The then Republican presidential candidate and former US President Donald Trump will speak at the Bitcoin 2024 event held in Nashville, Tennessee on July 27, 2024.Kevin Worm/Reuters
Chris Gay writes for the Wall Street Journal, the US News and World Report, and the Economic Review of the Far East, among others. He writes the newsletter figures at the centre.
At the White House Digital Assets Summit this month, US President Donald Trump vowed to “make America the world’s Bitcoin superpower and the crypto capital of the planet.”
This is like making the US the world leader in blackjack, but Trump has already taken important steps in that direction. It will stop Joe Biden’s aggressive crackdown on the industry, appoint crypto advocates to key managers, and create a national crypto sanctuary.
All this should worry you. This is why.
You may not have heard of Heyman Minsky, but after the 2008-09 financial crisis, his impact as an economist skyrocketed. That’s because of his financial instability hypothesis. It considers a financial crisis to be inevitable, not merely anomaly, without careful regulation.
Professor Minsky argued that financial markets tend to naturally steady. Because the relentless pressure of competition claims investors will be invested in a vicious cycle of risky trading driven by creating systemic risks that create ever-growing leverage. This inevitably leads to a “Minsky moment.” This is the point where the market realized that the game was up and everyone was rushing for the exit.
The housing bubble and the subsequent crisis seemed to many to confirm Professor Minsky’s paper. The story follows a common trajectory between the boom and bust chronicles. The irrational flock chases asset prices to unsustainable levels fueled by FOMOs and unreasonable borrowing. Eventually, a general risk aversion begins and panics tears. All you need is a shock – major default rumours, an alarming increase in interest rates, a political crisis – to surprise market flocks and cue Minsky’s moments. Then price collapses, liquidity crises and recessions (U-shaped or V-shaped) concluded with taxpayer-funded relief for those who burned their homes.
(For more information about Professor Minsky, New Yorker John Cassidy offers a useful chapter in his 2009 book, How Markets Fail: The Logic of Economic Disasters.
What you need to remember about the financial crisis is that it doesn’t start when everyone panics and the market collapses. They often bend public policy towards private interest in ways that rent-seeking insiders quietly loosen their bolts of regulation, no one else pays attention, prevents regulations, and puts innocent bystanders at risk.
That seems to be happening in Nomankratura, Trump’s Wall Street. The Crypto market is barely regulated and extremely unstable, as demonstrated by the FTX fiasco. Still, these digital tulip bulbs are an increasingly important force in the financial market. Systematically important financial institutions, and even pension funds, are increasing their crypto holdings. Crypto Market’s total capital peaked at US$3.9 trillion in December, with one forecast reaching US$12 trillion by 2030.
This pales in comparison to the US$62 trillion U.S. stock market, but meltdowns can rock the entire boat, even in relatively small corners of the financial system, as shown by the collapse of long-term capital management in 1998 and the collapse of the expected derivatives value of US$1.25 trillion, a hedge fund sporting 27-1 leverage. The stocks were tanked after the collapse, prompting the New York Federal Reserve to organize the rescue of US$3.6 billion.
The crypto market opens up several paths for systematic risk. According to one analysis, one is 4.8 times more volatility than the S&P 500. Volatility creates risk aversion and uncertainty. It never looks good to the open market or the general economy. The industry’s answer is stubcoins that are actually less volatile than altcoins, which are non-Bitcoin. (Understanding Contradiction: Stubcoins are primarily valuable and reliable reservoirs, to the extent that they are tied to Fiat currency and central banks that trustworthy supporters claim to be spew.)
The other is market opacity. Early coin provision (ICO) is rarely regulated in the US. This means that investors may not be completely different from highly scrutinized inventory IPOs, and may not know whether they are behind the offer or who is subscribing. “They’re because they have less regulations,” says Oberheiden, a blockchain law firm.
Leverage is also an issue. Some trading platforms allow 100x leverage. This, like any other market, also amplifies profits and losses. Excessive private debt can rush market conflicts and lead to a “balance sheet recession.” This is a long-term economic recession caused by individuals and institutions focusing on saving and repayment of debt. Savings may sound like a good thing, but in the short term it can hinder your total spending. Ultimately, it’s all “economists,” indicating what the economists call “The Paradox of Thriftox.”
The market already feels vulnerable, as demonstrated by the failures spurred by Trump’s reckless tariff war. Stocks are undoubtedly overvalued, and the general economy is vulnerable to recession, and it is possible that Trump was recognized at some point before walking through it.
Donald Trump doesn’t know, but what he says is important because market outcomes are often self-realized. If they are sure something will happen to a key chunk of investors and consumers, they will behave in the way that will make it happen.
Certainly, lawmakers are proposing regulatory schemes, but who knows how effective they are, or when they will come into effect. The last thing the US economy needs now or in the long run is the Wild West Crypto market, which can burst at any time. Rostin Bohnham, chairman of the Commodity Futures Trade Commission, told Politico in January:
