If anyone has good reason to cheer the decisive election victory of Donald Trump, it is the so-called “crypto bro” acolytes of Bitcoin and other cryptocurrencies. Since Tuesday, 5 November 2024, the entire sector has been on a tear, with the benchmark digital currency Bitcoin up an extraordinary 42%, hovering near all-time highs at just under $100,000.
MicroStrategy, the self-proclaimed “largest corporate holder of Bitcoin”, is up 252% since September, with the previously little-known CEO Michael Saylor now personally worth more than $10-billion. He has been vocal in his predictions that the value of the currency will eventually reach $13-million per coin by 2045, for no precise reason other than it sounds good, and that it is always wise to talk up your own book.
What matters is not the rationale for the valuation. Valuing cryptocurrency, in the same way that one would a stock or even a traditional currency, has never been the point. What matters is what is behind the bubble. The conventional narrative fuelling investor appetite is that Trump’s return to the White House will be a boon for cryptocurrencies.
Despite labelling bitcoin a “scam” as recently as 2021, Trump positioned himself as one of its strongest advocates on the campaign trail. At a bitcoin conference this summer he pledged to establish a “strategic bitcoin stockpile” and transform the US into “the bitcoin superpower of the world” by subsidising bitcoin mining. He also promised to remove Gary Gensler, the current chair of the Securities and Exchange Commission and a vocal critic of the crypto industry, on his first day in office.
The rationale for owning Bitcoin has changed
The more essential point is, outside of the narrative sold to punters, does any of this matter?
Bitcoin has always been a tough thing to describe. It is in equal parts a shadow currency (particularly useful in hyper-inflationary jurisdictions like Venezuela, or buying illicit contraband such as drugs or weapons), a self-proclaimed inflation hedge, an object of blind speculation and a kind of digital proxy for gold.
But with Trump, the digital asset changing hands for almost $100,000 has given it a new status; it is now a Veblen Good, or an asset that becomes more desirable as it gets more expensive.
Traditionally, luxury items such as ultra-rare supercars, fine wines, and occasionally even designer sneakers have served as indulgences that signal one’s elevated status. To the 19th century sociologist who termed the phrase, Thorstein Veblen, such items represent “a patent waste of time”, valued precisely because of their extravagance and lack of practicality. The more extravagant and impractical the item, the more coveted it becomes because of what it conveys to the broader public about the person willing — or more precisely, able — to buy it.
For years, Bitcoin came close to being a Veblen Good, but not entirely. Its appeal largely stemmed not from a desire to display status, but from the hope of selling it to someone else at a higher price. It was just an opportunity for blind speculation.
This speculative motive contrasts sharply with the behaviour of affluent buyers of Hermes bags, Richard Mille watches, or Tesla cybertrucks, who are not driven by investment returns, or the urge to sell. People buy such things simply because they can, and because of what people consequently think of them. Even the most ludicrous meme stock, however, has an implied utility – if you think there is someone stupider willing to buy it from you for more than you paid.
This has changed. Since Trump’s re-election bitcoin has officially entered its Veblen era. Now it functions as a badge of the de facto elite, or “bro-tocracy”. President-elect Donald Trump has conferred legitimacy on the digital token. His new commerce secretary Howard Lutnick has declared he is a fan and an owner. Ironically for a digital currency that was designed to be an alternative to the financial establishment, a friendly US administration would mean more status for those who hold it.
Collecting fine art, shooting birds and holidaying in St Barts used to show membership of the elite class. But now it’s tech moguls who rule the world. Buying crypto brings the proverbial shoe-shine boy psychologically closer to the inner circle.
Well into bubble territory
This new-found Veblen status, however, cannot last. Bitcoin and other cryptocurrencies are long into bubble territory. For more traditional economists the timing is puzzling, because usually such trading exuberance has been driven by excess liquidity pumped into the economy and needing to find a home, as it was in the heady pandemic days of 2021 and 2022. Now, liquidity is stagnant, if not slowly draining away from the monetary system. This has seemingly not dampened the enthusiasm of whoever is still buying the things.
As with all bubbles, eventually it will burst. If inflation runs higher and the Fed is forced to start tightening, that could presage its collapse. Only time will tell what level of yield for the 10-year US benchmark is the breaking point.
But for the moment the digital currencies, given their new Veblen status, are on a run. There still seem to be buyers out there, desperate to join the ranks of the newly anointed Masters of the Digital Universe. Crypto-bros had better all be hoping they will not be the last one left holding or, in the parlance, “hodling” (the buy-and-hold strategy) when the last reluctant buyer finally turns desperate seller. DM