Written by: Nic Carter, Partner at Castle Island Ventures
Translation: Luffy, Foresight News
Recently, the concept of a Strategic Bitcoin Reserve (SBR) has begun to gain widespread attention. Trump advocates for continuing to hold Bitcoin seized by the U.S. government, but some proposals go further, such as Senator Lummis's recent legislative draft suggesting the U.S. government purchase 1 million Bitcoins over five years.
Bitcoin enthusiasts believe the idea of a strategic reserve is nearly a foregone conclusion. But I think it is unlikely; a Bitcoin strategic reserve is not a good idea. Allow me to explain.
Are we talking about inventories, sovereign wealth funds, or reserves?
First, clarify the concept of a Bitcoin "reserve." Trump promised at the Nashville Bitcoin conference: "I announce that if I am elected, my government, the United States of America, will adopt the policy that all Bitcoin currently held or acquired by the U.S. government will be retained... this will essentially become the core of the national Bitcoin strategic reserve."
I strongly support the idea of the U.S. government maintaining a Bitcoin inventory, but I do not support purchasing more Bitcoin. Some proposals suggest the government should purchase Bitcoin in large quantities: from about 800,000 BTC (BPI) to 1 million BTC (Lummis), and up to 4 million BTC (RFK Jr.).
Senators Lummis, Michael Saylor, and the Bitcoin Policy Institute have been discussing a "Strategic Bitcoin Reserve (SBR)."
According to Senator Lummis's framework, the U.S. government will purchase 1 million BTC over five years and hold it for at least 20 years. His logic is "to strengthen the financial position of the U.S. and hedge against economic uncertainty and monetary instability." Lummis's bill explicitly states that the SBR will "strengthen the dollar's position" and compares it to the role of gold in previous monetary eras.
It is important to distinguish these proposals from the idea of purchasing Bitcoin in sovereign wealth funds, as described by George Selgin. As far as I know, the main advocates of the SBR do not see it as an asset in the national investment portfolio; they explicitly link Bitcoin to the dollar and suggest that Bitcoin would actually strengthen the dollar. This implies they envision a monetary system where Bitcoin plays a positive role. Currently, it functions similarly to foreign exchange reserves, but perhaps in the future, it will become the actual basis for a new commodity standard, just like the Bretton Woods system. (For those who think I am exaggerating, just read the writings of SBR advocates.)
It should be clear that I do not oppose the idea of holding existing seized Bitcoin (I believe this is a policy Trump will ultimately adopt), nor do I oppose the idea of including Bitcoin in sovereign wealth funds (though the U.S. does not have a sovereign wealth fund). Rather, I oppose the idea of creating a Bitcoin strategic reserve and giving it any form of monetary function.
Bitcoin reserves will weaken rather than strengthen the dollar.
My main point is that Bitcoin reserves will not strengthen the dollar. Unlike other countries, the U.S. issues the global reserve currency—the dollar. Other countries may attempt to purchase Bitcoin; in fact, some countries are doing so.
If you are Russia or Iran, considering adding an unseizable asset to your foreign exchange reserves may make sense, especially after the U.S. confiscated Russian bonds in 2022. But the U.S. does not need to hedge against its exposure to dollar risk because it issues dollars itself.
Purchasing Bitcoin and giving it a monetary role (whether as foreign exchange reserves or a more significant role) implies that the U.S. has lost confidence in the current dollar-based system.
This means the U.S. government would abandon its non-convertible fiat currency standard, which would throw the system into chaos. Currently, the dollar is supported by many factors, including the U.S. role as a global trade manager, the robustness of the U.S. economy, the solvency of the U.S. government, the U.S.'s ability to project hard and soft power, the depth of U.S. capital markets, and the dollar's ubiquity in global trade and finance.
If the U.S. government suddenly shifts its stance and states, "We are rethinking the entire Washington consensus," markets will begin to wonder what is wrong with the government. Are they planning a default? Will they dismantle the Bretton Woods institutions? Are they hinting at massive deficits and high-interest rates?
It should be noted that I don't think the government is considering these things, but bond traders would immediately be concerned.
