Paul Winfree is president and CEO of the Economic Policy Innovation Center.
Financial bubbles require investors to suspend a clear-eyed assessment of what an asset is actually worth. That suspension is often helped by appeals to economic progress, patriotism or financial modernization. The crypto bubble that is now forming displays all three characteristics. What makes it particularly concerning is the Trump administration’s role in promoting it. The federal government’s embrace of crypto as a favored asset class threatens to turn speculative enthusiasm into something far more destructive.
Economists William Quinn and John D. Turner, experts on financial manias across centuries, argue in their 2020 book that bubbles require three ingredients: speculation, marketability, and cheap money and credit. Politics or new technology can provide the spark. When all of these align, asset prices detach from fundamentals and feedback loops take over. Crypto checks every box.
The speculation is obvious. Changes in cryptocurrency values are driven by little more than vibes. Crypto is highly marketable — easy to buy, easy to trade and increasingly easy to hold through platforms that provide the appearance of safety. And cheap money has been abundant for 15 years, with expectations of more at just the hint of economic slowdown.
What is new is the political accelerant. The Trump administration has embraced crypto as a strategic priority. This posture, combined with legislative efforts such as the Genius Act, signals that crypto carries a federal endorsement. That signal lowers perceived risks, encourages leverage and draws capital that would otherwise flow to other investments.
Politics has ignited bubbles before, but the scale of a crypto bubble could rival or surpass the U.S. housing bubble that led to the 2008 financial crisis. Crypto’s market capitalization is above $3 trillion. This is a large, volatile asset class being pushed toward the financial mainstream by government action.
Crypto, however, is not money. Treating it as such introduces two significant risks.
The first is institutional. Once an asset begins to resemble money, it does not remain purely private. Regulators begin viewing it as systematically important, and when a bubble bursts, pressure for intervention becomes overwhelming. The Federal Reserve’s emergency lending authority was intended for rare circumstances, but its recent use has expanded when policymakers concluded that allowing markets to absorb losses was politically unacceptable.
That risk grows when the federal government lends crypto its credibility. Talk of a strategic crypto reserve or preferential regulatory treatment creates expectations in the market. Expectations harden into assumptions. Assumptions become liabilities in a downturn. Markets behave rationally when they infer the government has a stake in an asset’s survival.
If crypto continues down this path, it is easy to imagine a future crisis with officials arguing that a collapse would threaten payments, markets or confidence broadly. At that point, the question will not be whether crypto deserves a bailout, but whether the Fed can credibly refuse one.
The second risk is macroeconomic. If crypto becomes a genuine money substitute, the effective money supply expands by the full value of crypto in circulation — at current valuations, a multitrillion-dollar increase in liquidity operating outside of Fed control.
Money is defined by use. If households and firms treat crypto as a medium of exchange or store of value, it functions as money whether policymakers intend it to or not. Unlike bank deposits, however, this parallel system does not respond to monetary policy.
That matters for inflation. A large, money-like asset base beyond the Fed’s reach weakens monetary control and reduces the dollar’s value. Inflationary pressures can build without clear limits. The result is either higher inflation or more aggressive interventions elsewhere, neither of which is attractive.
The Genius Act, passed last year, rests in part on the claim that payment stablecoins are safe because they are backed by high-quality liquid assets, particularly U.S. Treasury securities. This argument should sound familiar. Before 2008, investors believed mortgage-backed securities were safe. They were wrong, not because housing was uniquely risky, but because overconfidence and leverage turned localized stress into systemic collapse.
Crypto presents similar dynamics. Stablecoins depend on confidence. When confidence deteriorates, stablecoin holders cash out, assets are liquidated, and liquidity evaporates. Because many stablecoins are backed by Treasury securities, that stress does not remain confined to crypto markets — it spills directly into the Treasury market itself. We have already seen episodes in which strains in nonbank financial markets disrupted Treasury trading. Expanding a crypto layer tied to government securities can trigger panic runs that increase fragility across the financial system
None of this requires banning crypto. Policy should allow market innovation and private risk-taking. But Washington should stop pretending crypto is something that it is not. Crypto remains a speculative asset held by a relatively small, politically connected share of the population. Treating it like money, and promoting it as strategically important, risks repeating old mistakes with familiar consequences that would ultimately be borne by the broader public.
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