A crypto-enthusiast friend asked me how the price of Bitcoin would respond if Trump won. My first response was “I have no idea but probably up”. If I had to guess though, I’d say it rallies 25% if he wins and falls 25% if he loses. Here’s the “consultant math” behind that rough estimate.
First, let’s start with theory. There are good reasons to think Trump winning would be directionally good for Bitcoin. If Trump wins, he likely pursues the following policies:
Large tax cuts that boost the deficit, and, to 2nd-order, raise interest rates.
Tariffs that raise the prices of imported goods, boosting inflation.
An effort to devalue the dollar to boost exports.
Crypto deregulation and quixotic price supports like “the government shall not sell the Bitcoin seized during criminal investigations.”
Some effort to curtail Fed independence, likely leading to a rise in long-term interest rates.
That is a set of policies that is directionally unfavorable to holders of long-term government debt denominated in dollars. It is directionally favorable to alternative currencies like gold and Bitcoin.
How favorable? Here is one extremely imprecise quantitative approach that uses recent market experience as a guide. The greatest increase in Trump’s odds this election cycle came from July 12th to July 16th: he rose from 60% to 72% (20% geometric) because the market perceived a politically wounded Biden would stay in the race. Over that same four-day period, Bitcoin rose from roughly $57,000 to roughly $65,000, or a 12.5% increase. Since that date, Bitcoin has fallen back to roughly 57k and Trump odds have fallen from 72% to 51% (27% decline geometric). If you extrapolated from recent experience, crypto then has about a 0.5 beta to Trump odds.
Given Trump’s odds are ~50%, an improvement from 50% to 100% and a beta of 0.5 would imply about a 25% increase in the price of Bitcoin if Trump wins.
A friend pointed out that options pricing implies something closer to 10% vol around the election.