Does the US Even Need a Strategic Bitcoin Reserve?
U.S. Bitcoin Strategic Reserve Asset is gaining prominence amid a heated debate among financial experts.
Cryptocurrency advocates have devised a strategy to enhance digital tokens: Propose the establishment of a national Bitcoin reserve in the United States, similar to the existing national gold reserve.
It may be unexpected, but politicians seeking support from crypto voters, including former president Donald Trump, have promised to establish a reserve of that nature.
What Exactly Is the U.S. Bitcoin Strategic Reserve Asset?
One role of governments is to redistribute income and purchasing power.
It is widely believed that these transfers will positively impact society as a whole, ensuring a fair standard of living for all and being transparently and responsibly determined with public involvement.
However, since there is no one-size-fits-all solution, politics often involves clashes of competing interests alongside disagreements over ideals.
Senator Cynthia Lummis of Wyoming has proposed a plan to acquire a significant stake in the total Bitcoin supply through a 1-million-unit purchase program over a set period.
To put the size and scope of gold reserves held by the "United States" into context, given the current price of $58,600, if someone were to make such a significant purchase without considering its value, it would likely cause the price to surge, resulting in a substantial profit for current holders.
It's no surprise that this notion has taken off for those who are well-versed in the world of Bitcoin ownership.
The acquisition would be funded by reassessing the Federal Reserve's claim on the Treasury's gold holdings, as outlined in section 9 of the bill.
Subsequently, the General Account (TGA) would be credited with a substantial amount of money, totaling hundreds of billions of dollars.
Despite the current market price of nearly $2,500 per ounce for gold, it is still officially recorded at a statutory price of only $42.22 per ounce.
This strategy is similar to "mint the coin" but involves gold instead of platinum.
It's interesting to see how the Argentinean central bank would profit from dollar-denominated assets during a decline in the peso and then use those funds to finance the budget deficit by issuing more pesos.
Regardless, after the Treasury uses the newly credited TGA funds to invest in Bitcoin, those dollars will eventually appear on private balance sheets, potentially as interest-bearing assets linked to the Fed, such as bank reserves or reverse repos.
Senator Lummis hinted in her speech at the Nashville Bitcoin conference that the growing value of the government's Bitcoin assets would enable the Treasury to repurchase all of its dollar-denominated debt.
She claimed, "This is our Louisiana Purchase moment."
In a press release, she said, "Establishing a strategic Bitcoin reserve would firmly secure the dollar's position as the world's reserve currency into the 21st century and ensure we remain the world leader in financial innovation…The United States maintains strategic reserves in certain hard assets critical to American national security and independence, such as gold and petroleum."
She added that "establishing a strategic Bitcoin reserve to bolster the U.S. dollar with a digital hard asset will secure our nation's standing as the global financial leader for decades to come."
Like individuals, governments keep a mix of physical and financial assets in reserve in case of sudden and unforeseen costs or income gaps.
The ability to enjoy fewer goods and services is sacrificed in pursuing these assets (and insurance), but the negative risk when things go wrong is limited.
The liabilities and risks you wish to mitigate should inform your decision on the types and quantities of assets to purchase.
For instance, a US resident's outlay will be expressed in US dollars.
So, they don't see the utility of keeping emergency funds in Canadian or Australian currencies if they frequent trips to or reside part-time in those countries.
It would also be foolish for such people's emergency fund to be sufficiently substantial to pay for decades' worth of costs; doing so would need an undesirable mix of living well below their means and under-investing in hazardous assets that should gain value over time.
Naysayers Call It a Risky Strategy
Reason: Bitcoin possesses several peculiar qualities (listed below), which makes it a risky bet.
- It records all transactions that cannot be changed, in theory.
- If there is a liberal regulatory framework, adequate computing power, and energy, anyone can create bitcoins.
- There is a hard cap of 21 million BTC since output is asymptotically going down to zero.
- There is no guarantee from the government or any other source of funding for it.
- Although it has a very unpredictable price, its total value has increased tremendously since its start.
According t the naysayers, no one attempting to build a sovereign reserve portfolio should be enticed by these assets, no matter how alluring they appear to others.
Importantly, Bitcoin's price volatility makes risks worse, not better.
In the early weeks of the pandemic, the price dropped 50 percent; between mid-November 2021 and November 2022, it dropped about 80 percent.
Having Bitcoin would have been a catastrophe for poorer nations looking for a hedge against their currencies depreciating against the rising dollar.
With the total outstanding amount — already around 20 million BTC — drawing closer to the cap and the price of fresh supply rising, this volatility will only likely worsen.
Bitcoin transactions are more difficult to monitor than dollar or euro transactions, but they are not impossible. Also, the conversion of Bitcoin transactions into fiat currencies used for bill payment will always occur at some time.
Trade with Russia denominated in yuan is politically delicate for a reason.
Bets in Favour Say Otherwise
When the idea of spot Bitcoin ETFs was floated, the one-two punch between crypto advocates and naysayers was similar to the fever-pitch ideology division we are seeing now.
Since January this year, when Bitcoin ETFs were approved, investments in these funds have grown exponentially.
If the concept does get a go-ahead, Bitcoin may reach $100,000 by year's end, while Ether might reach $4,000.
This is according to Metafide CEO Frank Speiser.
While appearing on "Bloomberg Crypto" with Tim Stenovec and Katie Greifeld, he also talks about the potential applications of a bitcoin strategic reserve.
The future of Bitcoin in the United States is a hotly debated topic as its popularity grows among large institutions.
According to recent discussions between BlockFills' Rob Nelson and John Divine, Head of OTC Trading, about bitcoin's possible transformation into a strategic reserve asset, the roundtable moderator called it an economic paradigm shift may be in the works.
This pivotal change prompts inquiries on the potential rate of transformation and obstacles that can emerge from political opposition.
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