You might protest, "We're not talking about moving to some new gold standard, weighing Bitcoin against the dollar. We're just talking about buying some Bitcoin and putting it on the U.S. balance sheet."
The market will not see it that way. If Bitcoin on the balance sheet is merely symbolic, it will be an extremely expensive symbol. At current prices, one million Bitcoins would cost $100 billion. Of course, it is well-known that the U.S. government is a price-insensitive buyer, so the U.S. might ultimately pay $1 million per Bitcoin, resulting in an expenditure of $1 trillion. This is a significant expense that should be spent on other more meaningful matters.
I suspect the market would not view the purchase of Bitcoin as symbolic, but rather as the first step towards a return to a new commodity standard supported by Bitcoin.
Austin Campbell stated that this would "accelerate the demise of the dollar as it would signal to the world that the U.S. does not intend to manage its finances properly and may reprice in Bitcoin at some point."
Suppose the probability of Lummis's SBR proposal begins to converge towards 1. You will see the financial markets collapse. Interest rates will soar as U.S. debt investors begin to question whether the U.S. is considering a complete exit from the Bretton Woods II system.
The capital costs for everyone on the planet would rise sharply, and inflation may worsen. A massive redistribution of wealth would occur as financial markets crash and Bitcoin surges.
In other words, America considering abandoning its currently relatively stable monetary system in favor of a currency standard based on a highly volatile emerging asset rather than gold would trigger a complete panic among its creditors.
In my view, if a Lummis-style reserve approaches its goals, the market will go wild, forcing Trump to withdraw that policy.
While BSR supporters may claim not to advocate for a new gold standard based on Bitcoin, their stated intentions are very radical, and if reserves approach reality, the bond market will panic.
From a political perspective, the SBR is unwise.
I believe any proposal to establish a Bitcoin strategic reserve would be completely unworkable in Congress. A few weeks ago, I visited some pro-cryptocurrency members of Congress in Washington, and that was my firsthand experience. The congressional landscape is dire, with Republicans holding only a slim majority. They cannot force a bill through on the basis of partisan strife, and I am not clear if Republicans would even vote on this.
Supporters of the reserve strategy insist that the executive branch can raise funds for the reserve strategy without going through legislation. Of course, the executive branch can also spend money without prior authorization from Congress. Bitcoin supporters have proposed various methods. But these methods completely miss the point. A Bitcoin reserve imposed by executive order is undemocratic and is likely to be revoked in subsequent administrations if Congress does not vote it through.
The executive branch can unilaterally decide to launch an expensive foreign war and siphon funds through various secret plans. However, such actions would be highly unpopular, as people would perceive it as undemocratic. The balance of power in our republic dictates that the president takes action, but Congress grants powers (and appropriations). We do not have a tyrant in power.
Since Congress controls the purse strings, American citizens will be consulted when significant spending decisions are made.
In other words, in a household, a husband might not mind if his wife occasionally uses his credit card for shopping. But if she decides to buy a new car or a house, he would certainly prefer to be consulted. Mechanically, if the limit is high enough, she might be able to buy a car with her husband's credit card. But that misses the point. She should consult her husband when making such significant decisions. The president should seek Congress's input on any major expenditure (and thus seek the people's input), and Bitcoin reserves certainly fall into this category.
You might say, "But Trump has the power." That is not the case. He does not have the power to spend hundreds of billions to establish a Bitcoin strategic reserve. The Bitcoin strategic reserve did not appear in campaign debates, nor has it meaningfully appeared in the media.
In his Nashville speech, he talked about Bitcoin reserves (i.e., holding existing seized Bitcoin), rather than the government purchasing Bitcoin additionally. Trump’s attempt to bypass Congress to spend government funds on Bitcoin is politically extremely unpopular. This would exhaust his limited political capital. Trump's agenda is far more than just Bitcoin. I expect that even if he gets excited about the concept of reserves for a moment, political logic will ultimately make him clear.
Another issue with forcing the purchase of Bitcoin through executive order is that easy-to-do things are also easy to reverse. If such a policy is unpopular, a future Democratic government would undoubtedly immediately sell off reserves, causing chaos in the Bitcoin market.
