Is Crypto Getting Too Political? 2 Indicators Investors Should Watch

Key Points

• Political lobbying is driving regulatory change in Washington.

• Clear rules could underpin long-term growth but only if they protect investors.

• Consider it a warning sign if politics, not policies, drive prices.

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One of the appeals of Bitcoin (CRYPTO: BTC) at its inception was its decentralized nature. Early adopters proclaimed the birth of a digital currency that didn't need the backing of central banks or governments. A lot has changed since then.

Blockchain may not need governments, but cryptocurrencies seem to need politicians. The industry spent more than $130 million on lobbying in 2024 per watchdog Follow the Crypto. Crypto leaders want regulations that will increase adoption and plug digital assets into traditional financial systems.

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It may not be in line with Bitcoin's original values, but many investors rightly welcome the prospect of clearer legislation as reflected in Bitcoin's recent rally. But has it all gotten to be too much? Are politics driving unsustainable highs? And are there long-term consequences? Let's dive into some key indicators to watch.

Image source: Getty Images.

How to know when crypto's become too political

The current administration is shifting the U.S. approach to crypto. That includes the bills being debated in Washington, the appointment of pro-crypto figures in key positions, the creation of a strategic Bitcoin reserve, and more.

Don't get me wrong. Freeing cryptocurrency from the regulatory quagmire of recent years is a good thing. So is creating rules for stablecoins and passing legislation that gives digital assets a clearer framework. These could all generate serious growth for long-term investors.

However, the launch of the OFFICIAL TRUMP meme coin and the president's family business connections to crypto have fueled accusations of conflicts of interest. There is also concern that weak legislation could eventually trigger a financial meltdown, hurt retail investors, and enable criminals to use crypto for illicit activities.

The risk of crypto getting too political is that the whole industry becomes one big pump-and-dump scheme. Rather than delivering decentralized finance to the masses and adding stability through careful legislation, it may instead fuel a crypto bubble and damage cryptocurrency's long-term prospects.

If you're worried about how the shifting politics around cryptocurrency could affect your portfolio, pay attention to these important signs.

1. If politics drive unsustainable price increases

The price of Bitcoin has already surged about 60% since November's election. Bitcoin is maturing, and regulatory changes mean it is entering a new phase. Increased institutional adoption and confidence could well reduce its volatility.

While talk of a bubble is somewhat overstated, it is hard to know how sustainable the current rally is. Bitcoin's price history shows that new highs are often followed by dramatic crashes. For example, in December 2017, Bitcoin soared to almost $20,00 only to fall by about 60% in the following months. It almost topped $68,000 in November 2021, but a year later it had dropped to around $17,000.

Bitcoin has always recovered after the plunges and gone on to set new highs. Even so, it is important to be prepared for another dip and pay attention to market sentiment, particularly if the crypto fear-and-greed index is flashing extreme greed, and investors are making emotional decisions.

Another indicator is when crypto prices move on the back of the president's social media activity rather than concrete developments in Washington. It doesn't mean this is a bubble that will burst next week, but it is a signal that politics, not fundamentals, are driving price action.

Also, watch for signs that political enthusiasm for crypto may be waning. A rally driven solely by politics may falter if a different party gains power or the current administration changes tack. For example, Bitcoin dipped twice in 2021 after crypto crackdowns in China.

2. If crypto crime goes unpunished

In recent years, the old Securities and Exchange Commission (SEC) pursued several enforcement actions against major crypto players that centered on the question of whether some cryptos are actually unregistered securities. Many insiders viewed the cases as a consequence of a lack of clear regulation rather than actual crimes.

That view seems to be supported by the new SEC regime, which has dropped cases against crypto exchanges. What's worrying is that it may drop other cases too. For example, it paused its case against Justin Sun -- the crypto entrepreneur behind BitTorrent and Tron (CRYPTO: TRX). The accusation went beyond a technicality about trading unregistered securities; it accused Sun of fraud and wash trading.

There's a difference between having regulatory clarity and allowing crypto platforms to do whatever they want. A swing to an anything-goes environment could expose investors to unfair practices and ultimately cost them money. Rather than preventing another FTX failure amid fraud by its founder, it could open the door to an even bigger collapse. Pay attention to what checks and balances exchanges need to follow and how authorities oversee and enforce the rules.

Handling today's crypto environment

Politics are a part of life, and savvy investors will look for ways to benefit from changing tides. That might mean jumping on the crypto train because you think the current administration's policies will create fertile ground for long-term growth. Ot it may mean putting the brakes on your crypto plans because you think it's creating an unsustainable environment.

If you don't like the political environment concerning crypto, here are some steps to take:

• Consider your risk tolerance: If you think politics has made crypto a riskier proposition, you may want to reassess your exposure. Ensure that risky assets make up only a small percentage of your portfolio. How much depends on your age, financial situation, and goals. Balance your crypto investments with less-risky assets such as equity ETFs, bonds, or even gold.
• Remember why you bought crypto: If your underlying investment thesis has changed, it may be time to consider other assets. If you're still willing to take risks, that might mean looking for opportunities in artificial intelligence (AI) stocks. If you think blockchain technology still has a way to run, consider companies like IBM (NYSE: IBM) that have integrated the tech into their businesses.

Diversification is key

There's a lot of uncertainty right now across many asset classes, including crypto. If you're a buy-and-hold investor, what matters is how the shifts in regulation could affect your investments over time. Ultimately, a diversified portfolio and long-term perspective are two of the best protections any investor can have.

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Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and International Business Machines. The Motley Fool has a disclosure policy.