Interpretation of the cryptocurrency market after the election, the golden age is about to arrive

Original Title: Entering the Digital Golden Era
Author: Alex Thorn, Head of Research at Galaxy
Compiled by: zhouzhou, BlockBeats

Editor's Note: The price of Bitcoin has reached new highs, supported by ETF inflows, cyclical upward trends, and moderate pullbacks. The short gamma positions in the options market may exacerbate volatility, but currently, volatility is limited, and the market does not show signs of overheating. Changes in global M2 money supply may also affect Bitcoin, especially in the context of enhanced hedging properties. If the Trump administration comes to power, regulatory easing will encourage traditional financial institutions to increase their investments, accelerating the maturation of crypto assets, with Bitcoin potentially breaking new highs in the next 12-18 months.

The following is the original content (reorganized for readability):

The digital asset industry is on the brink of a golden era. The cryptocurrency industry in the United States may welcome a renewed regulatory framework, with increasing support from key figures in both houses of Congress and the White House.

The industry has demonstrated its political strength, sending a strong warning to adversaries, which will have far-reaching implications across the political landscape. The strong headwinds that have hindered the industry's development over the past four years have gradually weakened, and legal costs have decreased, allowing the crypto industry to operate against the wind in the world's largest capital markets.

About Tuesday Night

President-elect Donald Trump made history—becoming the second president to win the presidency non-consecutively, with Grover Cleveland being the only former president to achieve this feat when he defeated Benjamin Harrison for a second term in 1892. At that time, this anti-tariff, gold standard-supporting Democrat regained power; today, this tariff-supporting, Bitcoin-supporting Republican has won a second non-consecutive term in 2024, with history often repeating itself.

Trump's victory is historically significant in modern times, as his electoral votes will exceed 310, an increase from the 306 votes in 2016. Additionally, Trump becomes the first Republican to win a nationwide popular vote since George W. Bush in 2004.

He not only reclaimed the "Blue Wall" states of Pennsylvania, Michigan, and Wisconsin but may even win Nevada, which was won by Hillary in 2016. In Florida, Trump's vote share reached 13%, largely due to demographic changes in the state during recent election cycles.

The following heat map produced by Bloomberg shows the voting results of over 95% in each county, comparing the support rates of the two parties' presidential candidates in 2020 and 2024, with significant increases in the red areas.

Source: Bloomberg

The Senate has shifted to Republican control, with the GOP expected to hold 54 seats. The results in the House may take longer to clarify, but the Republicans have a slight edge and are likely to maintain control of the House.

Some other key points from the election:

• The cryptocurrency industry has demonstrated its political influence: In addition to actively promoting President-elect Trump's commitment to support the cryptocurrency agenda, the industry has also gained widespread support in both the House and Senate. The most notable victory came from Bernie Moreno (Republican) in Ohio, who defeated the incumbent Senate Banking Committee Chairman Sherrod Brown (Democrat). The cryptocurrency political action committee invested tens of millions of dollars in opposing Brown's campaign, sending a strong signal to the political arena—that opposing cryptocurrency is a politically failed stance.

• Trump enters his second presidential term: Presidents in their second term often tackle more complex and challenging issues, aiming to create their political legacy. Trump's margin of victory is also larger than in 2016, and he has received support from perhaps the most diverse coalition of Republican voters in decades. This enhances his potential to push for significant reforms, possibly including major modernization of the financial system.

Trump's team is very supportive of the digital asset industry: Trump's core team strongly supports digital assets, with many members publicly stating they own Bitcoin. Incoming Vice President J.D. Vance has disclosed his Bitcoin holdings, Vivek Ramaswamy publicly supported the industry during the campaign, and RFK Jr. has been a long-time supporter of Bitcoin, providing thoughtful support for the industry for at least two years.

Transition team co-chair Howard Lutnick stated that he and other executives at Cantor Fitzgerald hold significant amounts of Bitcoin (and Cantor Bank provides banking services for Tether). Additionally, Trump himself has issued NFTs and launched his own decentralized finance protocol, World Liberty Financial. The support from the team, family, and donors for cryptocurrency increases the likelihood of Trump fulfilling his campaign promises to the industry.

Expectations for Washington's Policies

Let’s look ahead at possible developments in crypto policy:

Banking Regulators: Trump will immediately appoint a new Acting Comptroller of the Currency (OCC) and an Acting Chair of the Federal Deposit Insurance Corporation (FDIC). These agencies have regulatory authority over banks and deposit-taking institutions, and within days, banking regulators may issue guidance explicitly prohibiting discriminatory targeting of specific industries (i.e., "Bottleneck 2.0"). They can rescind existing interpretive guidance or letters that are unfavorable to the industry, such as the joint letter from January 3, 2023.

