Grayscale: Potential impact of US election results on crypto markets

Source: Grayscale; Compiled by Wuzhu, Golden Finance

Summary

• The outcome of the U.S. election could have a significant impact on the digital asset industry. The next president and Congress are likely to enact legislation targeting cryptocurrencies and could make changes to tax and spending policies that affect broader financial markets.

• Current polling data and implied odds from prediction markets such as Polymarket suggest that this is a tight race. [1] However, as of October 15, these data suggest that the likelihood of Republican control of the Senate appears strong. Grayscale Research believes that a change in Senate control could be particularly relevant to cryptocurrencies, given the Senate’s role in confirming presidential appointments to key regulatory agencies such as the SEC and CFTC chairmen.

• At the voter level, however, data shows that cryptocurrency is a bipartisan issue of concern, with Democrats having a slightly higher rate of Bitcoin ownership than Republicans. In addition, specific candidates from both parties have expressed support for cryptocurrency innovation.

• Regardless of which party is in control, Grayscale Research believes that comprehensive, bipartisan legislation may be the best long-term solution for the U.S. digital asset industry.

Despite the many issues surrounding the 2024 U.S. election, the digital asset industry has captured some of the candidates’ time and attention. This can be attributed in part to the changing preferences of voters: in a national survey conducted by Harris Poll on behalf of Grayscale, we found that about half of potential U.S. voters were more likely to vote for a candidate who was interested in cryptocurrency than for one who was not.The growing focus on cryptocurrencies also reflects the fact that U.S. rulemaking lags behind other countries, even as the industry continues to grow and innovate, making comprehensive legislation more urgent.

Below we consider potential election scenarios for the White House and Congress and their likely impact on crypto markets. For each outcome, we report the implied odds from Polymarket, a blockchain-based prediction market that has seen a sharp increase in adoption this year.

Most outcomes are highly uncertain: Polling data and prediction markets both suggest a highly divided race. However, the data suggests a shift in control of the Senate (from Democrats to Republicans) seems likely, which could be a particularly relevant change given the Senate’s role in confirming presidential appointments, with direct implications for the cryptocurrency industry.

White House

Polymarket odds: Trump 57% / Harris 43% (as of October 15, 2024)

The outcome: A Trump victory could mean more support from regulators and a larger budget deficit, both of which could provide a boost for Bitcoin and cryptocurrencies. But Trump’s fiscal policy plans will require congressional support, and tariffs could create market uncertainty.

The next president will set the cryptocurrency policy agenda, nominate key regulators, and drive broader economic policy decisions on taxes, spending, and tariffs. Former President Trump enthusiastically embraced the digital asset industry, expressing a desire to make the United States the “cryptocurrency and Bitcoin capital of the world”[2]. He also announced that he would launch a cryptocurrency lending platform called World Liberty Financial, though details about the project remain limited. [3]

Vice President Harris has recently made more supportive comments about digital assets, explaining that her administration will "encourage innovative technologies like artificial intelligence and digital assets while protecting our consumers and investors." [4] According to media reports, her campaign will also announce plans to "protect" crypto assets and develop "a plan to create rules for cryptocurrencies and other digital assets." [5]

However, the Harris campaign provided fewer specific details, and it is worth noting that, as viewed by some market participants and commentators in the cryptocurrency industry, the current Biden/Harris administration has taken an adversarial approach to industry regulation, including through a series of lawsuits, restricting access to traditional banking services, and vetoing bipartisan legislation. [6] As a result, Grayscale Research believes that the Trump administration is more likely to nominate regulators interested in supporting innovation in the crypto industry. [7]

Specifically, the outlook for Bitcoin may also depend on the next administration's macro policy choices. Analysis by independent researchers suggests that both Trump and Harris’ fiscal policy proposals would lead to larger budget deficits—even though the federal deficit is already quite large. [8] Before being incorporated into the campaign’s stated agenda, the Congressional Budget Office (CBO) projected that the federal deficit would average 6.2 percent of GDP over the next 10 years. According to the Penn Wharton Budget Model (PWBM), Vice President Harris’s proposal to expand the child tax credit and other reforms would result in a 10-year average budget deficit of 6.5 percent of GDP, even though she would raise the corporate tax rate to 28 percent. [9] Meanwhile, the PWBM analysis suggests that former President Trump’s plan to extend the 2017 tax cuts and reduce other tax rates would result in a 10-year average budget deficit of 7.8 percent of GDP (Exhibit 1). [10]

Grayscale Research argues that, all else being equal, large budget deficits should be viewed as negative for the dollar and positive for Bitcoin in the medium term.

Chart 1: Neither candidate has a plan to reduce the federal deficit

In practice, however, the market impact is uncertain. First, changes in fiscal policy must be approved by Congress, and it is unclear which campaign proposals can actually become law—especially if there is a divided government. Second, former President Trump also intended to significantly increase tariffs. Higher tariffs tend to increase the value of the dollar and could put pressure on risk assets, especially if other countries retaliate. [11]While tariffs would not directly affect Bitcoin, crypto asset valuations are correlated with the broader market, so higher tariffs could pose downside risks to prices.

Senate

Polymarket odds: Republicans control 78% / Democrats control 22%

The upshot: While members of both parties have shown support for certain aspects of cryptocurrency policy, Republican control could be considered a net positive for crypto, given the Senate’s key role in confirming regulatory appointments.

The Senate, along with the House, is responsible for passing any changes to fiscal policy[12] as well as any cryptocurrency-specific legislation. The Senate is also responsible for confirming presidential appointments, including those to key regulators at the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Reserve. Given the uncertain regulatory status of many crypto assets, Senate oversight of agency appointments could be critical to the industry.

Crypto legislation passed by this Congress has been bipartisan, including the Senate Agriculture Committee’s Digital Commodities Act and the Senate Banking Committee’s stablecoin legislation. [13]Meanwhile, Republican senators have become more vocal in their support for the digital asset industry. For example, crypto industry lobbying group Stand With Crypto[14] gave 39 of 49 Republican senators an “A” grade on crypto issues, but only 6 of 51 Democratic senators. [15]In addition, voting patterns indicate greater Republican support: when the Senate voted to repeal SEC Staff Accounting Bulletin (SAB) 121[16], 48 Republicans voted in favor, while 12 Democrats voted in favor.

Democrats currently control the Senate, and as such, chair key committees, set legislative priorities, and ultimately have the deciding vote on some presidential appointments. Given that Republicans are generally more supportive of digital asset innovation, Grayscale Research believes that a change in Senate control could be a positive outcome for the crypto market—arguably the most important election outcome for the industry, given the critical role of regulators.

House of Representatives

Polymarket odds: Republicans control 44% / Democrats control 56%

The upshot: Control of the House of Representatives will be critical in determining whether the government is unified or divided, which will determine, in part, whether the next president can achieve his or her stated fiscal policy goals, and thus the impact of the election on broader financial markets.

As with the Senate, passage of any fiscal policy changes or cryptocurrency-specific legislation will require support from the House of Representatives. Legislation considered in this Congress has been bipartisan, but with more Republican support. For example, for the House Financial Services Committee’s FIT21[17] bill, 208 Republicans voted in favor, as did 71 Democrats, including former Speaker Pelosi and Democratic Whip Clark.

Control of the House of Representatives will determine the House’s committee assignments and legislative priorities, which could have an impact on cryptocurrency policy. But perhaps the most important impact will be whether one party controls both the White House and both houses of Congress—“unified government”—or whether control is split among the parties—“divided government.” Changes in fiscal policy may be particularly difficult to achieve under divided government.

Eight Possibilities

For the upcoming U.S. election, there are three institutions in play (the White House, the Senate, and the House), each with two possible outcomes (control by either Republicans or Democrats). Therefore, there are eight different possible scenarios, each with different implications for the digital asset industry. Exhibit 2 provides Polymarket’s implied odds for each scenario.

Chart 2: Election is highly uncertain, according to market forecasts

Grayscale Research will highlight several key points. First, none of the four more likely scenarios clearly dominates - in other words, the balance of power after the election remains highly uncertain. Second, observers are divided on whether we will have a unified or divided government: the overall odds of a Democratic or Republican sweep remain close to 50%. Third, according to Polymarket, the only specific outcome with reasonably high odds is Republican control of the Senate. As long as this situation persists, we believe the election results will move in a direction that is favorable to the cryptocurrency market, given the key role the Senate plays in confirming presidential appointments.

Cryptocurrency is a bipartisan issue

Cryptocurrency is a bipartisan issue at the voter level. Results from a national survey conducted by Harris Poll on behalf of Grayscale show that self-identified Democrats own more Bitcoin and are more familiar with cryptocurrency than Republicans, and Democrats have generally become more interested in cryptocurrency this year. [18] Additionally, any new crypto legislation would require a supermajority in the Senate and would almost certainly require bipartisan support.

That said, given the Senate’s key role in confirming presidential appointees to regulatory agencies, Grayscale Research believes Republican control of the Senate is a meaningful positive for the digital asset industry. As a result, current polls and prediction markets’ implied odds currently indicate a favorable outcome for the cryptocurrency markets.

However, the prospects for any cryptocurrency-specific legislation and/or possible fiscal policy changes under the next administration are more uncertain. Grayscale Research believes that the best outcome for the health of the digital asset industry is a continued bipartisan push for comprehensive legislation.

Harris Poll Methodology

The survey was conducted online by Harris Poll on behalf of Grayscale through its Harris On Demand omnibus product from September 4-6, 2024, among 1,841 adults (ages 18 and older) in the United States who plan to vote in the 2024 Presidential Election. Where necessary, data was weighted to match their actual representation in the population by age, gender, race/ethnicity, region, education, marital status, household size, household income, employment, and online propensity. Respondents for this survey were selected from those who agreed to participate in our survey. Sampling precision for Harris Online Polls is measured using a Bayesian credible interval. For this study, using a 95% confidence level, the sample data is accurate to within +/- 2.8 percentage points. This credible interval is wider for subsets of the survey population of interest. All sample surveys and polls, whether or not they use probability sampling, are subject to a variety of other sources of error that are often difficult to quantify or estimate, including but not limited to coverage error, error associated with nonresponse, error associated with question wording and response options, and post-survey weightings and adjustments.

Notes

[1] Grayscale takes no position on the accuracy or reliability of polling data or the implied odds of prediction markets such as Polymarket. In this article, Grayscale uses data from Polymarket to indicate the general directionality of potential election outcomes.

[2] Source: Barron’s.

[3] Source: The New York Times.

[4] Source: Bloomberg.

[5] Source: National Public Radio.

[6] See, for example, The Wall Street Journal, Unchained Crypto, Reuters, TechCrunch, Axios, Reuters.

[7] On regulation, former President Trump once said, “The rules will be written by people who love your industry, not those who hate it.” Source: CNBC.

[8] This statement from the Congressional Budget Office summarizes the current budget situation: “Over the 10-year forecast period, the CBO primary deficit averages 2.5 percent of GDP. In the 62 years between 1947 and 2008, the primary deficit exceeded 2.5 percent of GDP only twice. However, in the past 15 years, it has exceeded 10 times, in part due to legislation enacted in response to the 2007-2009 financial crisis and the pandemic that began in early 2020.” Source: Congressional Budget Office.

[9] PWBM estimates are based on primary (pre-interest) deficits; Grayscale incorporates Congressional Budget Office estimates of interest spending before the campaign introduced its proposals to calculate the total deficit impact. Estimates of the budgetary impacts of campaign proposals vary by source, and the numbers presented here should be considered illustrative. For other estimates, see Committee for a Responsible Federal Budget et al.

[10] PWBM estimates of Trump’s proposals do not include the potential impact of tariffs on customs revenues. However, projections that do include tariff revenues, such as those from the Committee for a Responsible Federal Budget, find the net impact on the deficit to be roughly comparable. Estimates of the revenue impact over a ten-year period if Trump’s tariff plan remains unchanged range from about $2 trillion to $5 trillion. Sources: Committee for a Responsible Federal Budget, Tax Policy Center, Tax Foundation.

[11] Various studies have explored the impact of tariff increases on the dollar. See, for example, The Multifaceted Impact of U.S. Trade Policy on Financial Markets and To What Extent Are Tariffs Offset by the Exchange Rate. For the impact on risk assets, see The Impact of the U.S.-China Trade War on U.S. Investment et al.

[12] Changes to tariffs generally do not require congressional approval.

[13] Specific bills include the Digital Goods Consumer Protection Act of 2022 (S.4760) and the Lummis-Gillibrand Payment Stablecoin Act (S.4155).

[14] The Stand With Crypto Alliance is a 501(c)(4) nonprofit organization funded by donations. Grayscale takes no position on the accuracy or reliability of the data from The Stand With Crypto Alliance. In this post, Grayscale uses data from the Stand With Crypto Alliance to indicate the general directionality of members of Congress’ positions on cryptocurrency policy.

[15] Counting independent senators who caucus with the Democratic Party.

[16] SAB 121 is a financial guidance that requires companies to report customer cryptocurrency holdings as assets and liabilities, affecting how they manage cryptocurrency custody services.

[17] The 21st Century Financial Innovation and Technology Act (H.R.4763).

[18] Across three waves of polling, 18% of Democrats said they owned Bitcoin, compared to 15% of Republicans. Similarly, 51% of Democrats said they were “very familiar” or “somewhat familiar” with cryptocurrencies, compared to 45% of Republicans. Finally, in the third wave of polling (September 4-6, 2024), 37% of Democrats said they had become more open to learning more about cryptocurrency investments this year, compared to 30% of Republicans. Source: Harris Poll.