If Trump wins the election, what new opportunities will there be for cryptocurrencies and BTCFi?

Original title: 2024 U.S. Election For Crypto: A Potential Turning Point from Tight Regulation and Ban to Support and Innovation
Original author: HTX Ventures
Original translation: zhouzhou, BlockBeats

Editor's note:This article focuses on the impact of the U.S. election on the cryptocurrency market, especially the potential boost to the prediction market and BTCFi. By interpreting innovations in prediction platforms such as Polymarket, DeFi, and BTCFi, it explores possible opportunities for crypto projects in terms of policy, regulation, and technology. At the same time, the article also discusses the incentives for developer innovation from Bitcoin technology upgrades (such as OP_CAT) and its significance to the entire crypto market.

The following is the original content (the original content has been reorganized for easier reading and understanding):

Full text summary:

Singapore / November 4, 2024—Since its inception, Bitcoin has gone through three election cycles and has become a key issue in the 2024 US presidential election. As the Bitcoin concept proposed by Satoshi Nakamoto in his white paper has gained popularity, supporters have now formed an important voter group that cannot be ignored and have become an important force in US politics.

This article analyzes the various factors that have made Bitcoin and cryptocurrencies increasingly important in the election, including the decline in real wages caused by inflation, the challenges to the global dominance of the US dollar, the growing interest of US voters in cryptocurrencies, and the current government's regulatory strategy for the crypto industry.

The article further explores the different positions of presidential candidates on cryptocurrencies and how their attitudes can shape future policies and market expectations. At the same time, this article also discusses the role of prediction markets, especially the role of Polymarket in elections, potential innovation paths for prediction markets, and how elections affect crypto markets through macroeconomic liquidity.

Finally, this article predicts the impact that the election results may have on crypto companies. If Trump wins, a clearer and more relaxed regulatory environment is expected to be introduced, which will support the incubation and growth of crypto startups. This environment will also provide crypto companies with an IPO path, provide guarantees for the exit of traditional investment institutions, enhance the wealth effect and improve the financing environment. At the same time, DeFi will enter the mainstream financial market faster, and the innovation and development of BTCFi will also accelerate.

Background of Cryptocurrency Becoming a Key Election Issue

What Bitcoin Means to the United States

1. Growing Demand to Fight Inflation

A Forbes survey shows that real wages in the United States (adjusted for inflation) have barely changed since the mid-1980s. After adjusting for inflation, the purchasing power of the average hourly wage in the United States today is almost the same as in 1978. This has exacerbated wealth inequality: the upper class has become richer by holding a large amount of assets, while the wealth of the working class has shrunk.

Since the 2008 financial crisis, more and more people have seen Bitcoin as a potential tool to fight inflation and economic uncertainty, especially it provides hope for financial independence for the middle class, and Bitcoin's decentralization and limited supply make it an alternative asset to government and central bank intervention. While the dollar remains the world's reserve currency, Bitcoin's appeal continues to grow as investors increasingly demand a hedge asset. In particular, Bitcoin is seen as an effective hedge against inflation for the increasingly burdened working class.

Whether Trump or Harris wins the presidential election, U.S. fiscal policy is likely to lead to larger budget deficits. The Congressional Budget Office predicts that the federal budget deficit will be 6.2% of GDP over the next decade. If Trump restores the 2017 tax cuts and further reduces tax rates, the deficit could rise to 7.8% of GDP. In contrast, Harris plans to increase the corporate tax rate to 28%, but her other reform proposals could still push the deficit to 6.5% of GDP.

Over the past 25 years, the U.S. federal debt has surged from 40% of GDP to 100%, and this ratio may climb to between 124% and 200% in the next 10 to 30 years. The upcoming presidential election may trigger a "sensitive moment" when the bond market realizes the severity of the debt problem and may demand higher returns to offset the financing risks. This moment may cause the bond market to collapse, triggering a financial crisis.

