(TNND) — A tiny bit of shine appeared on Bitcoin when Federal Reserve Chairman Jerome Powell threw cold water on the idea that the U.S. government held a reserve of the cryptocurrency.
But bitcoin is still on the rise since Donald Trump won the White House.
Trump has expressed support for crypto and has chosen crypto supporters for key roles within his administration.
Bitcoin was valued at around $69,000 on Election Day. In the weeks following Trump’s election victory, bitcoin surpassed $100,000.
Trump spoke this summer at Bitcoin 2024, an industry conference, telling attendees that he wanted to make America the “crypto capital of the planet and the global bitcoin superpower.”
Some of his picks for key positions within his administration, such as Treasury secretary and chairman of the Securities and Exchange Commission, appear to confirm this pro-crypto stance.
But on Wednesday, Powell, the Fed chairman, said the central bank was not allowed to own bitcoin and was not seeking to change the law to allow the government to hold a reserve of the cryptocurrency.
A day later, bitcoin, the largest and oldest cryptocurrency, was trading about 5% below its 24-hour high, according to CoinDesk.
“I’m not surprised that the Fed chairman is saying he won’t hold a central bitcoin reserve,” Leonard Kostovetsky, an associate professor of finance at Baruch College, said by email. “It is not part of the Federal Reserve’s mandate to keep inflation and unemployment low and there is no obvious benefit to the economy for the Fed to keep it that way. It’s also a decentralized currency, so the Federal Reserve doesn’t really play a big role in regulating it.”
Kostovetsky, a cryptocurrency expert, also said he’s not sure Trump’s support for crypto has much impact on its legitimacy.
“But crypto market participants are certainly betting that his appointees will reduce regulation on crypto, making it more valuable,” he said.
The issue of regulating cryptocurrencies is not simple, said Roger Nober, director of the Center for Regulatory Studies at George Washington University.
And it starts with simply “deciding what it is.”
“Is crypto a security? Is it a commodity? Isn’t this nothing, like who won the coin toss at the Super Bowl, just some sort of side bet? Or is it one or a combination of these? » said Nober. “And so you first have to decide what it is and how to regulate it. »
The current SEC believes that cryptocurrencies are securities, like stocks, and continues to try to control them through lawsuits against exchanges or tokens, Nober said.
Many aspects of cryptography are now left in the eye of the beholder.
Nober said he believes the Trump administration will provide more clarity on crypto assets, but the approach remains murky.
“There are a lot of ideas that are thrown around by people, and it’s hard to know how many of them are what the administration thinks or what the administration doesn’t think,” Nober said. “I don’t know if the administration knows what they think. I think different people involved in the administration may think they know what the administration is thinking or want to speak on their behalf.
Peter Whitehead, a senior engineer at RAND, likened cryptocurrencies to “lemon” used cars due to an inherent information asymmetry between sellers and buyers of crypto.
“In the multi-billion dollar world of cryptocurrencies, information asymmetry is an inescapable and uncontrolled phenomenon and, unlike the used car market, there is currently little consumers can do about it,” Whitehead wrote .
Cryptocurrencies operate via blockchains or decentralized digital ledgers.
Most Americans know little about how cryptocurrencies work, Kostovetsky said.
He noted that a recent Motley Fool poll showed that only 18% felt they had a good understanding of how crypto worked.
Crypto is an extremely volatile investment, he said. It can often lose or gain up to 10% of its value in a single day.
And he said we can’t predict cryptocurrency prices.
Unlike normal financial assets, like stocks and bonds, crypto is an asset whose total value depends on what people are willing to pay for it at any given time, based on what they think someone someone else will pay for it in the future.
It is not backed by anything else, like gold, tax revenues, or corporate profits. Kostovetsky said this makes it impossible to estimate whether a particular crypto asset is overvalued or undervalued.
“The American public should approach crypto with extreme caution,” Kostovetsky said. “If people want to gamble, they can go to the casino, buy lottery tickets, or bet on sports, and investing money in cryptocurrency should be seen as more similar to those activities rather than investing their money. savings in stocks, bonds or real assets.”
Nober said the instability of crypto is a deterrent for people who want to make long-term investments.
“You have to have a risk tolerance that a lot of traditional investors don’t necessarily have,” he said.
Having the US government hold a reserve of bitcoin would be one way to demonstrate confidence in crypto.
“I think maybe people looking for a bitcoin stash were looking for that market signal,” Nober said.
The Trump administration can drive crypto adoption through clear regulation of digital currencies.
But he said congressional legislation would be preferable for reasons of clarity and market sustainability.
“Getting Congress to act on a statutory framework, especially for something as controversial as crypto, is challenging,” Nober said.
