Editor's Note: The price of Bitcoin has hit a new high, supported by the inflow of ETF funds, the cyclical upward trend, and a moderate correction. The short gamma positions in the options market may exacerbate volatility, but the current volatility is limited, and the market is not overheated. Changes in the global M2 money supply may also affect Bitcoin, especially in the context of enhanced hedging properties. If the Trump administration takes office, regulatory relaxation will drive traditional financial institutions to increase their investment, accelerating the maturation of crypto assets, and Bitcoin may break new highs within the next 12-18 months.
The following is the original content (edited for easier reading):
The digital asset industry is on the verge of a golden age. The cryptocurrency industry in the United States may be ushered in a renewed regulatory model, with an increasing number of key supporters in both houses of Congress and the White House.
The industry has demonstrated its political power, issuing a strong warning to hostile forces, which will have far-reaching implications for the entire political realm. The strong headwinds that have hindered the industry's development over the past four years have gradually weakened, and legal costs have also decreased accordingly. Now the crypto industry is running against the wind in the world's largest capital market.
About Tuesday Night
President-elect Donald Trump made history - becoming the second president to win the presidency non-consecutively, with Grover Cleveland being the only previous president to accomplish this feat, winning a second term in 1892 after defeating Benjamin Harrison. At that time, the anti-tariff, gold standard Democrat regained power; today, the pro-tariff, pro-Bitcoin Republican has won a second non-consecutive term in 2024, history often remarkably similar.
Trump's victory is also historically significant in the modern era, with his electoral votes increasing to over 310, up from 306 in 2016. Trump also became the first Republican to win the popular vote since 2004, when George W. Bush was re-elected.
Not only did he reclaim the "blue wall" states of Pennsylvania, Michigan, and Wisconsin, but he may also win Nevada, which Hillary Clinton won in 2016. In Florida, Trump's vote share was 13%, largely due to demographic changes in the state over the past few election cycles.
The heatmap below, produced by Bloomberg, shows the 95%+ voting results for each county and compares the changes in support for the two party presidential candidates between 2020 and 2024, with the red areas showing a significant increase.
The Senate has shifted to Republican control, with the GOP expected to hold 54 seats. The results in the House may take longer to be finalized, but the Republicans have a slight edge and are likely to maintain control of the House.
Some other key points about the election:
· Cryptocurrency has demonstrated its political influence: In addition to actively pushing President-elect Trump to support the crypto agenda, the industry has also gained widespread support in the House and Senate. The most notable victory came from Bernie Moreno (Republican) in Ohio, who defeated the incumbent Senate Banking Committee Chairman Sherrod Brown (Democrat). The Crypto Political Action Committee invested tens of millions of dollars in defeating Brown, sending a strong signal to the political establishment that opposing cryptocurrency is a politically failed position.
· Trump enters his second presidential term: In a president's second term, they often tackle more complex and challenging issues, striving to create their own political legacy. Trump's margin of victory was also larger than in 2016, and he has the support of perhaps the most diverse Republican voter coalition in decades. This increases the likelihood of him pushing for major reforms, potentially including significant modernization of the financial system.
Trump's team is highly supportive of the digital asset industry: Trump's core team is strongly supportive of digital assets, with many members already publicly stating that they own Bitcoin. Vice President-elect J.D. Vance has disclosed that he holds Bitcoin, Vivek Ramaswamy openly supported the industry during the campaign, and RFK Jr. has been a long-term supporter of Bitcoin, providing well-considered support for at least two years. Transition team co-chair Howard Lortnick stated that he and other senior executives at Cantor Fitzgerald have significant Bitcoin holdings (and Cantor Bank provides banking services for Tether), and Trump himself has issued NFTs and launched his own decentralized finance protocol, World Liberty Financial. The team's, family's, and donors' support for cryptocurrencies increases the likelihood of Trump fulfilling his campaign promises to the industry.
Expected Policies in Washington
Let's look at the potential developments in crypto policy:
Banking Regulators: Trump will immediately appoint new acting Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) acting chairs. These agencies have regulatory authority over banks and insured deposit institutions, and within days, the banking regulators may issue guidance explicitly prohibiting discriminatory targeting of specific industries (i.e., "Bottleneck 2.0"), and they can rescind existing adverse interpretive guidance or letters, such as the joint letter dated January 3, 2023.
