Grayscale Research: Potential Impact of the US Election on Cryptocurrency

Original title: Potential lmplications of U.S. election quotations come on Digital Asset Markets

Original author: Zach Pandl, Will ogdenMoore; Grayscale Research

Original translation: Shaofaye123, Foresight News

TL;DR

· The results of the U.S. election could have a significant impact on the crypto industry. The next president and Congress may pass legislation specifically targeting cryptocurrencies and may make adjustments to tax and spending policies that affect financial markets more broadly.

· Current polling data and implied odds from prediction markets such as Polymarket both show that the election is very competitive. As of October 15, these data indicate that Republicans are more likely to control the Senate. Given the Senate’s role in confirming presidential appointees to key regulatory agencies, such as the chairmen of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), changes in Senate control are highly relevant to cryptocurrency. [1]

· At the voter level, data shows that cryptocurrency is a bipartisan issue, with Democrats slightly more likely to own Bitcoin than Republicans. Additionally, candidates from both parties have expressed support for cryptocurrency innovation.

· Regardless of which party is in power, comprehensive bipartisan legislation may be the best long-term solution for the U.S. crypto industry.

While the 2024 U.S. election involves a wide range of issues, the crypto industry has successfully captured the time and attention of candidates. This can be attributed to changes in voter preferences: in a national survey conducted by Harris Poll on behalf of Grayscale, we found that about half of U.S. voters would prefer to vote for a candidate who is more interested in cryptocurrency education/information. The increased voter attention to cryptocurrency reflects that as the industry grows and innovates, comprehensive legislation has become more urgent.

Below, we consider potential election scenarios for the White House and Congress and their likely impact on cryptocurrency markets. For each outcome, we report the implied odds from Polymarket. "Polymarket is a blockchain-based prediction market that has seen a sharp increase in adoption this year."

Most outcomes are highly uncertain: both polling data and prediction markets suggest a close race. However, the data suggests a flip in control of the Senate (from Democrats to Republicans) seems likely, which could be a shift with direct implications for the crypto industry given the Senate's role in confirming presidential appointments.

White House

Polymarket odds: Trump 57% / Harris 43% (as of October 15, 2024)

Outcome: A Trump victory could mean more supportive regulators and a wider budget deficit, both of which could be bullish for Bitcoin and cryptocurrencies. But Trump’s fiscal policy plans will require congressional support, and tariffs could spark market uncertainty.

The next president will set the cryptocurrency policy agenda, nominate key regulators, and drive broader economic policy decisions such as taxes, spending, and tariffs. Former President Trump showed great enthusiasm for the digital asset industry, claiming to make the United States the “world capital of cryptocurrency and Bitcoin”[2]. He also announced the launch of a cryptocurrency lending platform called World Liberty Financial, although details of the project have yet to be revealed. [3]

Vice President Harris has recently made more supportive statements about digital assets, explaining that her administration will “encourage innovative technologies like artificial intelligence and digital assets while protecting consumers and investors.” [4] Her campaign will also reportedly announce plans to protect crypto assets and develop a “rule of law for cryptocurrencies and other digital assets.” [5]

However, the Harris campaign provided fewer details, and it is worth noting that, as seen by some market participants and commentators in the crypto industry, the current Biden/Harris administration has taken an adversarial approach to industry oversight, such as filing a series of lawsuits, restricting access to traditional banking services, and vetoing bipartisan legislation. [6] As a result, the Trump administration is more likely to nominate regulators who support innovation in the crypto industry. [7]

The outlook for Bitcoin may also depend on the macro policy choices of the next administration (for more information, see Bitcoin and the Macro Policy Question for Biden and Trump). Researcher analysis suggests that both Trump and Harris’ fiscal policy proposals would lead to larger budget deficits—even though the federal deficit is already quite large. [8] Before the campaign’s stated plans, the Congressional Budget Office (CBO) projected that federal deficits would average 6.2 percent of GDP over the next 10 years. According to the Penn Wharton Budget Model (PWBM), Harris’s proposal to expand the child tax credit and other reforms would increase the 10-year average budget deficit to 6.5 percent of GDP, despite her plan to raise the corporate tax rate to 28 percent. [9] Meanwhile, the PWBM analysis shows that former President Trump’s plan to extend the 2017 tax cuts and reduce other tax rates would increase the 10-year average budget deficit to 7.8 percent of GDP (Exhibit 1). [10]

Grayscale Research believes that, all else being equal, large budget deficits will be negative for the dollar and positive for Bitcoin in the medium term.

Chart 1: Neither candidate has a plan to reduce the federal deficit

In practice, however, the market impact is uncertain. First, fiscal policy changes must be approved by Congress, and it is unclear which campaign proposals can become law—especially with a divided administration. Second, former President Trump also intended to significantly increase tariffs. Higher tariffs tend to increase the value of the dollar and could weigh on risky assets, especially if other countries retaliate. [11] While tariffs do not directly affect Bitcoin, crypto asset valuations are correlated with broader market factors, so higher tariffs could pose downside risks to prices.

Senate

Polymarket Odds: Republican Control 78% / Democratic Control 22%

Result: While members of both parties have expressed support for some aspects of crypto policy, Republican control could have a more positive impact on the crypto industry due to the Senate’s key role in confirming regulatory appointments.

The Senate, along with the House, is responsible for passing fiscal policy changes [12] and legislation specific to cryptocurrencies. The Senate is also responsible for confirming presidential appointments, including key regulators at the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Reserve Board. Senate oversight of agency appointments is critical to the industry given the uncertain regulatory status of many crypto assets.

Crypto legislation considered in this Congress is bipartisan, including the Senate Agriculture Committee’s Digital Commodity Act and the Senate Banking Committee’s stablecoin legislation. [13] In contrast, Republican senators have been more supportive of the crypto industry. For example, crypto lobbying group Stand With Crypto [14] gave 39 of 49 Republican senators an “A” on crypto, while only 6 of 51 Democratic senators gave an “A.” [15] Moreover, voting patterns also indicate that Republicans are more supportive of the crypto industry: when the Senate voted to repeal SEC Staff Accounting Bulletin (SAB) 121 [16], 48 Republicans voted in favor, compared to just 12 Democrats.

Democrats currently control the Senate, and as such, chair committees, set legislative priorities, and ultimately have the deciding vote on some presidential appointments. Given that Republicans are generally more supportive of crypto innovation, Grayscale Research believes that a change in Senate control could have a positive impact on crypto markets — and given the critical role of regulatory oversight, this is arguably the most important election outcome for the industry.

House of Representatives

Polymarket Odds: Republicans 44% / Democrats 56%

The upshot: Control of the House of Representatives will be critical in determining whether the government is unified or divided, which will in part determine whether the next president can achieve his or her stated fiscal policy goals, with broader implications for financial markets.

As with the Senate, any fiscal policy changes or cryptocurrency-specific legislation will require the support of the House of Representatives. The legislation considered by this Congress has bipartisan approval, but Republican support is higher. For example, for the House Financial Services Committee’s FIT21 [17] bill, 208 Republicans voted in favor, while only 71 Democrats voted in favor, including former Speaker Pelosi and Democratic operative Clark.

Control of the House determines committee assignments and legislative priorities, which can have an impact on crypto policy. But the most important impact is whether one party controls both the White House and the House and Senate—“unified government”—or whether control is split between the two parties—“divided government.” Under a divided government, changes in fiscal policy may be difficult to achieve.

Eight Scenarios

For the upcoming U.S. election, there are three institutions involved (the White House, the Senate, and the House of Representatives), each with two possible outcomes (Republican or Democratic control). Therefore, there are eight different possible scenarios, each with different implications for the crypto industry. Figure 2 provides Polymarket’s implied odds for each scenario.

Figure 2: Election is highly uncertain, according to prediction markets

Grayscale Research highlights several key points. First, of the four more likely scenarios, none clearly dominates — in other words, the balance of power after the election remains highly uncertain. Second, observers are divided over whether we will have a unified or divided government: the combined odds of a Democratic or Republican sweep remain close to 50%. Third, the only specific outcome with a reasonably high probability is Republican control of the Senate, according to Polymarket. As long as this scenario persists, we would expect the election outcome to move in a direction favorable to crypto markets, given the Senate’s key role in confirming presidential appointments.

Crypto is a bipartisan issue

At the voter level, cryptocurrency is a bipartisan issue. According to a national survey conducted by the Harris Poll on behalf of Grayscale, Bitcoin ownership and familiarity with cryptocurrency are higher among self-identified Democrats than among Republicans, and Democrats have generally increased their interest in cryptocurrency this year. [18] In addition, any new cryptocurrency legislation would require a supermajority in the Senate, which would require bipartisan support.

Nevertheless, given the Senate’s key role in confirming presidential appointees to regulatory agencies, Grayscale Research believes that Republican control of the Senate is a significant positive for the crypto industry. As such, current polls and prediction market implied odds currently indicate a favorable outcome for the cryptocurrency market.

