Author: John Cassidy
Compiled: Bitpush BitpushNews
"With a government supportive of cryptocurrencies preparing to take power + cryptocurrency investors cheering with joy, this bears some resemblance to the dot-com bubble of the late 1990s."
Last week, after Donald Trump announced the nomination of cryptocurrency advocate Paul Atkins as chairman of the U.S. Securities and Exchange Commission (SEC), the price of Bitcoin broke through $100,000, and cryptocurrency enthusiasts cheered with joy. The mood in the cryptocurrency market reminds me of the dot-com bubble and its inevitable bursting, which I documented in a book over 20 years ago.
At the time, some long-term market participants and observers, including myself, were equally excited, equally predicting that prices would continue to rise, even higher, and equally uneasy.
It is certain that cryptocurrency investors, cryptocurrency entrepreneurs, and supporters of cryptocurrency donations have ample reason to be excited, as they have donated hundreds of millions of dollars to politicians who support cryptocurrencies before the November election. Investments in Trump's victory and the defeat of some well-known cryptocurrency skeptics (including Democratic Senator Sherrod Brown of Ohio) have already paid off.
The SEC is the leading investor protection agency in the U.S., and under the leadership of Gary Gensler, the agency has taken a tough stance against an industry that Gensler has described as "rife with fraud and deception," filing lawsuits against multiple cryptocurrency companies, including the cryptocurrency exchange Coinbase and the digital payment network Ripple.
However, under the leadership of Paul Atkins, the ongoing lawsuits and other cases at the agency may be shelved. Paul Atkins is a conservative lawyer who served as a commissioner of the U.S. Securities and Exchange Commission during the Bush administration and is currently the co-chair of the cryptocurrency lobbying group Token Alliance.
Overall, the U.S. Securities and Exchange Commission appears likely to take a more friendly stance towards issuers of cryptocurrency and digital tokens - a prospect that worries critics of the cryptocurrency industry. Dennis Kelleher, president of the Washington financial reform organization Better Markets, told me: "For crypto assets, the basic rules that have protected investors for decades will be greatly weakened, allowing the industry to expand with little regulation or accountability." "It will be like the 1920s - caveat emptor."
Cryptocurrency industry executives have praised Atkins' selection as a milestone. Michael Novogratz, founder and CEO of cryptocurrency firm Galaxy Digital, told Reuters: "We are witnessing a paradigm shift," "Bitcoin and the entire digital asset ecosystem are about to enter the financial mainstream."
In the late 1990s, the key paradigm shift that fueled the dot-com bubble was the rise of e-commerce, which gave birth to startups that went public on the Nasdaq, such as Amazon, eBay, Pets.com, and Webvan.
Speculative digital assets, including Bitcoin, Dogecoin (a cryptocurrency promoted by Elon Musk), and the cryptocurrency tokens issued by the Trump family's new World Liberty Financial, cannot be directly compared to the startups of the 1990s, many of which had the potential to generate huge profits, even if many ultimately went to zero. (Amazon is now worth about $2.4 trillion. Webvan, the online grocery chain that promised fast home delivery, raised $375 million in its 1999 IPO and filed for bankruptcy in 2001.)
But regardless of the speculative object, when I wrote about the dot-com stock bubble years ago, I concluded that large-scale speculative events depend on the "four horsemen":
Exciting new technology that captivates investors;
Effective means for them to communicate;
Active participation by the financial industry;
And a supportive policy environment.
In the case of crypto assets, the invention of Bitcoin and blockchain (a secure and decentralized digital ledger) and the rise of social media meet the first two requirements, but Wall Street and policymakers remain skeptical of the industry, factors that have so far confined cryptocurrency investment to a minority pursuit. In the crypto bubble burst of 2022-23, Bitcoin prices fell more than 70%, and some major cryptocurrency companies, including Sam Bankman-Fried's FTX, went bankrupt, while the overall stock market and the U.S. economy remained unscathed.
With Trump's election, it seems that all four conditions are now in place, laying the groundwork for a broader bubble to attract more participants. Blockchain technology is still under development, with its proponents still claiming it is about to disrupt the banking system, fundamentally change the international payments system, or generate other transformative impacts. On Musk's X, cryptocurrency enthusiasts have a massive social media platform they can use to hype crypto assets and attack skeptics. But the key development is that policy and Wall Street are now also aligned with the crypto world.
Under Atkins' leadership, the SEC may change its stance on the core legal issue of whether crypto assets are securities like stocks and bonds, which would mean they must fully comply with the nation's securities laws, or whether they are more like physical commodities such as gold and silver, which are subject to less regulation, in part because they are seen as fungible items that are easier to identify and value. (If you buy a gold bar, you know what you're buying.)
Under Gensler, the SEC has viewed many crypto assets as securities, subjecting their issuers to extensive registration and disclosure requirements. The agency accused Coinbase of operating an unregistered securities exchange and accused Ripple of organizing an unregistered securities offering when selling its XRP cryptocurrency. Both companies denied the allegations. Earlier this year, a federal judge ruled that most of the case against Coinbase could proceed, widely interpreted as a victory for the SEC. But Ripple's lawsuit ultimately ended with a ruling that the company's sales of XRP to retail investors on digital exchanges did not violate securities laws, which Ripple hailed as an important victory.