What Bitcoin users should hope for is a democratic consensus that a Bitcoin reserve or inventory is a good idea, implemented through bipartisan legislation or even a constitutional amendment. In general, meaningful monetary reform is achieved through legislation, such as the Gold Reserve Act of 1934 or the Gold Clause Resolution of 1977 after Nixon suspended the Bretton Woods I system.
Bitcoin users should hope that Bitcoin reserves can be enduring, rather than fleeting. Policies based on executive orders from the new Trump administration will not last.
The U.S. government's purchase of Bitcoin would severely alienate the public.
Undoubtedly, the SBR policy will be seen as a massive wealth transfer from American taxpayers to wealthy Bitcoin holders. This would be a regression and would not be welcomed by the public. Bitcoin holders represent a relatively small group. The Federal Reserve found in 2022 that only 8% of American adults hold cryptocurrency, with a higher proportion of wealthy individuals.
Even if the funding source for the SBR is in some fiscally "neutral" manner (such as selling part of the gold), it will still be seen as something that Bitcoin holders do not deserve. This funding could be used for anything else, rather than being allocated to Bitcoin holders.
A significant change in monetary policy benefiting a small portion of Americans would turn all non-Bitcoin holders against Bitcoin holders. Moreover, I suspect many Americans would not understand the logic of the SBR, as there is currently no obvious crisis with the dollar.
If de-dollarization accelerates, and the U.S. finds itself in some default predicament, interest rates soar, and many other countries begin adopting Bitcoin as a reserve asset, then people's attitudes may differ a decade or two down the line. But that is not the case today.
If you remember, student loan forgiveness was quite unpopular because it was seen as a rescue for middle-class Americans who could afford to attend college and obtain worthless liberal arts degrees. (Interestingly, Elizabeth Warren proposed a unilateral $640 billion plan to cancel student loans in 2019/2020, which was ultimately rejected by Congress.)
Biden's student loan forgiveness plan will benefit about 43 million Americans, a group larger than Bitcoin holders. From this perspective, the uproar sparked by Bitcoin reserves would be even greater.
Currently, due to Bitcoin's gradual organic adoption, the financial world is starting to show interest in Bitcoin. A reserve strategy would put ordinary Americans at odds with Bitcoin holders, which would severely impact Bitcoin's adoption.
The Bitcoin reserve lacks "strategic" purpose.
The terminology of SBR is perplexing, especially the word "strategic." The U.S. government holds many commodities that are truly used for strategic purposes. Chief among them is the Strategic Petroleum Reserve, which is a means to stabilize the oil market.
It is commendable that Biden actually sold a large amount of oil at high prices, later buying it back for profit. We also hold or have stored large amounts of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium, and other rare minerals and medical equipment.
The commonality is that these commodities have some industrial use, and the government is interested in retaining them for emergencies or to maintain market stability.
In contrast, Bitcoin has no industrial use. The U.S. government does not "need" Bitcoin to trade at any particular price level. It makes no difference to the government whether Bitcoin trades at $1 or $1 million. Bitcoin also does not generate cash flow, so reserves would not help pay interest on future debt.
The only "strategic" role Bitcoin could play is equivalent to existing reserve assets of the U.S. government, such as gold and foreign exchange. That is to say, it has no role at all. As George Selgin painstakingly explains, U.S. foreign exchange reserves are actually relatively small compared to other developed countries. This is because the dollar is a truly freely floating currency, and the U.S. does not manage this peg at all. Since 1971, the approximately 8,130 tons of gold held by the U.S. has had no relevant use. They are purely historical relics, held merely out of tradition. The last significant intervention to manage the dollar's exchange rate occurred in the 1980s.
Supporters of the Bitcoin reserve strategy often greatly overestimate gold's role in the dollar system. Ultimately, when it comes to the universality of the dollar system, the U.S. government's balance sheet is virtually irrelevant.
What truly supports the dollar is:
U.S. GDP is growing, and the resulting tax liabilities can only be paid in dollars.
The credibility and stability of the U.S. government and monetary policy.
The U.S. capital markets are the most attractive and liquid markets in the world, making them a hub for global investment.