However, there is a lot of uncertainty about the next administration’s legislative prospects for cryptocurrency or possible fiscal policy adjustments. In Grayscale Research’s view, the best outcome for the long-term development of the crypto industry would be for the two parties to continue to work on more comprehensive legislation.

Harris Poll Methodology

The survey was conducted online in the U.S. by The Harris Poll on behalf of Grayscale through its Harris On Demand integrated product from September 4-6, 2024, among 1,841 adults (ages 18 and older) who plan to vote in the 2024 presidential election. Data were weighted as needed by age, gender, race/ethnicity, region, education, marital status, household size, household income, employment, and online propensity to align with actual population proportions. Respondents for this survey were selected from those who agreed to participate in our surveys. Sampling precision for Harris Online Polls is measured using Bayesian credible intervals. For this study, the sample data is accurate to within +/- 2.8 percentage points at a 95% confidence level. This credible interval is wider for the subset of the population of interest surveyed. All sample surveys and opinion polls, whether or not they use probability sampling, are subject to a variety of other sources of error that are generally difficult to quantify or estimate, including but not limited to coverage error, error associated with nonresponse, error associated with question wording and response options, and post-survey weighting and adjustments.

References

[1] Grayscale takes no position as to the accuracy or reliability of polling data and implied odds from prediction markets like Polymarket. Throughout this piece, Grayscale uses data from Polymarket to suggest general directionality of potential election outcomes.

[2] Source: Barron's.

[3] Source: NY Times.

[4] Source: Bloomberg.

[5] Source: NPR.

[6] See, for example, WSJ, Unchained Crypto, Reuters, TechCrunch, Axios, Reuters.

[7] On regulation, former president Trump has said, for example, "The rules will be written by people who love your industry, not hate your industry." Source: CNBC.

[8] This statement from the CBO sums up the current budget picture: "Over the 10-year projection period, primary deficits in CBO's baseline average 2.5 percent of GDP. In the 62 years from 1947 to 2008, primary deficits exceeded 2.5 percent of GDP only twice. In the past 15 years, though, they have exceeded that percentage 10 times—in part because of legislation enacted in response to the 2007–2009 financial crisis and in the wake of the coronavirus pandemic that began in early 2020. Source: CBO.

[9] PWBM estimates are based on the primary (before interest) deficit; Grayscale incorporated CBO estimates of interest expense before the campaign's proposals to calculate the total deficit impact. example, Committee for a Responsible Federal Budget.

[10] PWBM estimates of the Trump proposals do not include the potential impact of tariffs on customs revenue. However, projections that do include tariff revenue, like those from the Committee for a Responsible Federal Budget, find a broadly comparable net impact on the deficit. Estimates of the revenue impact of Trump's tariffs plans over a ten-year period, if maintained, range from roughly $2 trillion to $5 trillion. Source: Committee for a Responsible Federal Budget, Tax Policy Center, Tax Foundation.

[11] A variety of research has examined the impact of tariff increases on the US Dollar. See, for example, The multifaceted impact of US trade policy on financial markets and To What Extent Are Tariffs Offset By Exchange Rates. Changing tariffs does not typically require Congressional approval.

[13] Specific bills are the Digital Commodities Consumer Protection Act of 2022 (S.4760) and the Lummis-Gillibrand Payment Stablecoin Act (S.4155).

[14] The Stand With Crypto Alliance is a 501(c)(4) nonprofit funded by donations. Grayscale takes no position as to the accuracy or reliability of data from The Stand With Crypto Alliance. Throughout this piece, Grayscale uses data from The Stand With Crypto Alliance to suggest general directionality of where members of Congress stand with respect to crypto policy.

[15] Counting independent senators who caucus with Democrats.

[16] SAB 121 is a financial guideline requiring companies to report customer-held crypto as both assets and crypto custody affecting liabilities, how they manage crypto custody services.

[17] Financial Innovation and Technology for the 21st Century Act (H.R.4763).

[18] Across the three waves of polling, 18% of self-identified Democrats said they owned Bitcoin, compared to 15% of Republicans. Similarly, 51% of Democrats said they were "very familiar" or "somewhat familiar" with crypto, compared to 45% of Republicans. Finally, in the In the third wave of polling (September 4-6, 2024), 37% of Democrats said they have become more open to learning more about investing in crypto this year, compared to 30% of Republicans. Source: The Harris Poll.

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