The Trump Administration Is A Massive Risk For Crypto

From socialism to extreme capitalism

Extractive Institutions:

The recent political and economic landscape in the United States reflects the pendulum swings between the extremes of capitalism and socialism described in Why Nations Fail.

The Biden administration’s extensive government spending and promotion of “woke” ideological policies represent the socialist extreme. These actions, while aimed at "equity and inclusion" (an excuse for incompetence), led to tighter regulatory scrutiny and stifled innovation in markets like crypto. Now, as the pendulum swings back under Trump’s potential leadership, we face the other extreme: a capitalist resurgence marked by deregulation and elite consolidation of power. This cyclical movement underscores a less-discussed but critical pattern—the cycle of political and monopolistic business institutions and their extractive tendencies.

Economic and financial market cycles are often studied for their impact on asset prices and business dynamics. However, political institutional cycles—highlighted in Why Nations Fail—are equally pivotal (I would strongly encourage you to read the book!). Extractive institutions emerge when extreme swings in policy concentrate power and resources, stifling broad-based innovation. Under Biden, regulatory overreach became the hallmark of extractive tendencies, particularly in crypto markets. The SEC’s crackdown on exchanges and tokens exemplified this, as the drive for “protection” created headwinds for the industry. Conversely, under Trump, extractive tendencies are likely to emerge through deregulation that consolidates power within elite circles, fostering a different but equally concerning form of risk.

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The Shift To New Risks:

The appointment of David Sacks as a leading figure in crypto policy provides a case study in how elite incentives shape markets. As noted in this Twitter thread, Sacks’ alignment with crypto funds creates inherent conflicts of interest.

His financial stakes incentivize policies that may pump crypto markets in the short term, benefiting shareholders at the expense of long-term stability. While this could initially drive a rally in crypto prices, it also risks centralizing capital and decision-making, undermining the decentralized ethos that underpins blockchain technology. For market practitioners, understanding these incentives is key to navigating potential volatility.

The risks for crypto differ across these extremes. Under the Biden administration, crypto faced stifling regulation that discouraged innovation and decentralized financial inclusion. In contrast, Trump’s administration could lead to a concentration of power within elite firms and institutions, reshaping crypto markets into a tool for the interests of business elites. This shift requires a recalibration of interpretive frameworks for crypto investors, focusing on elite business signals and the alignment of incentives that drive market actions. Observing where capital is flowing—and who controls it—will become increasingly critical.

Ultimately, the framework from Why Nations Fail offers a lens through which to analyze these political swings. Both extremes of socialism and capitalism breed extractive institutions that concentrate power, albeit through different mechanisms. For market practitioners, the takeaway is clear: adapt to these dynamics by focusing on the incentives shaping the market and the signals emanating from those in power. Crypto may still thrive, but only if participants can navigate the cycles of political institutions.

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A Regime Shift:

This new shift in the political regime is overlapping with a larger shift in the macroeconomic landscape laid out in the recent equity report. The combination of these inflection points could create significant headwinds for all risk assets, specifically in the crypto market.

As always, a Pepe for the culture!

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