind of like making sure your timeframes are known. So for example, I think the longer term outlook is ongoing fiscal dominance debate. That's kind of the structural backdrop we find ourselves in. And that can be a dangerous environment because if you do get kind of currency debasement, that's, we tend to get capital controls and things like that, which increases the odds of some of those risks. We talked about things like, you know, in certain jurisdictions, preventing people from buying, you know, Bitcoin or trying to kind of tax it back out of them, things like that. And then the shorter term outlook is kind of monitoring some of the economic softness we've been seeing a little bit, so rising unemployment rate, you know, kind of soft economic data. So I, I, you know, I do think that we're kind of entering maybe a soft patch within the broader trend of just overall fiscal dominance and debasement.

Cool. All right, thanks a lot, Lyn. It was a pleasure to have you on our show.

Thank you. Happy to be. Shift.