Within weeks or months, the OCC may issue guidance allowing banks to custody digital assets, use, operate, and interact with public blockchains and stablecoins. (Recall that former acting Comptroller of the Currency Brian Brooks issued similar interpretive letters in 2020.)
Market Regulators: Trump will elevate one of the current Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) commissioners to serve as acting chair. While Trump has promised to "fire Gary Gensler," most constitutional scholars believe the president cannot remove an independently confirmed agency commissioner.
However, the president can immediately designate an existing commissioner as the acting chair. After such personnel changes, some crypto enforcement actions may be paused, some litigation suspended or withdrawn, and certain projects may receive no-action letters, allowing the industry and regulators to discuss reasonable paths forward.
Comprehensive rulemaking will take longer, but the crypto industry can expect to quickly receive exemptive relief, primarily by loosening the SEC's definitions of "security" and "exchange." The CFTC's approach will be similar, but without clear market structure legislation delineating jurisdiction between the SEC and CFTC, the two market regulators' chairs will need to closely coordinate to develop progressive policies.
Congressional Legislation: The largest crypto policy agenda in Congress includes market structure (clarifying the regulatory status and oversight of digital assets) and stablecoins (legalizing and licensing stablecoin issuance). In May, the "Financial Innovation Act of 2021" passed the House with bipartisan majorities and will serve as the foundation for future market structure legislation. Currently, Democrats and Republicans have relatively minor disagreements on stablecoin legislation, with the main disputes being:
1. Whether only national banks can issue, or if states also have a pathway.
2. Which agency or agencies will be responsible for regulating and overseeing the issuers.
Notably, if the Republicans control the House, these bills are unlikely to advance quickly in 2025. A unified Republican Congress may focus the first 100 days of 2025 on tax reform, trade, and other priorities, pushing through budget reconciliation.
This does not mean crypto legislation is impossible in the next Congress, but in a unified Congress, it is expected to be a relatively lower priority - requiring close coordination between Congress and regulatory agencies on crypto policy. Our baseline expectation is that crypto legislation will be delayed until the latter half of the 119th Congress, by which time cabinet officials and independent regulators can establish a foothold to work with Congress.
Energy policy: Trump's presidency, especially if the Republican Party controls both houses of Congress, will be very favorable for domestic energy and power production. This is good news for Bitcoin miners, data centers, and any company or energy producer with abundant power resources.
Impact on market participants
The easing of regulatory headwinds, the issuance of specific interpretive letters, no-action letters or regulatory guidance, may significantly increase US institutional investors' access to cryptocurrencies.
The SEC's relaxation of the provisions applicable to SAB 121 in September, or the direct withdrawal of this guidance, will pave the way for the world's largest custodian banks to enter the crypto market. The Bank of New York Mellon has been granted an exemption because its primary prudential regulator (NYDFS) did not object to its request for an exemption, but the OCC is the primary prudential regulator for national banks such as Citigroup and JPMorgan Chase. Given the OCC's likely significant shift in attitude towards banks' direct interaction with cryptocurrencies, these major banks will also gradually gain deeper participation opportunities.
Further institutionalization will provide more financing options for crypto assets, making spot cryptocurrencies more accessible through existing institutional trading platforms and partnerships, while also generally improving the maturity of the institutional crypto market.
Relaxing the SEC's application of the Howey test standards, or allowing more "crypto asset securities" to be traded within broker/dealers, will allow more companies to enter the trading space, including potentially traditional financial institutions such as banks, exchanges or brokers. Furthermore, the SEC's relaxation of the Howey standard may lead to the listing of more spot-based cryptocurrency ETFs in the US.
Clear attitudes and lenient policies from regulators will allow traditional financial service companies and investors to operate on-chain for the first time, bringing new revenue and other strategic opportunities.
Expanded access to public blockchains may also revolutionize trading efficiency, transparency, issuance and other aspects of finance. Depending on the regulatory stance and any legislation enacted, the convergence of traditional finance and decentralized finance may become a reality.
Similarly, depending on the SEC's attitude towards the Howey Act and token disclosure requirements, we may see the emergence of new types of tokens, and even the possibility of equity security tokens, with existing tokens potentially adding more equity-like features to enhance their value proposition.
An expanded and improved asset ecosystem will support the liquidity crypto hedge fund industry, with the maturation and expansion of investment targets providing greater investment opportunities for the industry. Improved token disclosure and issuance capabilities will challenge and even disrupt the existing "SAFT to low liquidity, high FDV" model, making VC capital no longer superior to liquid assets.
In the venture capital space, the crypto company IPO market may see more meaningful openings, ultimately providing exit paths to realize investment returns. Currently, apart from a few SPACs, the only listed crypto startup is Coinbase. We estimate that if the conditions are right and the regulators take an open attitude, there could be dozens of crypto companies in the US hoping to go public.
Bitcoin market analysis
On Monday, November 4, Bitcoin fell to a low of $66,700, but has since risen 15%, setting a new all-time high. On November 5, as the probability of Trump's victory increased, Bitcoin quickly surged to a new all-time high, hovering in the $75,000-$76,000 range.
Although the market has seen significant volatility - up 15% since Monday and 26% since October 1 - the fundamentals do not show signs of overheating. As Bitcoin rose on election news, the "Coinbase premium" rebounded significantly on Tuesday evening and turned positive for the first time in at least a month.
Bitcoin ETFs have performed strongly, setting a new record for the largest single-day net inflow on Thursday, November 7, attracting as much as $1.375 billion in capital, driving Bitcoin to new highs. This data surpassed the previous record of $1 billion net inflow set on March 12, 2024.
Bitcoin Cycles
Looking back at history, Bitcoin's current trend is essentially consistent with the previous two bull markets. Compared to the historical cycle bottoms (2011: $2, 2015: $152, 2018: $3,122, 2022: $15,460), Bitcoin's trajectory is in sync with the 2017 bull market and only slightly behind the pace of the 2021 bull market.
Reviewing the historical bull market corrections, the 2024 pullback is more moderate compared to the corrections during the 2021 and 2017 bull markets.
Futures and Funding Rates
Although the open interest of cryptocurrency exchange futures has risen to a new annual high, the funding rates have remained essentially flat, indicating that this latest price movement has been primarily driven by the spot market.
Bitcoin Options Market
Bitcoin options traders hold a net short gamma position between $54,000 and $84,000, which will exacerbate any price volatility. In simple terms, when traders hold a short gamma position, they typically hedge by buying spot when prices rise, or selling spot when prices fall.
This effect can accelerate price movements and increase market volatility. Conversely, when traders hold a net long gamma position, they take the opposite actions: selling when prices rise and buying when prices fall, thereby reducing volatility.
Our analysis shows that the current short gamma peak is at $70,000, so this effect is diminishing as Bitcoin's price rises. Notably, many investors holding current high-strike call options are already in profit, so they may choose to roll their positions to even higher strike prices, pushing the short gamma position to higher strike ranges.
The chart below shows our view of the net trader gamma position across all Bitcoin option expiry dates from November 7, 2023 to September 26, 2025.
Bitcoin Fundamentals
The Realized HODL Ratio (RHODL) is a metric that measures the ratio of market capitalization realized in the 1-week and 1-2 year HODL bands (i.e., the realized value of Bitcoin that has changed hands in those time frames). A higher ratio typically indicates an overheated market, with peaks often coinciding with market tops.
The sideways trend of 2024 RHODL is more akin to the 2019-2020 consolidation phase, rather than any market top activity, suggesting that Bitcoin still has upside potential in the near and medium term.
The MVRV Z-Score is the ratio of market value to realized value, and the standard deviation of market value, used to help identify differences between an asset's trading value and its overall cost basis. Historically, this metric has been very effective in identifying market tops. The current value indicates that Bitcoin's price has not yet approached overbought or top territory.
Bitcoin and Global M2
Bitcoin has historically responded to changes in the global money supply. While this correlation is not unique to Bitcoin, it is still worth noting, especially if Bitcoin starts to be used more as a hedge asset, as Larry Fink mentioned.
Outlook
The arrival of the Trump administration, and a Republican-controlled Senate that can confirm its government appointments, may bring good news in the form of regulatory relaxation for the U.S. cryptocurrency industry. We expect that some form of exemptive relief will be forthcoming soon, while a more robust supportive regulatory framework will take more time to take shape.
The easing of the enforcement environment, coupled with progressive policy thinking, will pave the way for traditional financial services companies and institutional investors to dive deeper into this asset class. This will challenge the barriers of existing crypto infrastructure participants, but will also broadly support the expansion and maturation of this asset class. In this environment, we expect Bitcoin and other digital assets to trade at levels far above their current all-time highs over the next 12 to 18 months.
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