Author: Wolfgang Münchau, co-founder of Eurointelligence, DL News; Translator: Baishui, Golden Finance
There is an old story about an interview with Boris Yeltsin, in which the interviewer asked Yeltsin to describe the prospects of the Russian economy in one word.
“Good,” Yeltsin said. The interviewer, not used to the idea that politicians would follow instructions, turned around and asked for two words to describe the prospects.
“Not good,” Yeltsin retorted.
That’s how I feel about Donald Trump and Bitcoin.
It’s both good and bad.
The inherent contradiction of Bitcoin is that, in a way, it is insurance against financial crises, but its success is due to financial booms.
The same contradiction applies to Trump’s influence.
Inflation and the Fed
Trump’s policies will cause inflation.
The two most important changes I think he will make are not trade tariffs but rather a devaluation of the dollar and exerting political control over the Fed.
He can’t abolish the Fed’s formal independence, but he can insist on being consulted.
We live in an era of fiscal dominance, where central banks’ freedom to act is constrained by their governments.
Even the most independent-minded Fed chairs can’t successfully stand up to Trump.
In any case, Jerome Powell’s term as chairman ends in 2026. If elected, Trump will be able to appoint his successor.
The Fed’s inflation target will be harder to achieve than many people think.
Trump’s protectionism, continued geopolitical divisions, and aging Western populations will continue to create inflationary pressures.
Higher tariffs will push up prices and reduce trade (other countries will retaliate), which will affect global productivity growth.
A Different World
It would be complacent to think that a Trump second term would be a carbon copy of Trump’s first term, both in terms of what he would do and the impact on the economy.
There was no global inflation shock during his first term.
We live in a different economic environment.
If you unleash Trumpnomics in today’s world, I expect the result would be an inflationary boom-bust cycle and the potential for massive financial instability.
In such an environment, it is very possible that the USD price of Bitcoin would plummet as it did in 2021.
As of now, Bitcoin is not a good hedge against inflation.
I’m not saying this will always be the case, but I don’t see any reason at this point that the price of Bitcoin would react differently to dollar inflation than it did in 2021.
The risk of a financial crisis outweighs everything.
But that observation alone doesn’t answer the question.
In the long run, Trump may end up being a boon for the crypto industry precisely because of his economic policies.
The rational fear of the debasement of fiat currencies constitutes a valid reason to consider Bitcoin as a systemic hedge.
Personally, I like to think of Bitcoin as an option, an asset that gives me the right to trade if our dollar-based financial system has problems. It’s hard to put a value on this option.
It’s like a binary option, where the value is either close to the value of the underlying asset (i.e. the world’s total money supply) or close to zero.
The value of this option should therefore correspond to the perception of systemic risk.
I think the probability of a deep crisis in our fiat monetary system is very high—but I can’t predict the timing.
Trump’s policies increase this risk, and in that sense, it’s good for Bitcoin.
If people start to worry about the future of the dollar itself, the combination of soft regulation and a devaluing dollar could push the price of Bitcoin to levels beyond anything we’ve seen so far.
Inconsistent Assessments
My seemingly inconsistent assessments of Trump’s impact on Bitcoin are nothing more than a mirror image of the fundamental contradiction between Bitcoin as a plain vanilla risk asset and Bitcoin as insurance or an option.
Right now, I think the former view prevails. During the 2021-2023 inflationary period, investors believed that rising inflation was temporary.
That remains the consensus.
Investors are also not concerned about the impact of economic sanctions on the dollar as a global currency, nor the impact of the G7’s recent agreement to conduct raids on Russian assets for financing the war in Ukraine.
If that view shifts, then the fundamental dynamics of the market change.
If by the time of the next inflationary cycle, Bitcoin is viewed as a relatively safe store of value, then there is no reason to expect that investors will react to rising inflation in the same way they did in 2021.
We are not there yet. But we will.
Bitcoin as a Hedge?
We will likely see one or more repetitions of the 2021-23 cycle before investors view Bitcoin as a hedge. Even if Trump makes great progress in devaluing the dollar, it will not change the world immediately.
No other currency can replace the dollar as the global currency right now.
Bitcoin cannot replace the multiple roles of the dollar and the Federal Reserve in the global financial system.
Some form of global financial architecture must be established, whether it is cryptocurrency or otherwise.
For now, the risk of a financial crisis outweighs everything. If the current asset price bubble bursts, I highly doubt that Bitcoin can maintain anything close to its current valuation.
Many investors will have to withdraw from multiple classes of risky assets to meet margin calls.
My base case view is that Trump will push us further toward a financial crisis, which is very negative for Bitcoin in the short term, but could be very positive for the cryptocurrency industry in the long run.
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