Bitcoin frenzy highlights U.S. systemic risks

This photo taken on April 20, 2022 shows the U.S. Federal Reserve in Washington, D.C., the United States. (Xinhua/Liu Jie)

The recent dramatic rise in Bitcoin reflects shifts in U.S. political and financial dynamics. Analysts warn that the United States must adopt responsible financial regulation, and failure to do so risks harming both American investors and the broader global economy.

BEIJING, Dec. 7 (Xinhua) -- Days ago, Bitcoin surpassed 100,000 U.S. dollars for the first time, marking a key milestone in cryptocurrency history. Over the past month, buoyed by U.S. President-elect Donald Trump's pro-crypto stance and appointments, Bitcoin prices have surged over 40 percent, drawing significant global market attention.

This dramatic rise in Bitcoin reflects shifts in U.S. political and financial dynamics. The trajectory of policies under the upcoming Trump administration could profoundly influence the balance between regulation and speculative capital, shaping the future of the U.S. economy.

POLITICAL CHIPS

Trump's evolving stance on cryptocurrencies underscores a growing political influence of crypto-related capital. In 2019, Trump criticized cryptocurrencies as "highly volatile" and conducive to illegal activities. Yet in 2024, he declared plans to make the United States a global Bitcoin superpower, becoming the first major-party candidate to accept campaign donations in Bitcoin.

Trump's cabinet picks also reflect this pivot. His nominee for U.S. Securities and Exchange Commission chair, Paul Atkins, a staunch crypto advocate, further fueled Bitcoin's rally. This highlights how crypto institutions and their associated political action committees are exerting increasing influence in Washington, say, supporting pro-crypto candidates for Congress.

A Pew Research Center report shows that 17 percent of Americans have invested in, traded, or used Bitcoin or other cryptocurrencies. This figure rises to 23 percent among high-income groups and 41 percent among adults under 30. Analysts suggest that this expanding voter base makes U.S. political groups more inclined to adopt favorable or supportive stances toward Bitcoin.

GREED AND IGNORANCE

While Bitcoin's appeal grows, skepticism remains. Economists like Eswar Prasad argue that the unstable value has made it an unviable medium of exchange -- better suited for speculation than transactions. Many Americans remain wary of crypto's safety, with the Pew survey showing only 5 percent expressing strong confidence in its reliability.

Why do people engage with Bitcoin despite mistrust? This reflects a mix of greed and ignorance within the U.S. financial ecosystem.

On one hand, Bitcoin's hallmark volatility makes it vulnerable to manipulation by large capital players. With limited liquidity and utility, Bitcoin is highly sensitive to market sentiment, regulatory shifts, hacking, and speculative trading. In a lax regulatory environment, large players can profit by exploiting retail investors under the guise of "innovation" or "Bitcoin wealth myths."

On the other, the U.S. government's years of monetary easing have spurred inflation, eroding the purchasing power of ordinary Americans and pushing them to seek riskier assets. As traditional investment offers diminishing returns, more individuals turn to unfamiliar "financial innovations."

"In the absence of consumer protection regulation, the crypto industry's claims of furthering financial inclusion take on a more troubling cast," Hilary Allen, a law professor at the American University Washington College of Law, wrote in an article. "The crypto ecosystem is certainly rife with hacks and scams that prey on users."

GROWING RISKS

The risks of speculative bubbles in crypto are not new. In 2023, cryptocurrency-related scams in the United States caused over 5.6 billion dollars in losses, a 45 percent increase from the previous year. Better Markets, a nonprofit organization, warned that Bitcoin's dramatic price rises could mislead retail investors, exposing them to financial scams.

This speculation-driven economy also exacerbates inequality. Wealthy individuals and institutions disproportionately benefit from crypto gains, while the average investor bears the brunt of losses. Research suggests that the U.S. financial market has strayed from its original mission of funding the real economy, now primarily serving the interests of big capital and the wealthy.

"Crypto does not live up to its claims of decentralization, and crypto's booms and busts could have broad economic consequences if it is integrated with the traditional financial system and able to interrupt the flow of capital to the real economy," argued Allen.

Analysts warn that as the world's largest economy and a key player in global finance, the United States must adopt responsible financial regulation. Failure to do so risks harming both American investors and the broader global economy.