The network effects generated by the dollar's dominance in trade settlements, commodity markets, foreign exchange markets, and debt markets.
The U.S. continues to play the role of global hegemon and the guarantor of global trade and security.
Gold and Bitcoin are fundamentally unimportant in today's American monetary system. Perhaps one day they will play a role, but the current non-convertible standard is not based on any form of commodity reserves.
Is Bitcoin indispensable?
Why reserve Bitcoin? Why not something else? Bitcoin holders have yet to provide a compelling answer. You might say Bitcoin is valuable (with a market cap of about $2 trillion), has global liquidity, and is held by many people. But then Bitcoin is not unique in this regard. Can you make an argument supporting Bitcoin reserves that does not also apply to Apple or NVIDIA stocks?
"Well," you might say, "these are claims on corporate cash flows, not non-negotiable assets. Bitcoin is special because it cannot be seized." However, it is presumed that Apple or NVIDIA will not face the risk of their assets and intellectual property being confiscated. This would be another country's reason to oppose acquiring U.S. company equity as reserves, but we are talking about the U.S. government.
Choosing Bitcoin reserves over gold also makes no sense. If you want to remonetize hard assets and use them as a basis for a monetary system, gold is the obvious choice. If we want to be "ahead" of other countries in terms of reserve assets (a common argument for supporting the SBR), gold is the perfect choice because we have more gold than anyone else. Just remonetizing gold would put us ahead.
Gold is also a "non-negotiable" asset, as ownership does not constitute a claim to anything but the simple possession of bars and ingots. If Bitcoin holders successfully persuade the U.S. government to exit the Bretton Woods II standard and return to a commodity standard from before 1971, then gold is indeed a better choice. It has a longer history, is owned by more people, its value is about nine times that of Bitcoin, it is much less volatile, and we already possess it, so monetizing it would be much cheaper.
If you dislike gold because it is not a "high-growth" asset like Bitcoin, you might consider fast-growing assets such as NVIDIA, Apple, or Microsoft stocks. If we consider what commodities the U.S. might invest in for strategic purposes, my preference would be AI data centers or chip manufacturing. They serve obvious strategic purposes and would also be economically fruitful. We would then begin to discuss the use of Treasury or Federal Reserve resources for "industrial policy."
Most conservatives and libertarians are skeptical of the government allocating resources in this top-down manner and prefer the private sector to address this issue. I do not like Biden's massive infrastructure spending; I find it extremely wasteful, and therefore I do not support further government encroachment into the private sector, especially through blatant dollar issuance.
Typically, the U.S. government does not really use monetary tools to intervene in the market beyond setting interest rates; its role is to set rules and maintain system stability, not to actively invest government funds in commodities for day trading. (This is why many are skeptical of Biden selling strategic petroleum reserves.) We are a market-based capitalist economy, not a centrally planned economy. Managing commodity hedge funds is not the government's job.
This is left to the private sector, and the government will only intervene when there is an urgent strategic need to increase reserves of a certain important commodity. Ultimately, if the American private sector invests in appreciating commodities and assets, the U.S. government will still benefit from capital gains taxes.
Establishing the SBR now makes no sense.
Why create Bitcoin reserves now? What is so special about the current moment that makes Bitcoin reserves an urgent priority? There is none. The dollar is not collapsing; in fact, it is thriving. The dollar index has been rising for the past 15 years, which may harm U.S. manufacturing and other countries holding dollar debt.
Relative to other parts of the world, U.S. GDP is growing. In particular, Europe is experiencing a slow decline, while China is facing its first serious economic crisis since the reform and opening up. The U.S. stock market is beating the rest of the world, accounting for about 50% of the global stock market, and these trends are likely to continue.
You might say, "But the dollar is falling relative to gold and other hard assets. Its purchasing power is declining, and we are in a volatile high-inflation era." But the dollar does not seem to be facing a crisis.
Interest rates are slightly higher than they were a decade ago, but no one is panicking about the U.S. government's solvency. The dollar's share of global foreign exchange reserves has declined over the past few decades, but there is no real crisis either. The dollar still holds absolute dominance globally, with no potential challengers anywhere. Neither the dying euro nor the (managed) renminbi has the capacity or ambition to challenge the dollar's status as the global preferred reserve asset.
