-- by Will Nemirovsky & Zev Mintz
Investors gravitated towards Bitcoin prior to the U.S. election on November 3rd as a means of diversifying away some of the systematic risk associated with the uncertainty of the presidential race, as well as anticipation of largely democratic results. As ballots trickled in during the days following the election, Bitcoin’s price surged alongside Joe Biden’s odds of securing a presidential term. Bitcoin is well positioned moving forward, as the country’s leaders are increasingly open to including digital assets in the economy and are likely to enact looser fiscal policy.
- Equities suffered significant drawdowns in the days leading up to the election, whereas Bitcoin experienced minor gains and relatively low volatility. The currency presumably absorbed some of the capital flowing out of the stock market as investors anticipated the effects of the election. President Donald Trump has repeatedly voiced his disapproval of Bitcoin and other cryptocurrencies, stating their value is “based on thin air” and that they are used to “facilitate unlawful behavior.” President-elect Joe Biden has yet to take a stance on the currency. However, many members of the Biden/Harris team have shown signs of being pro-Bitcoin; including prominent members Andrew Yang and Ryan Montoya (an advisor of Kamala Harris).
- Bitcoin, long proclaimed a non-correlated asset, has fulfilled this use case in the past weeks, bucking several short term correlations. Gold prices are down since the election, indicating a risk-on investment environment. Conversely, technology stocks, relatively stable from pre-election prices, underperformed the broader market, consistent with a risk-off market. The rise in Bitcoin’s price shows a lack of correlation with risk-on or risk-off assets.
- The democratic shift of U.S. politicians in the election is likely to lead to increased government spending. However, the outstanding senate race in Georgia will determine the senate majority and as a result will have a large impact on future fiscal stimulus. The country already registered a record budget deficit for the fiscal year 2020. 2021 looks poised to be another year of outsized government budget deficits due to ongoing COVID-19 costs and an expected increase in public spending for social programs. With the US national debt quickly approaching $30 trillion, anticipated inflation is expected to contribute to upward pressure on Bitcoin’s dollar denominated prices. Newly elected Wyoming Senator Cynthia Lummis has cited this inflation as a primary reason for her “hopes to bring Bitcoin into the national conversation.”
2020 has marked a series of positive events for Bitcoin following significant increases in institutional adoption, outsized government spending, and a more favorable administration towards digital assets. In addition, we’ve seen Bitcoin’s role as a non-correlated asset reinforced as it breaks the short term correlation it was experiencing with the equities market. Entering the new year, inflation concerns, large scale government spending, and uncertainty surrounding the economy are all positive tailwinds for Bitcoin. As Biden continues filling in positions within his new administration and the Georgia senate races determine the senate majority, it will be exciting to see the longer term impacts on Bitcoin.