Why Cryptocurrencies Are On Fire Today

Cryptocurrencies have jumped on Wednesday after the U.S. election was called for former President Donald Trump. Investors are thinking a leadership change will lead to more token usage and more innovation on the blockchain, which will ultimately unlock value.

Solana (SOL 11.32%) was a big mover gaining 12.1% from the stock market’s close on Tuesday to 2 p.m. ET on Wednesday. Over that time, Sui (SUI 13.86%) was up 14.3%, Avalanche (AVAX 9.76%) had gained 10.2%, and Polkadot (DOT 4.80%) was up 4.9%. The move is still holding and even crypto stocks have made a huge move today.

The regulation trade in crypto

Ironically, while most businesses are looking for deregulation from a new administration, crypto is looking for more regulatory certainty. In a variety of ways, the current administration has been going after crypto including in court through the U.S. Securities and Exchange Commission. Those actions could end with changes at the top of regulatory bodies, but it’s also possible Congress could pass laws that would allow for innovation on the blockchain.

Companies like PayPal, Stripe, and Coinbase Global have all bought or launched stablecoin products and services to disrupt the traditional payment infrastructure and those efforts may get a boost from more regulatory clarity.

We also haven’t seen much business model innovation utilizing NFTs or novel tokens built on the top of blockchains like Solana, Avalanche, Sui, or Polkadot, which offer lower costs and faster transactions than chains like Ethereum or a popular token but very inefficient blockchain like Bitcoin.

Be careful what you wish for

The question for these blockchains and tokens in an era of a more friendly regulatory environment is, how does value flow to these tokens? I think it’s clear most of the transaction volume is moving to stablecoins and that will continue.

If that happens, stablecoin transactions may take place on a blockchain like Solana, but the Solana token may not be a big beneficiary.

Crypto tokens themselves have proven to be too volatile to be a reliable medium of exchange for goods and services in the broader economy and that could be a headwind even in a better regulatory environment.

Risk on and risk off

The other tension taking place today is a “risk on” trade taking place in crypto, which is typically correlated with growth stocks or highly volatile investments. But bond yields also rose today, which is more of a “risk off” trade.

These short-term tensions will likely sort out over the next few months as it becomes clear how the policy environment is going to change in the next administration. It’s all roses for crypto advocates and investors today, but the honeymoon may not last when it comes time to make policies for the real world.

I think the next few years will be great for the crypto industry, but that doesn’t mean that each token will do well. If there’s no utility for the token itself, value may not accrue to investors the way that’s being priced in today. That’s what would make me cautious about investing in altcoins today.