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The 2024 election process has largely concluded and the results were surprising to most. Not only did Donald Trump win the election, but he also undisputably won it with significant support across key swing states. In addition, the Senate flipped more seats to Republicans than expected and the House has retained a Republican majority. As I wrote before the election, “If Trump wins and Congress is Republican-controlled, crypto could easily be the best-performing asset class.” Bitcoin has gained 30% in the week following the election, but crypto-related equities have done far better, with some up over 50%. I’ll discuss some factors contributing to recent optimism and why I believe it is likely to continue.
Recent regulatory actions under the Biden administration have been detrimental to companies seeking to build on public blockchains and investors seeking to invest in digital assets. Trump has pledged to take an opposite approach, changing the entire risk profile of the industry. We are likely to see a new SEC Chair that abandons the regulation by enforcement approach and embraces a process by which new regulations can be crafted for this unique asset class. There is potential for changes in leadership at agencies such as the Office of the Comptroller of the Currency (“OCC”), Federal Deposit Insurance Corporation (“FDIC”), and Commodity Futures Trading Commission (“CFTC”), who are given a strong message from the Trump administration to cut the red tape, create realistic regulatory frameworks, and work with both crypto and non-crypto companies to support blockchain technology. These agencies have been the roadblock to crypto adoption and use cases in the U.S. and we believe the new administration will provide more clarity and confidence for companies operating within the space.
The changes mentioned above have broad implications. The ability for companies to offer services and software that utilize public blockchains has the potential to increase transparency and reduce costs for users. Payment platforms can benefit from near-instantaneous settlement capabilities, executed at lower costs compared to existing payment platforms. It is notable that the large private company Stripe, acquired the blockchain payments company, Bridge, a month before the election for $1.1bn. This was the largest acquisition ever made by Stripe. Incumbents are starting to realize the importance of adapting quickly to remain relevant as blockchain technology transforms the payments industry, which processes trillions of dollars annually. One other implication could be a new framework for regulating decentralized finance (DeFi) applications like Uniswap or Aave. These are two of the largest DeFi applications and have faced regulatory uncertainty, limiting their appeal. We anticipate a regulatory framework to emerge for these applications, which could increase volumes and use cases as more institutions feel comfortable using them.
We also expect increased activity in the equity IPO market for crypto and digital asset-related companies beginning as early as Q1 2025. As more companies move into mainstream equity markets, it will continue to raise awareness and highlight opportunities within the crypto industry. We believe strong companies like Circle, Fireblocks, NYDIG, Anchorage, and Kraken, among others, could pursue IPOs next year. As a result, investors and active managers can have access to a growing number of public companies, offering greater options for diversification in the crypto ecosystem. This also promotes strong employment growth opportunities in the U.S. as companies are no longer forced to expand in EMEA and Asia due to regulatory challenges in the U.S.
Investors should pay attention to the changes in this new administration's approach to crypto. Potential regulatory frameworks are expected to encourage broader adoption of blockchain technology with more companies developing compelling products that people want to use. Investors should also carefully consider their investment allocation in the crypto asset class. When regulatory uncertainty was at its peak, a portfolio allocation of 0-2% was often suggested; however, as clarity on regulatory frameworks improves, the suggested allocation could increase to around 2-5% over time. This would be more akin to an investment allocation to commodities or other low-correlation asset classes.
Longer term, crypto and blockchain technology can be compared to the evolution of companies like Amazon, which transformed from an online bookstore to a global leader in retail, logistics, and cloud computing. We believe decentralized blockchains could unlock a vast array of new ways to do business that improve accessibility and reduce costs. The next few years hold promising developments in crypto markets to watch closely.
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