Bitcoin is now a barometer of the devastated US economy, but things are looking bad

John Rapley is a contributing columnist for The Globe and Mail. He is a writer and scholar whose books include Why Empires Fall and Twilight of the Money Gods.

The Federal Open Market Committee (FOMC) appeared to have a majority in favor of further easing after the influential New York Fed president gave a speech last week suggesting he supported further rate cuts. After weeks of turmoil, the stock market is once again in party mode, celebrating the much-anticipated return of easy money.

But there is one asset class that has so far barely participated in the rally. It’s virtual currency. While most market indexes are back near the all-time highs set last month, Bitcoin, the crypto industry’s best performer, is still down 20%. This speaks to the fact that cryptocurrencies have been leading the market for a long time, and the recent woes may suggest that the worst is not yet over for the market.

Bitcoin on thin ice, free from risks

Bitcoin is a child of the cheap money era that began after the 2008 financial crisis and saw central banks massively increase the money supply to stem the bleeding in the asset class. That era ended four years ago with a spike in inflation, and central banks have been trying to get rid of it ever since. When they started raising interest rates and tightening the supply of money, the era of cryptocurrencies seemed to be over and the price of Bitcoin crashed.

$28 billion of “dirty money” in the cryptocurrency industry

But crypto came to the rescue last year when Donald Trump, initially a crypto skeptic, vowed to make the United States a “Bitcoin superpower” if he returned to office. The industry then invested heavily in his campaign, and that gamble paid off handsomely. Upon retaking the White House, Trump immediately began favoring the industry with deregulation, pardoning convicted crypto felons, and promoting his own family plans. At this point, a flood of institutional investors and “cryptocurrency” companies selling stock to buy Bitcoin drove Bitcoin to an all-time high of over $125,000.

But now, all of a sudden, that has changed. Bitcoin is no stranger to volatility, but it appears that a combination of factors may be causing something structural to change. First, while investors are celebrating the return of the “Fed Put” (the central bank’s guarantee that it will inject money into the market every time asset prices fall), it is unclear whether this will be the central bank’s incentive to cut interest rates next month. Some FOMC members, particularly Trump appointees, have advocated a return to easy money, while others are concerned about inflation. Therefore, next month’s decision could be a “hawkish rate cut,” a small rate cut accompanied by a statement that no further rate cuts are planned.

Second, it has become clear that the United States is now a two-speed economy. As the stock market soars, the wealthy are getting richer, but ordinary people are feeling stressed by rising prices and slowing wage growth. If we ignore the headline numbers about inflation and focus on what ordinary people consume, especially food, there is evidence that the negative feelings people report to pollsters about the economy are well-founded. For millions of Americans, things are actually getting worse.

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This helps explain President Donald Trump’s declining approval ratings and the Republican Party’s poor performance in recent elections. But it could also signal future problems for the market. In particular, Trump’s collusion with the tech oligarchy and opposition to all forms of AI regulation has led to him doing very poorly in the polls, especially among Republican voters. Markets have largely ignored political risks to the booming market, but Zoran Mamdani’s recent victory in the New York mayoral election shows that public sentiment is turning against Wall Street, the oligarchy, and unchecked AI. Moreover, if the cost of living remains a key issue in next year’s election campaign, Fed hawks may gain more courage to stop inflation.

Finally, on a related note, Trump’s authority appears to be declining due to his deepening unpopularity and the approach of the midterm elections. His sudden outburst about the Epstein file and growing criticism from within the Republican Party suggest he is losing the vice-like grip he had over the party. Given that crypto’s resurgence is largely due to his backing, investors may be starting to doubt whether he can provide the kind of support he did last year. And if Trump can’t protect cryptocurrencies, he probably won’t be able to stop a possible AI crackdown.

So far, Bitcoin has come back off the canvas and is rising again, albeit well behind the major market indexes. A key moment may come at the next FOMC meeting in two weeks. If Bitcoin continues to rise through hawkish interest rate cuts, it could point to a good 2026 for the market. But if it falls again, especially before the Fed meeting, it could signal a bumpy new year ahead.