Both Trump's tax cuts and Harris's tax increases may further exacerbate the U.S. fiscal deficit and debt burden, increasing the risk of financial market turmoil. Faced with such a high debt, there are limited solutions, and diluting the debt through inflation may be the only way out for the U.S. government. However, the adverse effects of inflation will erode the purchasing power of the working class and exacerbate wealth inequality.

It is worth noting that the Bitcoin Act, which is yet to be approved by Congress, may provide a new way to solve the US debt problem. The bill aims to incorporate Bitcoin into the broader financial system, which may attract a large amount of private and institutional capital, help stabilize the US debt structure, and may even bring a certain degree of stability to the global financial system.

As a decentralized and scarce asset, Bitcoin can become an effective tool for governments and investors to fight inflation and risks, especially in the face of debt and inflationary pressures, it has potential strategic significance.

2. Strengthen the influence of the US dollar in the world

As one of the most popular cryptocurrency products today, stablecoins have become the center of policy discussions, and the US Congress is also considering a number of bills related to this. A key factor driving these discussions is that stablecoins are believed to help expand the international influence of the US dollar, especially in the context of the decline of the US dollar as a global reserve currency.

Currently, more than 99% of stablecoins are denominated in US dollars, far exceeding the second-ranked euro, which accounts for only 0.20%. The exponential growth of stablecoins further consolidates the dollar's dominance in the digital asset market and provides the United States with a new way to maintain its advantage in the global financial system.

In addition to strengthening the dollar's international influence, stablecoins may also consolidate the financial foundation of the United States domestically. Although stablecoins were launched only 10 years ago, they have become the top 20 holders of U.S. Treasuries, surpassing countries like Germany. This shows that stablecoins have not only expanded the dollar's global dominance, but also become an important part of the U.S. financial system by absorbing a large amount of Treasuries, providing additional liquidity support to the economy.

Rise in Voter Interest in Cryptocurrencies

According to a national survey commissioned by Grayscale and conducted by Harris Poll, more than half of voters said they would be more likely to support candidates who "understand cryptocurrency" rather than those who do not understand cryptocurrency.

At the same time, voters in swing states have also seen a significant rise in interest in cryptocurrencies. Since the 2020 election, Pennsylvania and Wisconsin, two key battleground states where fierce competition is expected, have jumped to fourth and fifth place in Google's cryptocurrency search interest rankings. Michigan ranks eighth on this indicator.

Intensified Regulation of Crypto Companies by the Biden Administration

Since taking office, the Biden administration has been committed to increasing regulation of cryptocurrencies and has pledged to establish a stricter regulatory framework. Relevant measures include filing a lawsuit against Ripple for unregistered securities offerings, imposing additional tax reporting requirements on crypto companies and Bitcoin miners, and imposing capital gains taxes.

After the collapse of FTX, the government has stepped up its crackdown on major crypto companies and made several important legal developments. For example, Zhao Changpeng, the former CEO of Binance, the world's largest crypto exchange, was sentenced to four months in prison for U.S. and international lawsuits. Subsequently, the U.S. Securities and Exchange Commission filed a lawsuit against Coinbase, accusing it of operating a crypto asset trading platform without registering as a securities exchange. If successful, this case could pose a major threat to Coinbase's business model. Other companies sued include crypto exchange KuCoin.

The Central Role of Crypto Donations

In 2024, crypto companies have become the leading contributors to U.S. political donations. Coinbase and Ripple are the largest corporate political donors this year, contributing nearly 48% of total corporate donations. Fairshake, a super political action committee (Super PAC) founded in 2023 by Josh Vlasto, a former aide to the New York governor, has raised more than $200 million to support pro-cryptocurrency candidates, becoming the PAC with the most spending in this election cycle.

Fairshake aims to elect pro-cryptocurrency candidates and combat skeptical opponents, and has received support from companies such as Coinbase, Ripple, and Andreessen Horowitz. These funds have not only influenced the policies of presidential candidates, but also promoted congressional election strategies that support cryptocurrencies. As a result, the crypto industry has come to the fore from behind the scenes and become an important force in American politics.

A typical example occurred in March of this year, when progressive Democratic star Katie Porter raised more than $30 million in the California Senate election and was expected to win. However, because she adopted Elizabeth Warren's political stance and stood on the same front with Harris on bank regulation, Fairshake saw her as an "ally of the anti-crypto movement."

During the California primary, Fairshake spent more than $10 million against Porter, weakening her support base among young voters. Through Hollywood billboards and speeches targeting her, Fairshake claimed that Porter misled voters to support pro-corporate legislation. As a result, her campaign funds suffered and ultimately failed to enter the general election in the fall.

As a result, many Democratic candidates have added crypto-supported sections to their campaign pages and sought financial support from crypto PACs, which now have a significant influence on candidates' positions.

Election Impact

Candidates' Policy Proposals

Harris

Harris has been limited in her comments on cryptocurrency policy, saying only that her administration will "encourage innovative technologies like AI and digital assets while protecting our consumers and investors." Recently, she has proposed a series of economic security plans targeting lower-than-expected support among black people, including a commitment to establish a cryptocurrency regulatory framework designed to protect black men's crypto investments.

However, this framework is only targeted at black voters and lacks clear regulatory details or specific policy positions, so it has been criticized by the cryptocurrency community as hypocritical, believing that it is just using cryptocurrency to win votes. The current Biden-Harris administration has taken a more confrontational regulatory approach to the crypto industry, taking actions such as multiple lawsuits, restricting traditional banking services, and vetoing bipartisan legislation.

The administration is also considering imposing a capital gains tax on cryptocurrencies, and while Harris' crypto policies may be friendlier than Biden's and could improve the regulatory environment for the industry, she remains cautious on key issues such as taxation, Bitcoin mining, and self-custody, and is far less pro-cryptocurrency than Trump.

Trump

The Republican Party has always emphasized individual freedom, and its values are more in line with the principles of cryptocurrency decentralization. The Republican National Committee promised in its party platform that Trump would defend the right to mine Bitcoin and "ensure that every American has the right to self-custody digital assets and can trade freely without government surveillance." In contrast, the Democratic Party generally advocates for greater government power and regulation, which may have ideological friction with the cryptocurrency community.

Trump has shown a strong interest in the digital asset industry, claiming that his goal is to make the United States a "global crypto hub and Bitcoin superpower." He supports Bitcoin mining and promises to protect self-custody rights. In addition, during the campaign, Trump used Bitcoin to buy burgers for restaurant customers and criticized the Securities and Exchange Commission (SEC) for its tough stance on cryptocurrencies, vowing to appoint a pro-crypto chairman if re-elected. Trump even launched his own DeFi project, World Liberty Financial.

Trump proposed a series of crypto policies, including:

· Establishing a Strategic Bitcoin Reserve:

Trump said the government would “retain all Bitcoin currently held or acquired by the U.S. government in the future” as the “core of the Strategic National Bitcoin Reserve.” As of October 2023, the U.S. government holds more than $5 billion worth of Bitcoin, mostly seized through criminal investigations. However, it is unclear how these Bitcoin reserves will be utilized, how viable they are, and whether the crypto industry will broadly accept this move.

· Establishing a Presidential Advisory Council on Cryptocurrency:

In Nashville, Trump promised to set up a “Presidential Advisory Council on Bitcoin and Cryptocurrency,” saying it would be run by “industry supporters” rather than “crypto skeptics” to set the rules.

· Prohibiting the Federal Reserve from Issuing Digital Currency:

While many countries are moving forward with central bank digital currencies, the trend has been met with resistance in the U.S. cryptocurrency community. Although the Federal Reserve has not yet decided whether to issue a digital dollar, a report released in January 2022 detailed the possible costs and benefits of a CBDC.

Trump has publicly opposed the proposal on multiple occasions, calling it a "dangerous threat to freedom." In May 2024, the House of Representatives passed a bill prohibiting the Federal Reserve from issuing a CBDC, although the bill still needs to be further advanced before it can become law. It is important to note that while Trump supports cryptocurrencies, his tariff policies may cause economic uncertainty. The long-term impact of his policies on the market and the crypto industry remains to be seen.

