Song Xuetao: Why does Trump want to bind Bitcoin?

Trump fulfilled his campaign promise on Bitcoin by nominating cryptocurrency supporter Paul Atkins as SEC Chairman, replacing current Chairman Gary Gensler, who is known for his tough regulatory stance on cryptocurrencies. After Trump's election, the price of Bitcoin quickly broke through $76,000, setting a new historical high, and then continued to surge past the $100,000 mark.

During his 1.0 phase, Trump was a skeptic of cryptocurrencies, but in his 2.0 phase, he transformed into an active advocate for "making America the world's cryptocurrency capital." One major reason is that MAGA needs an alternative to maintain the dollar's hegemonic status, and Bitcoin has been given a special mission that transcends technological development.

Trump's 2.0 aims to escape the political fate of being ousted due to stagflation, hoping to improve fiscal efficiency and total factor productivity through AI. However, if AI fails to deliver the expected results, deficit monetization will accelerate the process of "de-dollarization." Over the past two years, gold has emerged as a beneficiary of de-dollarization and has become a favorite among investors.

However, MAGA cannot tolerate any erosion of the dollar's monetary hegemony, so Trump needs an alternative to maintain the dollar's status. This alternative must be something that the U.S. can control and exert influence over; gold is likely already off the table, while cryptocurrencies represented by Bitcoin may still have a chance. But the essence of currency is credit; without credit, it must be injected with credit.

1 Trump's Unbreakable Bond with Bitcoin

After announcing his candidacy for president again, Trump's relationship with the cryptocurrency world has grown increasingly close. First, Trump's commitment to "deregulation" aligns perfectly with the demands of the crypto space. Secondly, Silicon Valley elites, including Elon Musk and Peter Thiel, are increasingly unable to tolerate the California government's and the Democratic Party's increasingly left-leaning policies, such as antitrust actions threatening the growth of efficiency-first tech giants, which indirectly promotes Trump's collaboration with Silicon Valley and has, to some extent, catalyzed the development of Bitcoin.

Since Trump announced his presidential campaign, the price of Bitcoin has experienced two significant surges, each exceeding 40%, first from approximately $40,000 to about $70,000 after a successful first battle in Iowa, and then from around $70,000 to approximately $100,000 after winning the presidential election.

The rise in Bitcoin's price is related to Trump's binding of the MAGA ideology to his campaign. Trump stated, "Bitcoin is a miracle of technology and human achievement, and it will surpass gold in the future," proposing to grant Bitcoin the same reserve currency status as the dollar, maintain a national strategic Bitcoin reserve, never sell government-seized Bitcoin, and make America the cryptocurrency capital.

2 Bitcoin is not a substitute for gold

After Trump's election, the decline of gold sharply contrasted with the rise of Bitcoin. The discussion about whether cryptocurrencies, especially Bitcoin known as digital gold, can replace gold has resurfaced.

(1) Bitcoin and gold have three similarities:

First, both have supply scarcity. Specifically, as of the year 2023, the above-ground stock of gold is 212,582 tons, and the underground reserves are about 59,000 tons. The Bitcoin protocol stipulates a total supply limit of 21 million coins, and the mining reward, known as the "block reward," undergoes a halving every four years, which is one of the key mechanisms that maintain Bitcoin's scarcity, meaning that the difficulty of mining will gradually increase.

Second, both are decentralized and non-sovereign assets. Gold and Bitcoin are not issued by central authorities. In other words, central banks cannot decide to mint more gold coins. Similarly, the Treasury Secretary cannot order to slow down or speed up Bitcoin mining. In the past, investors chose to invest in gold to hedge against currency and fiscal policy risks for asset diversification, and now Bitcoin has become a new option.

Additionally, both have certain speculative and hedging properties. However, there are significant differences in degree. Bitcoin is often a risk asset with strong speculative attributes, only occasionally exhibiting hedging characteristics. Gold, in this regard, is like a mirror image of Bitcoin, with more pronounced hedging properties and only occasionally displaying speculative characteristics. The speculative attributes of gold may appear as a momentum effect during rapid price increases, but this reaction is usually short-lived, as gold has characteristics that differ from Bitcoin.

(2) Gold and Bitcoin also have three differences:

First, gold has physical uses, involving industrial production, personal consumption, etc., while Bitcoin is a digital asset composed of code and exists virtually. Physical assets have physical uses, and virtual assets have virtual uses; for example, Bitcoin may be used for money laundering, tax evasion, funding illegal activities, and other gray areas, which poses challenges for global anti-money laundering regulations, especially in cross-border fund tracking.

Second, gold has a unique position in the commodity market. Other precious metals, whether silver or platinum, cannot compare with gold. Bitcoin currently still dominates the cryptocurrency market, accounting for about 56.72% of the total market value of all cryptocurrencies, but more and more Bitcoin alternatives are emerging, such as Ethereum and Binance Coin.