In weeks or months, the OCC may issue guidance allowing banks to custody digital assets, use, operate, and interact with public blockchains and stablecoins. (Recall that Trump’s former Acting Comptroller of the Currency, Brian Brooks, issued similar interpretive letters in 2020.)

Market Regulators: Trump would promote one of the current commissioners of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to serve as Acting Chair. While Trump has promised to "fire Gary Gensler," most constitutional scholars believe the president cannot dismiss a confirmed independent agency commissioner.

However, the president can immediately designate a current commissioner as Acting Chair. Following such personnel changes, some enforcement actions against certain cryptocurrencies may be paused, some lawsuits may be suspended or withdrawn, and specific projects may receive no-action letters, allowing the industry and regulators to discuss reasonable future paths.

Comprehensive rule-making will take longer, but the crypto industry is expected to quickly gain exemptive relief, primarily including a relaxation of the SEC's definitions of "securities" and "exchanges." The CFTC's stance is similar, but without market structure legislation providing clear jurisdiction between the SEC and CFTC, the chairs of the two market regulators must closely coordinate to develop progressive policies.

Congressional Legislation: The largest crypto policy agenda in Congress includes market structure (clarifying the regulatory status and oversight agencies for digital assets) and stablecoins (legalizing and licensing stablecoin issuance). In May of this year, the "Financial Innovation Act of 2021" passed the House with bipartisan support, which will serve as a foundational framework for future market structure legislation. Currently, there is little disagreement between Democrats and Republicans on stablecoin legislation, with the main controversies being:

1. Whether only national banks can issue them, or if states can also have pathways.
2. Which agency or agencies will take on the regulatory and oversight responsibilities for issuers.

It is worth noting that if the Republicans control the House, these bills are not expected to advance quickly in 2025. A unified Republican Congress may focus on tax reform, trade, and other issues in the first 100 days of 2025, pushing priorities through budget reconciliation.

This does not mean that crypto legislation cannot advance in the next Congress, but in a unified Congress, its priority is expected to be relatively low—this requires close coordination between Congress and regulators on crypto policy. Our basic expectation is that crypto legislation will be delayed until the second half of the 119th Congress, when cabinet officials and independent regulatory agencies can establish a foothold before collaborating with Congress.

Energy Policy: Trump's presidency, especially if the Republicans control both houses of Congress, will be very favorable for domestic energy and electricity production. This is good news for Bitcoin miners, data centers, and any companies and energy producers with significant power resources.

Impact on Market Participants

The easing of regulatory headwinds, the issuance of specific interpretive letters, no-action letters, or regulatory guidance may significantly increase access for U.S. institutional investors to cryptocurrencies.

In September, the SEC relaxed the provisions applicable to SAB 121 or directly withdrew that guidance, paving the way for the world's largest custodial banks to enter the crypto market. Bank of New York Mellon received an exemption because its primary prudential regulator (NYDFS) did not oppose its exemption request, but the OCC is the primary prudential regulator for national banks like Citibank and JPMorgan Chase. Given that the OCC's attitude towards direct interaction between banks and cryptocurrencies is likely to undergo a significant shift, these large banks will gradually gain deeper participation opportunities.

Further institutionalization will provide more financing options for crypto assets, making spot cryptocurrencies more accessible through existing institutional trading platforms and partnerships, while overall enhancing the maturity of the institutional crypto market.

Relaxing the SEC's standards for the application of the Howey Test or allowing more "crypto asset securities" to be traded within broker-dealers will enable more companies, including potential traditional financial institutions such as banks, exchanges, or broker-dealers, to enter the trading space. Additionally, a relaxation of the SEC's stance on the Howey standard may lead to more spot-based cryptocurrency ETFs being listed in the U.S.

Clear attitudes and lenient policies from regulators will allow traditional financial services companies and investors to operate on-chain for the first time, bringing new revenue and other strategic opportunities.

The expanded access to public blockchains may also revolutionize trading efficiency, transparency, issuance, and other aspects of finance. Depending on regulatory stances and any enacted legislation, the integration of traditional finance and decentralized finance may become a reality.

Similarly, depending on the SEC's attitude towards the Howey Test and the disclosure requirements for tokens, we may see the emergence of new types of tokens, and there may even be equity security tokens, with existing tokens potentially adding more equity-like features to enhance their value proposition.