Possible "divided government"

At present, unless one party can control both houses of Congress and the presidency, a period of political instability seems almost inevitable.

As of October 25, Polymarket data showed that there were large differences in the odds of winning the presidential, Senate and House of Representatives elections. The only relatively likely outcome at present is that the Republicans will control the Senate. At the same time, the possibility of "divided government" is also high - that is, the president and the Senate will be controlled by different parties. The last time a divided government occurred was during the Obama administration, and Biden and Trump have both governed without a divided government.

This political landscape usually leads to policy deadlocks because the president and the Senate must compromise on major legislation and appointments. If the Republicans win across the board, they may introduce new laws within three to six months, which is a favorable outcome for the cryptocurrency market because Republicans generally advocate a more relaxed regulatory framework for cryptocurrencies.

On Wednesday, September 25, 2024, the U.S. Congress passed a temporary government spending bill that ensures funding for government agencies until December to avoid a government shutdown. The bill postpones final spending decisions until after the presidential election on November 5. In other words, the government's fiscal budget will be subject to certain restrictions from December until the new Congress is sworn in on January 3. This means that during this transition period, the president's power to influence fiscal policy may be limited, and the formal budget can only be passed after the new House of Representatives takes office.

Possible SEC Leadership Changes

Since Gary Gensler became the chairman of the SEC, his tough regulatory stance has sparked opposition from the cryptocurrency community. Although he has made some achievements in cracking down on illegal securities issuance, his strict law enforcement has been protested by many crypto companies.

Trump has publicly stated that if he is re-elected, he will "fire" Gensler and push the SEC to take a more pro-cryptocurrency stance. Traditionally, the SEC chairman usually resigns when a new president takes office. If the Harris administration comes to power, it will not be surprising to take a similar stance to the opposing camp to win industry support. Therefore, whether Harris or Trump is elected, the SEC leadership may experience significant changes.

Macroeconomic Liquidity: Inevitable Fluctuations and the Decisive Role of Quantitative Easing Levels

When the Federal Reserve cuts interest rates and global capital liquidity rises significantly, the price of Bitcoin tends to rise, indicating that macroeconomic liquidity still has a decisive influence on the cryptocurrency market.

In 2020, in response to the COVID-19 pandemic, the Trump administration launched an unlimited quantitative easing policy, injecting a large amount of funds into the cryptocurrency market. On March 15, 2020, the Federal Reserve cut the federal funds rate by 1 percentage point to between 0% and 0.25% and launched a $700 billion quantitative easing program. Subsequently, the Fed further announced the removal of the QE limit and promised to purchase assets as needed, thus launching unlimited quantitative easing. This move brought huge liquidity to the crypto market.

On October 21, 2024, at a town hall meeting in Lancaster, Pennsylvania, Trump reiterated that if he was re-elected on November 5, he would significantly reduce US interest rates. This promise may once again drive the rise of crypto assets such as Bitcoin, especially if liquidity increases further.

How Elections Impact Crypto Startups

Web3 Prediction Markets Outperform Web2 Competitors

Since its launch in 2020, Polymarket has quickly risen to become a leader in the space. It accounts for 80% of the volume driven by betting on the US presidential election. As an application developed in an on-chain environment, Polymarket competes with traditional markets and has the largest market share, which is extremely rare in the industry. Polymarket allows users to speculate and bet on the outcomes of future events related to sports, politics, business, science, and more. The platform gained its first significant traction during the 2021 US presidential election, handling 91% of the total betting volume, equivalent to $3.5 million in bets.

Polymarket has faced many challenges, including a $1.4 million civil monetary penalty and settlement with the U.S. Commodity Futures Trading Commission, after which it ceased official operations in the U.S. and blocked U.S. users from accessing the site via geo-fencing. CFTC Chairman Rostin Behnam warned that if its "footprint" in the U.S. is large enough, it must register its derivatives contracts or face enforcement action.

