Last-Minute De-Risking: A Key Factor in Disrupting the Trump Trade
The crypto market has been abuzz with speculation surrounding the US presidential election, with many expecting a sell-off in bitcoin (BTC) as Republican Donald Trump’s victory becomes more certain. However, recent data suggests that a significant portion of excess leverage has been flushed out from the derivatives market, potentially disrupting the Trump trade.
A Brief History of the Sell-the-Fact Phenomenon
Markets often experience a sell-off after realizing highly anticipated positive developments. A notable example of this phenomenon is bitcoin’s 22% slide in two weeks following the launch of spot bitcoin exchange-traded funds (ETFs) in the US on January 11.
Why a Big Sell-the-Fact Decline Looks Unlikely
Several factors suggest that a significant sell-off in BTC may not materialize despite the Trump victory. Firstly, last-minute de-risking has been observed in the derivatives market as Kamala Harris’ odds picked up in crucial swing states like Pennsylvania. This sudden spike in Harris’ chances led to a decrease in bullish bets on BTC, the dollar index, and short positions in Mexican peso and government bonds.
BTC Futures Yields (Premium) and Funding Rates
BlockScholes data shows that short-duration BTC futures yields or basis surged in October alongside a spike in funding rates. Both metrics climbed down over the weekend as Trump’s victory became uncertain, signaling a last-minute moderation in derivatives market activity. This moderation may set the stage for a long-lasting bullish action on potential Trump victory.
The Absence of a ‘Buy-the-Rumor’ Rally
A key prerequisite for a sell-the-fact price drop is a strong buy-the-rumor rally. Bitcoin never really had it. Despite Trump’s aggressive courting of the crypto community, including promising to launch a strategic bitcoin reserve and accepting crypto donations, BTC’s price remained trapped in a broad sideways range.
Why Retail Investor Frenzy Remains Low
There is barely any sign of retail investor frenzy, as highlighted by low values in Google search query for the term ‘Bitcoin’ relative to the term ‘Trump’. A retail frenzy is often observed at notable market tops. This lack of retail interest may prevent a significant sell-off in BTC.
The Other Side of the Trump Trade: Rising Bond Yields and a Strong Dollar
However, there is another side to the Trump trade that could pose a headwind to risk assets, including cryptocurrencies. Rising bond yields and a strong dollar index may derail the Fed’s plan to normalize monetary policy via rate cuts. This could strengthen the dollar and drain capital from riskier assets.
Conclusion: The Party Continues
While some market participants may anticipate a sell-off in BTC following Trump’s victory, several factors suggest that this may not materialize. Last-minute de-risking has been observed, and the absence of a ‘buy-the-rumor’ rally may prevent a significant sell-off. Additionally, rising bond yields and a strong dollar index could pose a headwind to risk assets.
Why Bitcoin Never Had a Steep ‘Buy the Rumor’ Rally
Despite Trump’s aggressive courting of the crypto community, BTC never really had a steep ‘buy the rumor’ rally. The price remained trapped in a broad sideways range, with the upside consistently capped at around $70,000 due to supply overhang fears and macroeconomic factors.
A Retail Frenzy Is Often Observed at Notable Market Tops
Google Trends data shows that retail investor frenzy is often observed at notable market tops. However, this frenzy remains low in BTC, as highlighted by the Google search query for the term ‘Bitcoin’ relative to the term ‘Trump’.
The Trump Trade: A Risky Bet on Higher Bond Yields and a Strong Dollar
The other side of the Trump trade involves taking bearish bets on U.S. government bonds (betting on higher bond yields) and betting on gains in the dollar index. This could pose a headwind to risk assets, including cryptocurrencies.
Why Rising Bond Yields Could Derail the Fed’s Plan to Normalize Monetary Policy
Rising bond yields may derail the Fed’s plan to normalize monetary policy via rate cuts. Tariffs promised by Trump are inflationary in nature and may lead to accelerated gains in the benchmark yield or the so-called risk-free rate.
A Strong Dollar Index May Drain Capital from Riskier Assets
A strong dollar index may drain capital from riskier assets, including cryptocurrencies. This could strengthen the dollar and reduce demand for BTC, leading to a decline in price.
The Gensler Effect: Regulatory Clouds Likely to Vanish with Trump’s Victory
With Trump’s victory, regulatory clouds are likely to vanish, providing clarity on regulations surrounding crypto assets. This may boost investor confidence and lead to increased demand for BTC.
Conclusion: The Future of Bitcoin Remains Uncertain
Despite the various factors at play, the future of bitcoin remains uncertain. A sell-off in BTC following Trump’s victory is possible, but several factors suggest that this may not materialize. The market will continue to monitor developments closely and adjust accordingly.