Bitcoin Is Bigger Than Trump
Bitcoin Resists the Trump News Cycle, At Least For Now
It's hard to escape news about US President Donald Trump. His tweets reverberate all over the globe. The media is constantly reacting to his statements, and sometimes the stock market does too. One exception to this rule is Bitcoin, which is not particularly concerned about anything that Trump says or does. The data suggests that Bitcoin prices are generally not affected by the non-stop Trump news cycle — at least for now.
Why does this matter? Because Bitcoin’s indifference to the Trump news cycle is just one more example of how Bitcoin, a digital currency that is not backed by any government or central bank, exists on its own planet. News that affect other financial markets simply do not have the same impact on Bitcoin. Understanding this fact can help you understand the type of events that influence Bitcoin’s price.
Take the US stock market, for example. Trump likes to take credit for booming stock prices, and the American media often attributes stock market moves, both good and bad, to Trump-related events. "The Dow Drops More Than 400 Points After Trump Announces Tariffs," blared a CNN headline in March, following news that the Trump administration would be imposing tariffs on imports of steel and aluminum.
Yet while both the S&P 500 and Bitcoin's prices moved up in 2017, specific price movements were determined by different factors. The accompanying chart compares Trump’s impact on the S&P 500 Index to Trump's impact on Bitcoin's price. On certain days in 2017, Trump news appeared to have a small effect on the S&P 500. But this news did not have the same effect on Bitcoin.
Sometimes Bitcoin and the S&P 500 moved in opposite directions. The great uncertainty leading up to the 2016 election caused major turmoil in the stock market, but didn’t have a discernible impact on Bitcoin prices. Following Trump's inauguration, the S&P 500 rose by 0.34%, while the price of Bitcoin fell by 0.71%.
A more dramatic split took place in May of 2017, when the S&P 500 fell in reaction to news of a memo by former FBI director James Comey, which said that Trump asked him to stop investigating former national security adviser Michael Flynn. This was bad news for the Trump presidency. The S&P 500 dropped by nearly 2%, while the price of Bitcoin rose by nearly 5%. On September 25, the S&P 500 dropped slightly, this time in an apparent reaction to a conflict with North Korea. Bitcoin moved in the opposite direction, jumping 9%. In a few cases, Trump may have had an indirect effect on Bitcoin's price. Perhaps some people bought Bitcoin because they were losing faith in the US government, or worrying about a war with North Korea.
Eric Zitzewitz, an economics professor at Dartmouth, has analyzed Trump's impact on the US stock market. So what about Bitcoin? Zitzewitz observes that "liquidity created by share buybacks motivated by the tax cuts and the cautious approach to raising rates may have helped the price of Bitcoin." In other words, when firms buy back shares, someone has to sell to them. This puts cash in someone else's hands for reinvestment. "All else equal, this can put upward pressure on asset prices, including for non-traditional assets," Zitzewitz explains.
One could argue that the stock market increases and decreases on this chart are too minor to be meaningful. But Trump and the stock market still exist in the same universe, while Bitcoin’s price changes are largely independent of Trump news.
So what does affect Bitcoin prices? Most simply, Bitcoin tends to be affected by cryptocurrency-related news, for example disagreements in the Bitcoin community about how best to bring Bitcoin to scale. Because Bitcoin is such a radically new kind of currency, its value is largely determined by people's belief in its viability. Bitcoin is thus particularly sensitive to any news that suggests that cryptocurrency does not have a bright future. A resolution of a battle about a potential fork in Bitcoin's software, known as Segwit2X, led to a sharp increase in Bitcoin's price. Additionally, reports of hacks of major cryptocurrency exchanges like Binance can help drive prices down.
Government attempts to regulate Bitcoin also have an immediate impact on Bitcoin's price. Bitcoin, in theory at least, does not need government support in order to survive. But the world is waiting to see if that is really true. In the meantime, Bitcoin prices react strongly to government attempts to crack down on cryptocurrency. In September 2017, when China closed cryptocurrency exchanges, the price of Bitcoin dropped by nearly 17%. When it became clear to the world that China's crackdown wouldn't be enough to defeat Bitcoin around the world, Bitcoin's price not only recovered but proceeded to reach record highs.
Still, government attempts to regulate Bitcoin continue to have short-term impact on prices. More recently, Bitcoin plunged on reports that South Korea would start cracking down on exchanges. In March, comments by the US Security and Exchange Commission related to cryptocurrency regulation were followed by a drop in Bitcoin's price. But Mr. Zitzewitz believes that when it comes to the impact on Bitcoin, "policy in Asia has been and/or will continue to be more important than US policy."
But for how long? Trump has tweeted about the stock market dozens of times, but up until now, he has not taken a personal interest in cryptocurrency. This could change. If Trump himself were to comment on Bitcoin, then the price of Bitcoin would surely react. In other words, there may come a time when Bitcoin is no longer immune from the Trump news cycle. But for now, Bitcoin is full of drama, but at least it's not Trump drama.