Bybit x Block Scholes: Takeaways from the U.S. Election and What to Look for Next

The ‘Crypto President’

Donald Trump has emerged victorious in the U.S. presidential race, branding himself as the crypto president. His successful 2024 election campaign was distinguished by his sudden embrace of Bitcoin, marking this election cycle as the first in which the cryptocurrency industry played an important role.

However, the incoming 47th president’s views on crypto have evolved significantly since his last presidency. Once a staunch critic, Trump openly condemned Bitcoin in 2019 as “not money,” deeming it “highly volatile” and based on thin air. Trump’s stance took a sharp U-turn in 2024, when he declared his intent to “end Joe Biden’s war on crypto” and make America “the crypto capital of the planet.”

The president-elect’s renewed attitude is not a coincidence: crypto firms contributed approximately $119 million to the 2024 federal campaigns through the use of crypto Super PACs such as Fairshake. This influx of funding accounted for 48% of all corporate funds used toward the election, showcasing the industry’s growing influence and role in politics. As a result, many newly elected members of both houses of the 119th Congress are expected to play a crucial role in redefining the regulatory environment for cryptocurrencies and digital assets.

During the race, the crypto market reacted to pivotal events, and Trump’s winning result has moved markets across both TradFi and DeFi. In this report, we’ll examine the important role crypto played in the election, look at the election’s impact on crypto spot and derivatives markets, and consider the as-yet unrealized impact of the election results on Bitcoin and other cryptocurrencies alongside the macroeconomic drivers that could drive crypto beyond the election outcome.

The Impact of the Election Campaign on Crypto Markets

A Crypto Election — The Impact of Prediction Markets on Its Outcome

Onchain prediction markets emerged as a key metric to track the probability of each U.S. presidential candidate during the campaign. While traditional polling methods forecasted an incredibly tight result, prediction markets indicated a distinct preference for the eventual Republican winner throughout the race. In particular, Polymarket’s odds of Trump’s victory peaked at 66% in October, with the poll recording a total of $3.6B in trading volume (as of Nov 11, 2024) for the headline election markets.

Besides becoming a novel method to follow the election, real-time trading of presidential probabilities allowed markets to track the changing probability of a Trump win on BTC’s spot price, alongside a basket of other so-called “Trump trades.” This correlation weakened at points, but rebounded at important developments in the election campaign — especially following periods of Republican momentum, such as in early October, and during BTC Nashville 2024 when Trump established his pro-crypto positioning.

This BTC spot/Trump odds correlation also strengthened as traders used Polymarket for an alternative data source when positioning themselves on election outcomes, creating a mutually reinforcing cycle. 

Given such explicit coverage of cryptocurrency by both candidates, it’s no surprise that BTC’s price exhibited increased sensitivity to key developments during the election campaign. However, the coverage was supercharged by the growing correlation of BTC to macroeconomic drivers. The launch of BTC Spot ETFs in January 2024 opened cryptocurrency to a wave of institutional investors who could now express their macroeconomic views via a new asset class alongside the existing basket of macro favorites.

Movements in an otherwise range-bound BTC spot price were strongest near key events in the election campaign (as shown in the chart below), which highlights the moves in BTC’s spot price during the failed assassination attempt on Trump, the first televised debate and Biden’s exit from the race. Price action had remained range-bound since the highs in March 2024, but the tight nature of the election meant that positioning was primarily driven by the election campaign.

As the U.S. election results unfolded from the night of Nov 5, 2024 through the next day, both Bitcoin (BTC) and Polymarket experienced a notable rally alongside the announcements of voting results, which foreshadowed a Trump win. Polymarket’s implied odds for a Trump win began the night at a 63% probability before rocketing higher, as key swing-state races were called for the Republican candidate.

BTC, which ranged around the $70K mark, rallied in parallel to a (since beaten) all-time high of $76,243.98 on Nov 6, 2024, as Trump was announced winner of the election. This sharp rally reflects not only the market’s real-time responsiveness to significant political events, but also the perceived alignment between a Trump administration and a favorable regulatory environment for digital assets.

In derivatives markets, we saw evidence of increased positioning in leveraged long futures and perpetual swap markets. On top of the near all-time high levels of open interest in both markets, futures prices drifted further above spot prices, while perpetual swap funding rates were consistently large and positive. Each of these metrics indicates a strong willingness to pay a premium above spot prices in order to gain leveraged long exposure to an anticipated post-election rally.

This positioning grew as the election date approached, with traders rushing into leveraged long positions in order to achieve a more attractive entry point to their long positions. This was clearest during the spot rally of 11% in early October, which encouraged those who had been waiting to enter these positions imminently and resulted in new perpetual positions being opened alongside a rallying spot price.

Extreme Volatility, Extreme Times

Nowhere was the extreme level of pre-election positioning more apparent than in options markets. Beginning several months before the date itself, we observed a strong and distinct “kink” form in the term structure of BTC’s at-the-money (ATM) implied volatility. Options expiring before the election priced in a lower level of volatility than those expiring after, causing this kink to traverse across the term structure as the event drew closer.

The kink in the term structure eventually developed into a strong inversion, as implied volatility of options with short tenors rose well above levels at longer-dated expirations. Inversions in the term structure of volatility are often short-lived, and reflect extreme levels of positioning ahead of event risk, such as the election date on Nov 5, 2024. This is exactly what happened to the 8NOV24 expiration (the first listed contract expiring after the election date), whose implied volatility rallied above 100% on the night of the election before the resolution of the uncertainty caused by the event saw it return to levels implied by longer-dated expirations.

We had seen this once before in 2024, during a previous event risk: the launch of Bitcoin Spot ETFs in January 2024. At that time, implied volatility at the front end of the term structure inverted strongly ahead of the event risk. However, the following month was marked by a fall in volatility to just 30% in the three weeks that followed.

Post-Election Results — Following the Election, BTC Behaved Differently From Bitcoin Spot ETF Approvals

Since BTC’s floor of $69K on the evening of the election, its price has rallied more than 25% to nearly touch $90K. ETH has rallied even further by 38% to $3.4K. This rally has certainly delivered the bullish move that leveraged long positions had paid to gain exposure for, repeatedly breaking above previous highs to record an almost daily all-time high (ATH).

The eventual peak of this BTC and ETH rally — an unknown that many long positions will have on their minds following a brief pullback in spot to $85K — is difficult to judge. Nevertheless, we can compare the move to the previous run to an ATH earlier in 2024. While we’ve drawn similarities in pre-event positioning between last week’s election and January’s ETF launch, the post-event spot response has been drastically different.

In January 2024, we saw a clear “sell-the-news” event, as spot recorded a nearly 20% sell-off two weeks after the announcement. Much of the bullish move had been priced in over the previous three months, as speculation of the announcement built up; it took a total of 63 days to reach what was, at the time, the ATH of $73K in March 2024.

This election, however, brought a new ATH on the day of the event. Since then, BTC has continuously pushed higher to more than 20% above the pre-event price. As a result, instead of highly leveraged long positions dissipating following the news, the derivatives market's positioning has surpassed the levels observed in the days before the election. Open interest in perpetual swap markets for BTC has been incredibly resilient throughout the election week (ending Nov 11, 2024), despite funding rates demanding long positions to pay for their exposure. Derivatives markets expect more action to come.

Far from continuing to fall at the front end of the term structure, the term structure of ATM implied volatility has reinverted.

While outright volatility levels are slightly lower at all tenors than during the pre-election period of uncertainty, end-of-year volatility smiles continue to express the same bullish tilt toward OTM calls and upside exposure.

What to Look for After Trump Takes the White House

A Crypto Congress?

Following an unexpected Republican sweep of the White House, Senate and the House of Representatives, President-elect Trump and his administration will be met with a sympathetic legislative branch. As a result, Trump is expected to have fewer barriers to passing legislation, including those that introduce regulation in the cryptocurrency industry.

However, Congress has attempted to define crypto before. A look at the progress of several bills introduced to previous congressional sessions can tell us what exactly needs to be decided by top lawmakers in the U.S. in order to provide regulatory clarity.

The Financial Innovation and Technology for the 21st Century (FIT21) Act, introduced in 2023, attempts to set out a clear regulatory framework for digital assets by defining the regulatory agency that would hold the responsibility for defining that framework. According to the bill, each digital asset would fall within one of three categories: 

1. A digital commodity under the purview of the Commodity Futures Trading Commission (CFTC), which is seen as a more relaxed regulator than its securities counterpart, with fewer resources at hand.
2. A digital security, subject to stricter regulation under the Securities and Exchange Commission (SEC), similar to stocks and bonds.
3. A permitted payment stablecoin, subject to either the SEC or CFTC.

For a crypto asset to be defined as a commodity, it would need to be “sufficiently decentralized” (whereby no person has control of over 20% of the asset). This would likely include cryptocurrencies such as Bitcoin. For non-stablecoins that don’t meet this definition, the SEC will hold regulatory rights of the cryptocurrency. Furthermore, it would be up to the SEC to review the decentralized nature of an asset within 60 days. If no decision is made, it can be treated as a commodity.

The bill passed the House of Representatives in May earlier this year, but there is currently no companion bill in the Senate. The only crypto bill that has passed both chambers of Congress is the Congressional Disapproval of SAB 121, a guidance report by SEC staff in 2022 that states that digital asset custodians, such as banks and exchanges, should report customer crypto assets as liabilities on their own balance sheets. Crypto institutions that hold digital assets on behalf of their customers have opposed the guidance, as it would likely trigger an increase in their capital reserve requirements, and make crypto custody services less feasible. 

A bill to repeal SAB 121 was passed in the House and, subsequently, in the Senate in May 2024, before President Joe Biden vetoed the bill. The House was unable to secure a two-thirds majority to overturn the presidential veto, a barrier to regulatory clarity that the incoming congress and president look likely to remove.

The crypto-friendliness of the incoming congressional cohort is not a coincidence. Many congressional races in this election were marked by significant spending by crypto Super PACs with the primary goal of electing as many crypto-friendly members in Congress to ensure a clearer regulatory framework.

The Super PAC known as Fairshake spent $172.22M on the U.S. election, with primary donors consisting of Coinbase, Ripple, a16z and other crypto firms. A closely affiliated super PAC, Defend American Jobs, spent $58.7M in the federal races. 

The spending by these PACs was crucial in influencing key Senate races — none more explicitly than the race for Ohio’s senate seat, where the PAC called Defend American Jobs spent $40M in support of Republican Bernie Moreno. Moreno successfully flipped Democrat incumbent Sherrod Brown, the current chair of the U.S. Senate Banking Committee, who had previously called crypto the “Wild West of investing” and argued for stricter oversight of crypto firms. This not only added a pro-crypto seat to the Senate, but also meant that Brown would likely be replaced as the chair of the committee by someone more welcoming to digital assets.

The huge investments spent to influence the results of this election cycle has resulted in the most crypto-friendly congress we’ve seen, and the most motivated to regulate the industry in the way that its largest players see fit. This is highly significant: while a pro-crypto president is one thing, it’s the tri-party consisting of the executive branch, the House and the Senate that will collectively influence the government’s approach to regulating digital assets.

Current SEC Chair Gary Gensler is a case in point of this. As part of Trump’s campaign, during the Bitcoin 2024 Conference, he promised to fire Gensler “on day one” and “appoint a new SEC Chairman”. A day after the Republican trifecta was confirmed, Gensler made a ‘farewell’ speech, alluding to the fact he may step down. President-elect Trump will be able to choose a new SEC Chairman should Gensler resign, and would likely choose a more crypto-friendly Chair than Gensler. Trump’s chosen nomination then needs to get approval from the Senate – and given the Republican majority here, he is less likely to face resistance.    

Trump’s Macro Policies

The consensus in the market ahead of the election was that Trump’s policies will increase an already bloated budget deficit or — at the very least — do less to reduce it than Harris’ policies. Trump ran on a platform of policies that increase inflationary pressures and fiscal spending, and lower taxes — their interplay with a floated “Department of Government Efficiency” (DOGE) to be determined.

As a result of how tight the election result was right up until the end of the race, the effects of these policies were only partially priced in by the market ahead of the event. In addition, the Republican majority in the Senate and lead in the House are likely to have boosted the chances that policies suggested by Trump will be successfully enacted. As a result, many of the “Trump trades” (including Bitcoin) performed well as the results came in on election night.

One example is the U.S. dollar, whose performance on election night is highlighted in the chart above by the DXY, an index that tracks the strength of the U.S. dollar against a basket of peer currencies. While Trump has consistently touted the idea that the U.S. dollar is overvalued, his policies are more likely to strengthen the U.S. dollar. High tariffs on imported goods, tighter immigration controls and cuts to taxes increase the possibility of higher inflation and, subsequently, higher long-term interest rates, making the dollar more attractive against its peers.

Historically, we’ve noted an inverse relationship between BTC’s price and the U.S. dollar strength index (DXY), which makes intuitive sense, given that we’re measuring the value of BTC against that of the dollar. Following the July 2016 halving, BTC enjoyed a huge rally toward $20K while the dollar became weaker. The same dynamic occurred in 2020 when the Fed was forced into ballooning its balance sheet, resulting in a weaker dollar while BTC rallied. However, while a weaker dollar explains part of the crypto asset’s appreciation, this weakening alone doesn’t explain the extent of these rallies in their entirety, as a weaker base currency only exacerbated the BTC and crypto run.

Another Trump trade that performed well on election night was that of betting on the U.S. stock market. Large-cap U.S. stocks are likely to benefit from Trump’s policies of extending tax cuts (increasing earnings per share) and platform of deregulation. The rally in the S&P 500 has continued post-election, with the SPX recording its best weekly performance of 2024 (up 4.7% during the week of the election). 

BTC is no stranger to a strong correlation with macro assets, particularly the S&P 500. After the election result, the correlation between the two has not only remained positive, but increased toward the ATH levels we last saw in 2022. Both assets have been hitting new price highs together, suggesting that BTC isn’t yet moving without the support of broader risk-on sentiment. 

The correlation with gold, however, fell sharply as gold prices fell on the night of the election. We can see this move below alongside the BTC rally. Increased expectations of higher interest rates and a rally in the dollar typically decrease the non-yielding appeal of gold, which might explain the downward move. This went against consensus expectations of the gold’s performance in the case of a Trump win.

Ether and Altcoins Might Play Catch-Up

Although altcoins rallied alongside BTC in the run-up from January to March, in line with Bitcoin Spot ETF accumulation, this time the dominance of the U.S. election campaign saw BTC enjoy the main share of attention. Since BTC’s price hit $73K in March 2024, it has steadily gained a proportional share in market cap while the majority of altcoins underperformed.

One example of this is ETH, whose cross-pair to BTC is shown in the chart below. ETH has historically been the first beneficiary of profit-taking and capital rotation in both of the previous two crypto bull- run cycles, while recording underperformance in the intermediary period. Beginning as early as September 2022, BTC has outperformed ETH, with an acceleration in this trend during the second half of 2024. While ETH did see some corrections in the January–March period, it remains down 29% against BTC since the latter’s March 14 high.

However, this pattern isn’t exclusive to Ethereum, as Bitcoin’s dominance of the total crypto market cap has grown steadily to above 60% since the peak of the 2020–2021 bull cycle in November 2021. This follows a repeated pattern of capital rotation from the two previous cycles: BTC dominance grows during a bear market, with bull cycles historically having been led by strong BTC rallies, followed by periods during which we see the market cap of other tokens (including Ether) increase.

In both of the previous cycles, BTC dominance increased for roughly 200 days after the halving of its block reward before sharply correcting downward. This indicates a period when BTC holders likely take profits from their positions and reinvest them into tokens such as ETH and other altcoins in pursuit of higher returns.

Based on the limited historical data, BTC dominance will revert within 50 days. However, the presence of a crypto-friendly administration and the possibility of favorable (or at least clearer) regulation may act to accelerate the trend reversal in BTC’s increasing dominance. We saw early evidence of that on election night itself, with ETH outperforming BTC since the result was made clear. However, this didn’t last long – ETH subsequently pared back its gains a few days later to its pre-election levels.

While volatile moves in spot prices have been catalysts for a correction in ETH’s trend of underperformance throughout 2024 (following the BTC Spot ETF launches in January 2024 and the ETH Spot ETF launches in May), there are other signs of factors that could end this trend of under-performance. In the three days following the election outcome, ETH Spot ETFs have registered $217.9M in inflows. Despite remaining far lower than BTC’s inflows over the same period, these inflows are among some of the highest since their launch. 

The outperformance of altcoins may continue post-election, especially Layer 1 blockchains such as Ethereum and Solana, which support ecosystems of decentralized finance (DeFi) protocols that stand to gain the most from a U.S. Congress stacked with pro-crypto regulators. Therefore, it’s no surprise that some of the strongest post-election performers have been Layer 1 blockchains (SUI, ADA) and DeFI tokens on liquid staking protocols such as Ethena (ENA). 

Post-Election Drivers in Q4 2024

The election cycle has been the dominant narrative driving cryptocurrency markets since president-elect Donald Trump embraced BTC at the Bitcoin 2024 conference in Nashville in July 2024. However, the passing of the event risk means that attention can now shift to other drivers. We therefore turn our attention to a range of possible post-election crypto drivers for the remainder of Q4 2024 and into next year.

Pace of Cuts From the Federal Reserve

The Federal Reserve lowered its target range for the Federal Funds Rate (FFR) by 25 bps in November 2024, after a larger 50 bps cut in September. By lowering the FFR target range, the Fed makes it cheaper for banks to borrow from each other, which feeds into lower interest rates on consumer loans and business borrowing costs in order to stimulate the economy.

Currently, the Fed is cutting rates to balance a healthy jobs market and low inflation, rather than to stimulate an economy that has fallen into recession. For this reason, cuts to interest rates have typically seen risky assets such as large-cap equities perform well. This is because lower rates encourage consumer and business spending without the impact of a recession weighing on earnings and consumer sentiment. The lower cost of credit also means consumers have more money to spend, which can then flow into risk-on assets as the return offered on riskless investments falls.

Following the first rate cut earlier in September 2024, the S&P 500 has certainly delivered a strong performance. It is up 5% since the September 18th FOMC meeting, beating the average performance of the past four non-recessionary cycles. However, it has not yet outperformed the Covid-19 recovery rally, nor the 2019 post-cut cycle.

The strong performance of the S&P 500 is a positive sign for risk sentiment, especially given its remarkable recovery from early August shocks. In addition, the increased correlation between U.S. equities and BTC’s price grew and accelerated in the final stretch of the election cycle.

As the election approached, Bitcoin’s price action was primarily influenced by the presidential campaign rather than responding directly to revisions in market expectations of the pace of rate cuts by the Fed. However, given the event risk has now passed, focus can now widen to include the health of the U.S. economy and the speed of rate cuts, which were more potent drivers of crypto price action in August and September. 

Immediately following the election, markets expected an even slower pace of cuts. The chart below shows the CME Fed Funds Futures implied probability of a December rate cut; the probability of a 25 bps cut in the FOMC December meeting fell from 79.65% on Nov 4, 2024, the day before the election, to just 55.5% as of Nov 11, 2024, with a 45% probability of a December pause. 

These market expectations quickly reversed with the lack of an upward surprise in the U.S. inflation figures released on Nov 13, 2024. As the data matched market expectations, the implied probability for a December rate cut rose from 58.7% on Nov 12 to 82.5% on Nov 14. BTC rallied on the data, and boosted its correlation to U.S. equities, suggesting Bitcoin is still moving with the support of broader risk-on sentiment.

Changing expectations for the pace of rate cuts are also reflected in moves in the bond market. Given the continued resilience of the U.S. economy and a broader market sentiment of stronger future growth, the back end of the yield curve has risen higher than the front end. This has resulted in a steepening of the yield curve, shown below as the spread between U.S. treasury yields at 2Y and 10Y tenors. Fed Chair Jerome Powell also made it clear in the November FOMC meeting that the Fed is in no hurry to get to a neutral interest rate.

Retail Traders and Cycle Update: What's Different in This Cycle?

Despite the post-election spot rally, historical post-halving cycles indicate that BTC is still relatively underperforming. Each halving event has taken place in the months before a U.S. election, with both following a quadrennial cycle. Still, none so far have combined the supply shock with a crypto-friendly U.S. administration.

One factor that could potentially drive this is an influx of new retail participants, who have been sidelined thus far. Previous bullish cycles have been marked by strong retail participation. One way to measure this retail interest is via Google search interest for “bitcoin”, whose peak has previously correlated with the first of the twin peaks in BTC spot price in 2021.

In the immediate aftermath of the election outcome, even as BTC broke through various new highs, search interest was subdued. However, this completely changed once BTC broke past psychological barriers of $80K and $90K. Post-election search interest has so far eclipsed the search levels seen in the March 2024 high, but we note it is below the levels of the first peak in the 2021 run.

We see a similar trend for Ethereum but on a much smaller scale. We see a slight uptick to the March 2024 rally levels, but is even more subdued compared to the 2021 highs than BTC.

One noteworthy difference in this cycle is the existence of BTC Spot ETFs, which have opened BTC trading to a wave of new investors. From January to March, BTC’s price rally coincided with major ETF inflows. The same trend has been apparent since the end of September, when inflows heavily dominated in line with spot price increases. Since October 10, 2024, inflows have amounted to $8.3B, amounting to 31% of total inflows of $26.97B since their launches. 

What’s Next?

Now that the election has passed, the Fed’s predicted implications for global liquidity can once again take center stage. Via spot ETFs, institutional Bitcoin investors have expressed an apparently insatiable appetite for BTC exposure throughout the past month, far exceeding the rate of new supply of BTC. However, a rally driven by a more sophisticated demographic, coupled with fewer investable crypto assets within the ETF ecosystem, may prevent the historical capital rotation into higher volatility altcoins.

Despite this, Bitcoin’s dominance by market cap shows of turning. Investor confidence in the acceptance of the industry by the upcoming U.S. administration has seen altcoins — particularly those subcategories that depend upon a thriving developer base, such as Layer 1s, DeFi, and AI-linked tokens — outperform majors in the days after the election. Few coins (apart from BTC) have rallied to ATHs following the election, although this masks a considerable period of altcoin underperformance before the event.

Ultimately, while going forward the pace of interest rate cuts and the health of the economy may be crucial to support the continuation of this bullish sentiment, the enthusiastic acceptance of the industry by a sitting U.S. president marks a watershed moment for crypto.