Prediction markets have evolved into a broader financial tool that goes beyond mere speculation. As Polymarket expands, the impact of prediction markets has expanded to areas as diverse as public opinion, financial hedging, and business decision-making.

How Prediction Markets Work

A prediction market is a derivatives market where participants place bets on the outcome of an event. These markets typically use binary options. For example, in a binary market, a question like "Will a Bitcoin spot ETF be approved?" can be answered with a "yes" or "no." The price distribution of "yes" or "no" is determined by the predictions and bets of market participants, both of which add up to a price of one dollar or slightly more.

On the expiration date, when the outcome of the event is revealed, the stock price converges to either $0 or $1. Participants who predicted correctly receive a payout of $1, while those who predicted incorrectly receive $0. This is how profit and loss are determined.

In addition to cryptocurrencies, offshore centralized providers often limit the amount that can be bet on a specific outcome, similar to sports betting. This limits individuals from fully leveraging their insights, while the final outcome is often controlled by centralized operators. On-chain prediction markets remove these barriers as smart contracts and decentralized ledgers create transparent global markets, ensuring that these platforms are fair and tamper-proof.

Polymarket’s order book uses a hybrid decentralized model. Orders submitted by users are sent to Polymarket’s operators, who match and match orders off-chain. The basis of the trading system is a custom exchange contract that facilitates atomic swaps (settlement) between binary outcome tokens and collateral assets (ERC20) based on signed limit orders.

In addition to the binary markets mentioned above, Polymarket also offers categorical markets and scalar markets. categorical markets allow bets on multiple options, each of which is determined to be $1 or $0 depending on the outcome. For example, a market predicting the 2025 NBA champion might include options such as the Celtics, Thunder, Knicks, and Nuggets.

Since the regular season has just begun and everything is uncertain, users can choose to bet on multiple teams. Scalar markets are different from the previous two markets in that profits and settlements are based on where the final outcome value falls within a predefined range.

Product iterations of prediction markets

Augur is one of the earliest blockchain prediction markets. By 2018, it had achieved $400,000 in trading volume, which was a considerable number considering the on-chain activity at the time, fully demonstrating the market demand for on-chain prediction markets. However, Augur failed to maintain a stable user base, mainly because its mechanism was complex and vulnerable to malicious attacks.

Unlike Polymarket, Augur allows anyone to create markets by staking its governance token REP. Augur's system is designed to invalidate a market if errors are detected in its basic components (market definition, expiration time, or decision conditions) during market creation.

Thus, an attacker could intentionally create a flawed market with the intention of forcing the market to be invalid and profit from it. At the same time, Augur's permissionless market creation has also led to several controversial incidents, such as the creation of a market like "When will a certain singer die?"

To attract users during the initial application development process, Polymarket internalized the market creation process and selectively centralized operations. By providing a user-friendly market and avoiding ethical disputes as much as possible, Polymarket has established a stable group of early users. This selective centralization strategy is designed to help successfully attract early users while ensuring transparency and traceability of core trading activities.

Prediction Markets Break Boundaries and Enter the Mainstream

According to the efficient market hypothesis, asset prices in capital markets quickly and completely reflect all information held by market participants. Therefore, prediction markets are always efficient, and they have the potential to solve the problem of inaccurate predictions, that is, market inefficiencies, and achieve accurate predictions.

Polymarket's founders pointed out that the platform was launched in response to widespread errors and misinformation during the epidemic. In fact, Polymarket effectively transformed the speculative demand of market participants into a tool for collecting public sentiment data. For example, it predicted Kamala Harris as the Democratic nominee and J.D. Vans as Trump’s vice presidential candidate before the official announcement.

As a result, Polymarket has been widely adopted by multiple mainstream media (even among crypto-skeptic media in mainland China) as an alternative news source. The widely purchased and used Bloomberg Terminal even began to incorporate Polymarket’s data into its dashboard in August 2024.

