October 16, 2024

Insights and analysis for the professional investor

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Hi readers,

In today's newsletter, Gregory Mall from AMINA Bank looks at the cautiously optimistic picture the options market paints and questions if the winner of the U.S. election actually matters for crypto.

Then, Beth Haddock from Warburton Advisers points out that regardless of who becomes the next Commander-in-Chief, investors should brace for regulatory changes in 2025.

Thanks for joining us.

– Alexandra Levis

From the Analyst

US Elections 2024: Brace for Impact

With the U.S. presidential election polls showing a tense race, cryptocurrency investors are bracing for volatility. But how important is the outcome of the election for the future of crypto in the medium to long run?

Looking at implied volatilities for BTC and ETH options, we can see a clear spike around the U.S. election date, which is not really surprising given that overall volatility is likely to increase around that date. Interestingly, BTC Put/Call Skew (the difference in price between a comparable call and put option) signals optimism across the curve. Even longer dated options with expiries beyond the election dates (>3 months) are showing a call premium over puts. This is rather surprising given the fact that the presidential race is on a knife's edge, with the winner being anyone's guess. It seems like the market is optimistic regardless of who wins the election.

Source: Deribit, 15.10.2024

Until President Biden dropped out of the race in July, it seemed like Trump was the clear favorite within the crypto community. In the aftermath of the failed assassination attempt on July 12th, bitcoin jumped from $56,000 to $65,000, on the back of expectations that the former president would benefit from the incident. Trump's view on crypto seems to have changed over the years. As president, he voiced skepticism over crypto, claiming that they could be used to facilitate illegal activities such as drug trafficking. He also mentioned at one point that he sees bitcoin as a currency competing against the dollar. In more recent times however, he wholeheartedly embraced crypto, pledging that he wants the U.S. to become a "bitcoin superpower" and the "crypto capital of the planet" under his leadership. His campaign has started accepting bitcoin donations. He also mentioned that he would replace SEC Commission Chair Gary Gensler, a notoriously disliked figure among crypto proponents. This pivot seems to have worked. Most of the crypto community is seemingly rallying behind Trump.

But Trump is not the only one who seems to have discovered the growing demographic of crypto constituents. While the Biden administration has taken a rather strict approach with regard to crypto legislation, Vice President Harris has signaled a more positive stance toward the technology, rebuffing allegations that she would seek a crackdown on the industry. Harris' support comes amid increased pressure from special interest groups promoting crypto. By August, the crypto industry had already spent an unprecedented $119M on donations, according to research by the non-profit Public Citizen. According to the report, crypto corporations have contributed almost half (44%) of all corporate money in this year's election.

So which candidate is better for crypto? Maybe the better question is: does it really matter? Although it seems common wisdom that a Trump presidency would be more favorable toward the industry, the options market paints a cautiously optimistic image despite the highly uncertain outcome of the election. With an estimated 40% of American adults owning crypto, it seems like neither candidate can ignore the demands for a regulatory level-playing field any longer. Now whether or not the candidates will actually act upon their electoral promises is obviously a whole different story. But the numbers and the public discourse show how far the industry has come in the past years, effectively evolving from a libertarian niche into a powerhouse with significant lobbying power and influence.

- Gregory Mall, head investment solutions, AMINA Bank

Institutional Outlook

Planning for Inevitable Regulatory Change

As the U.S. edges closer to election day, its digital asset regulatory landscape remains mired in ambiguity. Regardless of who wins, 2025 will bring regulatory shifts that investors must prepare for.

The recent World Economic Forum (WEF) report on global approaches to crypto regulation highlights the U.S.'s reliance on enforcement rather than clear policy, complicating growth and innovation, especially as compared to the EU's structured MiCA (Markets in Crypto-Assets) framework which gives investors a regional roadmap for engagement. Regulatory uncertainty is particularly critical for decentralized finance (DeFi), where the U.S.'s aggressive enforcement strategy has resulted in chilling effects on innovation. For example, the SEC's recent closure of its probe into ConsenSys without filing charges, while a short term win for Ethereum-based DeFi projects, underscores the lack of regulatory consistency.

This uncertainty is creating opportunity as well as risk, as traditional financial (TradFi) institutions ramp up their entry into digital assets. TradFi firm's sophisticated regulatory strategies, honed over decades of navigating complex compliance environments, are better positioned than smaller crypto-native companies. As major players launch products like Bitcoin ETFs and tokenized funds, innovators without regulatory expertise may be squeezed out unless they adapt to emerging frameworks such as those proposed by the Stablecoin Standard, which offers voluntary requirements for transparency, operational resilience, and reserve-backing. This model could offer a path for other innovators to meet compliance expectations and accelerate growth and adoption.

For institutional investors, a strategic approach is crucial. Using a "regulatory ladder" framework, similar to a fixed-income ladder, can balance risk and opportunity across different asset profiles:

New TradFi entrants: Bitcoin ETFs and tokenized funds that have demonstrated regulatory compliance.
Payment processing innovations: Consider regulated stablecoins or other payment-related projects with transparent reserves and governance as seen in New York's regulated stablecoins like Paxos and GMO-Z.com Trust.
Innovators: Allocate to high-potential, early-stage blockchain projects that are equipped to navigate shifting compliance requirements.

With potential regulatory shifts on the horizon regardless of election outcomes, investors should prepare diversified crypto portfolios that include both TradFi and nimble innovators backed by thoughtful regulatory strategies. Ultimately, as the WEF highlights, the U.S. must eventually reconcile its enforcement-first approach or risk losing its competitiveness to more progressive regulatory regimes in the EU and Asia.

- Beth Haddock, board director and advisor, Warburton Advisers