Looking ahead, the international law firm WilmerHale said in a recent client alert that during a second Trump administration, the Securities and Exchange Commission "may propose tailored rules that account for the differences between crypto assets and traditional securities" - precisely what the crypto industry wants. Meanwhile, on Capitol Hill, Republicans can pass legislation that would at least partially exempt many cryptocurrency issuers from SEC oversight by expanding the jurisdiction of the Commodity Futures Trading Commission (CFTC), which has a much smaller budget and enforcement arm. Earlier this year, the House passed a Republican-backed bill that would authorize the CFTC to regulate digital assets as commodities, as long as the underlying blockchain is decentralized. Gensler opposed the bill, saying it would weaken investor protections and allow cryptocurrency issuers to self-certify their products as digital commodities rather than securities. Given the Republicans' takeover of the Senate, similar legislation may be introduced and sent to the president's desk.
The incoming crypto advocate has already promised to turn the U.S. into the "crypto capital of the world." Crypto enthusiasts will look forward to Trump fulfilling his campaign promise to establish a "national Bitcoin reserve." Last week, Trump appointed Musk's partner, venture capitalist David Sacks, as his "White House AI and crypto czar," further inspiring crypto enthusiasts.
In theory, the Federal Reserve could dampen the crypto craze by restricting financial leverage, raising interest rates, or doing both. But such measures are not popular when speculative activity is rampant and asset prices are soaring.
In the late 1990s, then-Federal Reserve Chairman Alan Greenspan, after initially warning of "irrational exuberance," stood by and watched the Nasdaq plummet. (The tech stock index doubled in value from January 1998 to March 2000.) Currently, the Federal Reserve's intervention to suppress the value of crypto assets seems unlikely. The central bank is taking action to lower interest rates rather than raise them, and last week, Fed Chairman Jerome Powell compared Bit to gold, treating it as an investment asset - a position many in the crypto community have advocated.
Finally, Wall Street is starting to embrace cryptocurrencies. After losing a key lawsuit in 2023, the SEC approved the launch of Bit exchange-traded funds (ETFs) at the beginning of this year, which track the value of the cryptocurrency, allowing retail investors to buy in. Major financial firms like BlackRock, Fidelity, and Franklin Templeton have already offered these products, while Charles Schwab offers "crypto-themed ETFs," index funds designed to track the prices of multiple crypto assets and companies. Since the election, the value of Bit ETFs has risen about 45%, which is sure to spur other financial firms to launch similar products.
Considering all these factors, it is hardly surprising that the value of crypto assets is rising, or that some observers feel anxious. Eswar Prasad, an economist at Cornell University and author of "The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance," says he is concerned that recent developments may lead many ordinary Americans to see crypto assets as a safe investment, rather than an extremely volatile and speculative one.
Eswar Prasad told me: "The U.S. government seems poised to approve a range of crypto products and to tacitly endorse crypto as an asset class. This could really exacerbate the crypto bubble. And if something happens to burst that bubble, we may end up with a very bad outcome."
How bad? That may depend on the degree of interconnectedness between crypto assets and the rest of the financial system, as the internet bubble engulfed hundreds of startups and the stocks of many large companies. After the 2000 bubble burst, many startups went under, and the Nasdaq index fell more than 70%; the economy entered a relatively mild recession, lasting less than a year. In the late 2000s, the bursting of the real estate bubble had more disastrous effects, as it turned out the banking system was heavily dependent on subprime mortgage assets. When the value of these assets evaporated, it nearly destroyed the entire financial system, plunging the economy into one of the worst recessions since the 1930s.
So far, federal bank regulators have worked to keep cryptocurrencies confined to their own world, encouraging banks to be cautious in dealing with cryptocurrency business and preventing them from holding any crypto assets on their balance sheets. In a joint statement last year, the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency wrote: "It is important that risks that cannot be mitigated or controlled from the crypto-asset sector do not migrate to the banking system." Powell reiterated the Federal Reserve's goal in last week's comments of not letting any interaction between cryptocurrencies and banks threaten the banking system.
But Dennis Kelleher reminds me that recent history is not entirely reassuring. During the 2022-23 crypto bubble burst, coinciding with soaring interest rates, three banks with ties to the crypto industry collapsed: Silvergate, Silicon Valley, and Signature. Kelleher predicts that Trump will appoint bank regulators in a more laissez-faire manner, and adds: "You're going to see crypto flowing into the cracks of the financial system like water... I think the bell has already started tolling for the next financial crisis with the election of a second Trump administration."
The worst-case scenario is a full-blown financial collapse, which I've seen many times in the 90s, where people get crazy about something and a bubble forms. Prasad thinks cryptocurrencies could see a similar situation, and the government may tacitly or even actively encourage such speculation. When I asked the economist if he could think of a historical analogy, he pointed to the Chinese government's encouragement of citizens to invest in real estate, which we all know did not seem to end well.
