The Scoop: Is the crypto market wrong about a Harris Administration?

This column was co-written by Frank Chaparro, director of special projects at The Block, and Laura Vidiella of MNNC Group. The views expressed in this column are their own and do not reflect the opinions of their employers.

Kamala Harris is emerging as the front-runner for the 2024 presidential election, and crypto markets are not responding well.

Bitcoin's recent inability to break through $70,000 can be attributed to Harris's rising odds of beating former President Donald Trump. Trump has promised to be the "crypto president," pledging to maintain a strategic reserve of bitcoins and potentially offering crypto companies relief from the current regulatory environment under Gary Gensler’s Securities and Exchange Commission.

Under a new Trump Administration, crypto market participants could enjoy a widespread reduction in U.S. regulatory hostility. A more relaxed regulatory environment could attract new market participants and large banks, which have largely sat on the sidelines, to enter the market and offer custody, banking, and trading services. Even with the launch of spot bitcoin and ether ETFs, firms like JPMorgan and Citigroup have largely avoided dealing with physical crypto. This could change under a Trump Administration, benefiting BTC prices and the market overall.

Still, we are puzzled by Bitcoin's stagnation. For one, Harris and Trump are currently even opponents. Despite concerns about Harris's stance, there are promising signs she could become more favorable towards crypto. Many industry insiders believe a shakeup at the SEC is likely under her administration. According to FalconX’s Austin Reid, the market is not pricing in the potential upside of either a very positive Trump Administration or a potentially more positive Harris Administration.

“Regulatory clarity in the US plus a pro-crypto president would be a massive unlock with huge upside potential," Reid said. "The market doesn’t seem to be pricing that in yet, reflecting the uncertainty of the election outcome and belief in a positive Harris campaign position.”

Noelle Acheson agrees. Here’s what she said in a direct message to us on X:

“Any thawing in US regulatory hostility is pure upside. Trump dropping in the polls while Harris climbs is one of the factors keeping the BTC price depressed these days, in my opinion. The real upside is that few believe Harris can be pro-crypto.”

Her outreach to industry insiders, Anita Dunn joining a Harris PAC, the possibility of a straightforward regulatory roadmap, and growing pressure from within the Democratic Party suggest a potential thaw in the party's hostility towards cryptocurrency. Until Harris outlines a specific cryptocurrency policy roadmap that is at least slightly more positive than the current Biden Administration, we expect uncertainty to drive the market.

Elections are not the only reason for market uncertainty: a wallet tagged as "U.S. Government: Silk Road DOJ" transferred 29,800 BTC related to the Silk Road website to an unlabeled address with no prior history of transactions. Bitcoin’s price took an immediate hit. This comes right after Trump announced his plans to create a Bitcoin reserve fund. Republican Senator Cynthia Lummis of Wyoming also announced her plans to introduce a bill that would call for the U.S. to acquire one million Bitcoin, or nearly 5% of the outstanding tokens, over five years.

Another sign that cryptocurrency markets are less exciting than they were earlier this year is Bitcoin’s growing dominance. Bitcoin dominance, a measure of Bitcoin’s market capitalization relative to the total crypto market cap, reached a high of 52.7% this past week. That’s the highest level since April 2021. Clearly, people are not keen to dabble in altcoins and the long tail of cryptocurrencies amid political and macroeconomic uncertainty.

Until recently, it was unclear when the Federal Reserve would cut rates, but this week's meeting opens the door to a rate cut in September — if inflation remains under control. This could be a tailwind for altcoins, which might follow the trajectory of small-cap stocks that have been rallying in anticipation of rate cuts. Small-cap stocks have experienced a notable surge recently, driven partly by expectations of the Federal Reserve cutting interest rates and the relative underperformance of large-cap stocks. For instance, the Russell 2000, a key small-cap index, has seen significant gains, even as major large-cap indices like the NASDAQ have faltered.