An expanded and improved asset ecosystem will support the liquidity of the crypto hedge fund industry, and the maturation and expansion of investment targets will provide greater investment opportunities for the industry. Improved token disclosure and issuance capabilities will challenge or even disrupt the existing "SAFT to low liquidity, high FDV" model, making VC capital no longer superior to liquid assets.

In the venture capital space, the crypto IPO market may see a more meaningful opening, ultimately providing exit routes for investment returns. Currently, aside from a few SPACs, the only publicly listed crypto startup is Coinbase. We estimate that if conditions are right and regulators maintain an open attitude, there could be dozens of crypto companies in the U.S. looking to go public.

Bitcoin Market Analysis

On Monday, November 4, Bitcoin dipped to a low of $66,700, but has since risen 15%, reaching a new all-time high. On November 5, as the probability of Trump's victory increased, Bitcoin quickly climbed to new historical highs, hovering in the $75,000-$76,000 range.

Despite significant market volatility—up 15% since Monday and 26% since October 1—the market does not show signs of overheating from a fundamental perspective. While Bitcoin rose due to election news, the "Coinbase Premium" significantly rebounded on Tuesday night, turning positive for the first time in at least a month.

Bitcoin ETFs performed strongly, setting a record for the largest net inflow on November 7 (Thursday), attracting up to $1.375 billion, pushing Bitcoin to new highs. This figure broke the previous record of $1 billion net inflow set on March 12, 2024.

Bitcoin Cycles

Historically, Bitcoin's current trajectory is consistent with the previous two bull markets. From the historical cycle lows (2011: $2, 2015: $152, 2018: $3,122, 2022: $15,460), Bitcoin's movement is in sync with the 2017 bull market, only slightly lagging behind the pace of the 2021 bull market.

Looking back at historical bull market pullbacks, the retracement in 2024 is milder compared to the pullbacks during the 2021 and 2017 bull markets.

Futures and Funding Rates

Although the open interest in futures on cryptocurrency exchanges has risen to new annual highs, funding rates have remained relatively stable, indicating that this volatility is primarily driven by the spot market.

Source: Velo.xyz

Bitcoin Options Market

Bitcoin options traders hold net short gamma positions between $54,000 and $84,000, which will exacerbate any price fluctuations. Simply put, when traders hold short gamma positions, they typically hedge by buying spot when prices rise or selling spot when prices fall.

This effect can accelerate price fluctuations and increase market volatility. Conversely, when traders hold net long gamma positions, they do the opposite: selling when prices rise and buying when prices fall, thereby reducing volatility.

Our analysis indicates that the current short gamma peak is at $70,000, so as Bitcoin's price rises, this effect is diminishing. Notably, many investors holding current high strike call options are already in profit, so they may choose to roll their positions at higher strike prices, pushing the short gamma positions into higher strike price ranges.

The following chart shows our view of the net dealer gamma positions for all Bitcoin options expiration dates from November 7, 2023, to September 26, 2025.

Bitcoin Fundamentals

The Realized HODL Ratio is a metric that measures the ratio between the realized market capitalization of Bitcoin that has been held for 1 week and 1-2 years (i.e., the realized value of Bitcoin that has been traded during these time periods).

A higher ratio typically indicates an overheated market, and peaks often coincide with market tops. The sideways movement of the 2024 RHODL is more similar to the sideways phase of 2019-2020 rather than any market top activity, suggesting that Bitcoin still has room to rise in the near and medium term.

The MVRV Z-Score is the ratio of market value to realized value, as well as the standard deviation of market value, used to help identify discrepancies between the trading value of an asset and its overall cost basis. Historically, this metric has been very effective in identifying market tops. The current value indicates that Bitcoin's price is not yet close to overheating or top territory.

Bitcoin and Global M2

Historically, Bitcoin has reacted to changes in the global money supply. While this correlation is not unique to Bitcoin, it is still worth noting, especially if Bitcoin begins to be used more as a hedging asset, as mentioned by Larry Fink.

Outlook

The arrival of the Trump administration, along with a strong Republican Senate capable of confirming its departmental appointments, may bring favorable news of regulatory easing for the U.S. cryptocurrency industry. We expect that certain forms of exemptive relief will be introduced soon, while a more solid supportive regulatory framework will take longer to develop.

The relaxation of the regulatory enforcement environment, combined with progressive policy thinking, will pave the way for traditional financial services companies and institutional investors to engage deeply in this asset class. This will challenge the barriers of existing crypto infrastructure participants but will also broadly support the expansion and maturation of this asset class. In this environment, we expect Bitcoin and other digital assets to trade at levels far above the current historical highs in the next 12 to 18 months.