Finally, gold and Bitcoin also differ in terms of security. Gold, as a physical asset, is not easily affected by cyberattacks or digital fraud, but it requires secure storage, especially during cross-border transportation. Bitcoin holders may face hacking attacks or loss of private keys, resulting in loss of control, and lack additional security measures Bitcoin wallets are divided into hot wallets that store private keys online and cold wallets that store them offline. In Bitcoin transactions, users must use their private keys to create digital signatures to prove their control and ownership of the wallet. However, incidents of hot wallets being hacked occur frequently. As for cold wallets, investors often suffer significant Bitcoin losses due to device damage or loss.

3 Bitcoin as Plan B in the Event of AI Failure

Trump, returning to the White House, has realized that if the efficiency issues of U.S. finance and manufacturing are not addressed, the U.S. economy will increasingly rely on deficit monetization. Once a certain critical point is breached, a debt spiral will emerge, accelerating the erosion of the dollar's hegemonic status. Therefore, Trump's governance philosophy during his second term is very clear: to improve production efficiency and government financial efficiency through AI, allowing the U.S. to break free from the track of stagflation and maintain the dollar's globally recognized reserve currency status. In this process, Musk will play an important role, which is why Trump is elevating Musk's political status, making him the most important figure around him, and Musk has already had a direct impact on U.S. government budget proposals.

If it fails, the dollar will not only depreciate against gold but may also further undermine its status as a global reserve currency and sovereign credit currency. Although the probability is low in the short term, such erosion often accelerates suddenly at some point. Historically, the transition of great power status often experiences a long period of parallelism and competition, with the actual transfer of power occurring in a short time. Therefore, Trump needs to formulate a Plan B to preserve the dollar's status in case AI technology fails to improve production efficiency, reduce fiscal deficits, lower inflation, and narrow the wealth gap, and this alternative plan is Bitcoin.

Although there is currently no currency that can replace the dollar in the short term, linking Bitcoin to the dollar can be seen as a hedging strategy against the dollar's status. Once the dollar's global reserve currency status is severely threatened, the U.S. can at least weaken gold's position by controlling Bitcoin, thereby continuing to maintain the dollar's monetary status.

4 Energy is the Key to Technological Revolution

After meeting with executives from several cryptocurrency mining companies, Trump proposed on June 24 to fully realize "Made in America" for Bitcoin. Energy, as a key limiting factor for Bitcoin mining and transactions, is of paramount importance The energy demand of Bitcoin is entirely dependent on electricity supply. According to estimates from the University of Cambridge in the UK, Bitcoin's annual electricity consumption is approximately 172.1 terawatt-hours, exceeding the annual electricity consumption of countries like Egypt, Malaysia, and Poland. In Texas, where many cryptocurrency mining companies are concentrated, 10 mining companies consume more than 1,800 megawatts of electricity annually.

Bitcoin miners tend to seek low-cost electricity supplies to ensure profitability. In 2023, 81% of newly commissioned renewable energy projects (approximately 382 gigawatts) had costs lower than fossil fuel projects. For example, in the case of photovoltaic power generation, the cost of photovoltaic power fell to around 4 cents per kilowatt-hour within a year in 2023, which is 56% lower than fossil fuel and nuclear power generation. As a result, the share of renewable energy used in Bitcoin mining continues to increase. According to Woocharts data, as of October 24, 2024, the proportion of mining using sustainable energy was 56.8%.

Historically, a country's strength is often closely linked to its energy productivity. For example, the technological revolution enabled the UK to achieve breakthroughs in coal mining and usage technology, laying the foundation for the long-term status of the pound. The United States has consolidated the global leadership of the dollar and itself by controlling the extraction, transportation, and consumption of oil, as well as its influence on global geopolitics. Countries that master the energy relied upon by advanced productivity can stand out in a century-long competition, establishing their dominant position across trade, manufacturing, consumption, and finance.

Today, the constraints of traditional energy are gradually weakening, and new energy represented by sustainable energy is on the rise. For a country, developing and mastering new energy has become crucial, as low costs, stable and secure supply, decentralized layout, and mobile energy supply systems are important foundations for triggering a new round of technological revolution and productivity enhancement.

Thus, AI represents plan A for maintaining the dollar's status, while cryptocurrency represents plan B for hedging against the potential erosion of the dollar's status. However, whether it is Bitcoin or AI, energy is an unavoidable core element. The essence of currency is credit, the essence of credit is order, the essence of order is technological competition, and the essence of technological competition is energy efficiency. Countries that master new energy can lead the application of new technologies, improve production efficiency, expand the scope of efficient and low-cost applications, and thus enhance total factor productivity. Whichever country wins in this competition, once a new order is established, the historical mission represented by gold in the unprecedented changes of the past century will also be declared complete.

Author of this article: Song Xuetao S1110517090003, Li Mengying, Source: Xuetao Macro Notes, Original title: "Song Xuetao: Why Did Trump Bind Bitcoin?" Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk