Why US midterm elections matter for crypto, and how

Crypto in a flash

Bitcoin BTCUSD,
+0.27%
lost 1.6% over the past seven days, trading at around $20,235 on Thursday, according to CoinDesk data. Ether ETHUSD,
+1.74%
fell 0.3% over the seven-day stretch to around $1,539. Meme token Dogecoin DOGEUSD,
+1.70%
increased 67.6% while another dog theme, Shiba Inu SHIBUSD,
2.40,
increased 7.15% from seven days ago.

Cryptometrics

Mid-term election impact on crypto

The US midterm elections are less than a week away. This year, all 435 seats in the House and 35 of the 100 seats in the Senate are up for grabs.

Historically, the stock market tends to perform better after the midterm elections. Some investors expect crypto to also rally after Election Day on November 8, as the correlation between bitcoin and major stock indexes remains high.

For 17 of 19 midterm elections since 1946, the stock market performed better in the six months after the election than it did in the six months before it, according to a report by Charles Schwab.

It is mostly because investors face uncertainty in the months leading up to election day, according to Mauricio Di Bartolomeo, head of strategy and co-founder of Ledn. “As things become clearer, investors become more confident and they bid up the market,” Di Bartolomeo said.

“If history is any guide, we just need to get through next Tuesday and the road ahead looks a lot better,” said Timothy Holland, chief investment officer at Orion Advisor Solutions. “Seasonality is getting better and you’re getting through the midterms. You’re also likely to get a divided government in DC, and the market likes gridlock,” Holland noted.

Still, this year could be different, as stock market performance has already deviated significantly from its historic levels, with the S&P 500 down 27% year-to-date, much worse than the index’s average performance in past midterms.

“I think given where interest rates are, I wouldn’t be surprised if this is one of those years where the rally fades back,” according to Di Bartolomeo. The Federal Reserve on Wednesday raised its key interest rate by 0.75 percentage points to a range of 3.75% to 4%, the highest level in 15 years.

“I think the markets are going to be less sensitive to any medium-term developments than they are to the Federal Reserve’s moves, to major economic data indicators or to any moves out of the Treasury.” said Joel Kruger, marketing strategist at LMAX Group.

When it comes to crypto regulations, investors don’t expect the interim to have much influence, as recent digital asset-related initiatives are bipartisan, Di Bartolomeo noted.

Still, if Republicans take the House or Senate, with a Democratic president on pace, it could be more difficult to pass new legislation, Bartolomeo noted. “I don’t think it would be a crypto-specific problem. I think it’s going to slow down regulation in general,” Bartolomeo said.

One of the bills most likely to pass Congress was proposed by Senators Debbie Stabenow, a Democrat from Michigan, and John Boozman, a Republican from Arkansas. The bill, if passed, would significantly expand the authority of the US Commodity Futures Trading Commission to regulate digital commodities, according to Jeremy Liabo, a partner at the law firm Ropes & Gray.

“If you listen to the dialogue about this seal around the bill, the criticism doesn’t go along party lines.” Liabo said. “However, we will see changes in the bill before it actually goes to a vote,” according to Liabo.

The Doge Rally

Dogecoin rallied more than 67% in the past seven days as billionaire Elon Musk, a vocal supporter of the Shiba Inu-themed cryptocurrency, last week finalized his deal to acquire social media platform Twitter.

Some Dogecoin holders hope that Musk can push for wider adoption of the meme coin, in ways such as accepting the crypto for payment on Twitter. On Tuesday, Musk tweeted a photo of a Shiba Inu dog wearing a shirt with a Twitter logo.

In June, Musk’s SpaceX began accepting Dogecoin for some goods, after Tesla made a similar move in January.

Meanwhile, Changpeng Zhao, also known as “CZ”, CEO of the world’s largest digital asset exchange Binance, said that cryptocurrencies could be used to charge some Twitter users for services. Zhao made the comments after Binance invested $500 million in Musk’s acquisition.

“We want to help solve immediate problems,” Zhao said on CNBC’s “Squawk Box” Monday. “Payment for membership etcetera can be done very easily globally using cryptocurrencies as means of payment.”

The Deribit hack

Crypto exchange Deribit lost $28 million from a hot wallet hack on Tuesday, adding to at least $3 billion in losses from exploits in the digital asset space so far this year.

Customer funds are safe while the company will use its reserves to cover the loss, Deribit tweeted on Wednesday. “Deribit remains in a financially sound position and ongoing operations will not be affected,” the company wrote on Twitter.

The hack is limited to the company’s bitcoin, ether and stablecoin USDC hot wallets, while any funds in cold storage were not affected, Deribit said. Hot wallets are those connected to the Internet, while cold storage means that the crypto keys are offline for security. I wrote more here.

Crypto companies, funds

Shares of Coinbase Global Inc. COIN,
-8.09%
plunged 8.1% Thursday to around $55.80, and they were down 23% over the last five trading sessions. Michael Saylor’s Micro strategy Inc.
MSTR,
+0.08%
shares rose 0.1% Thursday to $248.44, while they were down 8.2% over the past five days.

Mining company Riot Blockchain Inc. RIOT,
-6.13%
shares sank 6.1% to $5.50 on Thursday, down 19% in the past five days. Shares of Marathon Digital Holdings Inc.
MARA,
-3.71%
lost 3.7% to $10.50, and down 23% in the last five days. Another miner, Ebang International Holdings Inc. EBONY,
-0.63%
so shares fell 0.6% to $0.32 on Thursday, while rising 2.6% over the past five days.

Overstock.com Inc.
OSTK,
-1.94%‘s
the stock was down 1.9% at $21.20. Shares traded 8.9% lower during the five-up period.

Shares of Block Inc.
SQ,
-1.34%,
formerly known as Square, fell 1.3% to $53.91 and was down 10.5% for the week. Tesla Inc. TSLA,
+0.15%
shares rose 0.2% to 215.31%, down 4.3% in the past five days.

PayPal Holdings Inc.
PYPL,
-3.65%
fell 3.7% to $76.55, down 12.4% in five sessions. Nvidia Corp.
NVDA,
+1.53%
shares rose 1.5% to $134.21, up 1.9% in the past week.

Advanced Micro Devices Inc.
AMD,
+2.52%
shares closed down 0.1% at $60.07 on Thursday, up 2.6% from five trading days ago.

Among crypto funds, ProShares Bitcoin Strategy ETF
BITO,
+0.24%
was flat at $12.51 Thursday, while its Short Bitcoin Strategy ETF
BITI,
-0.16%
lost 0.1% to $36.42. Valkyrie Bitcoin Strategy ETF
BTF,
+0.26%
rose 0.3% to $7.81, while VanEck Bitcoin Strategy ETF
xbtf,
-0.03%
rose 0.1% to $19.83.

Grayscale Bitcoin Trust
GBTC,
+0.25%
up 0.3% to $12.83.

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