The only reason to seriously discuss the SBR today is Trump's electoral victory. Bitcoin enthusiasts seized on this politically expedient moment, hoping he would not only introduce more favorable regulations but also become a true national-level buyer of Bitcoin.
However, the scale and liquidity of Bitcoin are still far from sufficient to impact the U.S. reserve portfolio, and under the gold standard, it is certainly not ready to become a monetary commodity like gold. Its current value is only about $2 trillion, while gold is valued at approximately $17 trillion. Bitcoin remains extremely volatile and clearly unsuitable as a unit of account.
Bitcoin holders should be more patient. Bitcoin has performed exceptionally well over its short 15-year lifespan and is becoming an important global monetary asset.
Over time, its volatility will ease (its market capitalization and liquidity will grow), and it will become a more suitable asset for the government to consider in its portfolio. But for now, it does not play a meaningful role in the U.S. monetary system.
Bitcoin reserves are not necessarily what you want.
The fact is, there is no need to establish any form of Bitcoin reserves. The U.S. can simply wait patiently without any loss. If Bitcoin continues to monetize and eventually challenges gold, and other countries adopt Bitcoin as part of their sovereign wealth funds or even start to "back" their currencies with Bitcoin, then the U.S. still has sufficient time to take action.
U.S. institutions, investors, and individuals hold more Bitcoin than anyone else. If the U.S. government really wanted Bitcoin, it has ample means to acquire it at any time.
They could buy Bitcoin on the open market. In my view, it is more likely that they would choose a cheaper method, such as setting price caps, banning private ownership, and forcibly exchanging Bitcoin held by Americans, just as they did with gold in 1933.
They could also simply seize Bitcoin held on domestic platforms; American custodians are by far the largest custodians. They could nationalize Bitcoin mining companies. They could raise capital gains taxes and insist on physical payment. They could arrest individuals known to hold large amounts of Bitcoin and seize their funds. They could invest resources in developing quantum computing sufficient to steal approximately 4 million Bitcoin vulnerable to quantum attacks.
"Wait... not like that." But that’s the problem. You cannot dictate how the U.S. government acquires Bitcoin. If you successfully persuade them of the merits of Bitcoin, and they are truly determined to reserve Bitcoin, they will do so in the politically most advantageous way.
This may not necessarily align with the best interests of American Bitcoin holders. If given a choice between purchasing 1 million BTC at $1 million each and seizing 1 million Bitcoin by other means, they would opt for a more efficient method.
How should we support the dollar without Bitcoin?
The long-term solvency of the U.S. government is certainly concerning. The debt-to-GDP ratio is approaching a historical high of 120%. The interest cost as a percentage of GDP has reached the highest level in 60 years and continues to rise. Federal net spending as a percentage of GDP is at its highest level in the past century, second only to levels during and immediately after World War II.
While the deficit has declined from its pandemic peak, it remains high, and if an economic recession hits, we have little breathing room. The reckless spending of the past four years has led to an inflationary explosion, and we are still grappling with that.
Over the past quarter-century, the dollar's share of global foreign exchange reserves has fallen from 70% to 60%. After the U.S. confiscated Russian reserves in 2022, certain buyers are now cautious about purchasing U.S. Treasury bonds.
All of this suggests that the dollar may have long-term issues, though there does not seem to be an imminent crisis. If we experience an economic recession and the government finds itself unable to engage in large-scale stimulus spending, this situation could change, as interest rates are already quite high and we are facing massive deficits.
If it were up to me, I would do the following:
Do everything possible to increase GDP growth. This means cheaper energy, fostering high-growth sectors like AI, and freeing up the private sector.
Cut the scale of government spending to reduce deficits, as the wastefulness of government spending far exceeds that of equivalent capital in private markets.
Limit political intervention in dollar markets, for example, recognizing that the U.S. power of sanctions conflicts with its international utility.
Allow inflation to persist for a while to reduce the real debt burden.
The good news is that the incoming Treasury Secretary Scott Bessent's 3-3-3 plan basically achieves this. We do not need Bitcoin.