Polymarket is also integrating with content platforms. On July 30, 2023, the well-known content subscription platform Substack announced the embedding of Polymarket’s prediction market and launched the new “Substack The Oracle by Polymarket”.

On "The Oracle", readers can find insights and analysis from thousands of active markets on the Polymarket trading platform. Polymarket's "The Oracle" regularly summarizes significant markets and key statistics, and provides in-depth analysis of some of today's hottest topics.

Prediction of the future direction of the market

Currently, Backpack Exchange has launched a prediction token for the US presidential election. SynFutures and dYdX have launched leveraged trading products related to the election and introduced advanced order features such as limit orders and stop orders to help users manage risks. This leveraged trading allows users to operate larger positions with a smaller initial investment, thereby amplifying potential returns.

dYdX specifically focuses on perpetual contracts for the Trump prediction market, allowing traders to participate in the market with 20x leverage and trade long or short. This flexible trading structure allows users to take advantage of every market fluctuation and potentially earn significant returns in the short term. In general, the combination of leveraged trading and prediction markets is still relatively complex for ordinary users and is more suitable for professional traders.

Trump's victory may encourage crypto companies to go public in the United States

Under the Trump administration, there will be a clearer regulatory framework and a more relaxed regulatory environment, which will reverse the current trend of crypto companies fleeing the United States and blocking US IP addresses. Meanwhile, according to Bloomberg, several crypto-related companies, such as Circle Internet Financial, Kraken, Fireblocks, Chainalysis, and eToro, may go public in the next few years, and other eligible crypto companies are also expected to take standard IPO procedures.

Looking back at the Biden administration, only a handful of crypto companies have completed IPOs in recent years due to the tough regulatory stance taken by current SEC Chairman Gary Gensler. As a result, it has become more difficult for crypto companies to obtain mainstream institutional funding. Although the wealth effect of Coinbase's listing in 2021 attracted many traditional funds to establish crypto departments, Coinbase remains the only crypto project to appear on Forbes' 2024 Midas list.

DeFi and BTCFi will benefit first

Although Trump's own DeFi project, World Liberty Financial (WLFI), sold only 4.3% of its tokens and the project was criticized for its lack of practicality, it reflects his attention to DeFi.

Among DeFi, BTCFi stands out for its ease of building consensus and gaining legitimacy, with a stronger foundation that ensures its continued development.

Bitcoin remains the biggest commonality between the crypto industry, Wall Street, and the SEC. At its core, BTCFi is about leveraging BTC through various businesses such as staking, lending, trading, and derivatives. Over time, BTCFi will grow in value to multiple times that of BTC, mirroring trends in other major asset classes. However, this development requires a relatively long period of favorable external environment. This process could be accelerated if Trump wins the election.

Crypto companies developing BTC financial instruments will be incentivized and have access to a more relaxed regulatory environment, thereby consolidating BTC's position as a base asset. On the other hand, BTCFi's innovation will be led by developers, driving a variety of breakthrough applications based on Bitcoin's programmability. For example, Bitcoin's 2025 upgrade, another upgrade after Taproot in 2021, is expected to implement OP_CAT.

Once OP_CAT is enabled, developers will be able to use high-level Bitcoin native programming languages such as sCrypt to develop decentralized, transparent smart contracts directly on the Bitcoin mainnet. sCrypt is a TypeScript framework for writing smart contracts on Bitcoin, allowing developers to write smart contracts directly in TypeScript, which is one of the most popular high-level programming languages.

In addition, Bitcoin's current second-layer solutions may also transition to zk-rollups, and the total market potential of BTCFi is expected to exceed ten times the current market value of BTC.

Many projects are already exploring how to use sCrypt to develop around OP_CAT. For example, Bitcoin's parachain Fractal Bitcoin already supports OP_CAT and has launched the CAT protocol.

Currently, Babylon, a re-pledge project developed using Bitcoin scripts, and Shell Finance, a stablecoin lending platform, are also considering related development after the release of OP_CAT to achieve full decentralization and more complex on-chain functions, relying on the Bitcoin consensus mechanism to fully ensure security.

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