Original title: Opinion I don’t support a Strategic Bitcoin Reserve, and neither should you
Original author: Nic Carter
Original source: https://bitcoinmagazine.com/
Translation: Daisy, Mars Finance
Recently, the concept of a 'Strategic Bitcoin Reserve' has begun to attract attention among Bitcoin enthusiasts. Trump proposed retaining a batch of seized Bitcoins, while certain proposals go further. Currently, legislation like the Bitcoin Act proposed by Senator Lummis suggests that the U.S. government acquire 1 million Bitcoins within five years.
Among Bitcoin enthusiasts, establishing a 'strategic reserve' is almost taken for granted. But I do not think this is achievable, nor do I think it is a good idea.
Let me explain.
Are we talking about hoarding, sovereign wealth funds, or reserves?
First, regarding the concept of 'hoarding' Bitcoin. Trump promised in his pre-election speech in Nashville, 'I hereby announce that if I am elected, the U.S. government's policy will be to retain 100% of all Bitcoins we currently hold or acquire in the future. [...] These Bitcoins will be the core of the national Strategic Bitcoin Reserve.'
But that is not what I am talking about. (In fact, I strongly advocate for hoarding.) What I mean is the actual acquisition of more Bitcoin by the U.S. government. Various proposals range from acquiring around 800,000 Bitcoins (BPI), to 1 million (Lummis), to 4 million (Robert F. Kennedy Jr.).
Senators Lummis, Michael Saylor, and the Bitcoin Policy Institute (among many others) have been discussing the idea of establishing a 'Strategic Bitcoin Reserve.'
According to Senator Lummis's framework, the U.S. government would acquire 1 million Bitcoins in five years and hold them for at least 20 years. The explicit logic of this reserve is to 'strengthen the U.S. financial position and hedge against economic uncertainty and monetary instability.' Lummis's bill specifically mentions that the SBR (Strategic Bitcoin Reserve) will 'enhance the dollar's standing' and compares it to the role of gold in past monetary eras.
It is important to note that these proposals differ from the concept mentioned by George Selgin about acquiring Bitcoin through a sovereign wealth fund. To my knowledge, the main advocates of the SBR do not view it as an asset in the national portfolio—they explicitly link Bitcoin to the dollar and claim that Bitcoin would actually strengthen the dollar's position. This means they envision a monetary system where Bitcoin plays some active role—currently akin to a foreign exchange reserve, but potentially becoming the actual basis for a new commodity standard (like Bretton Woods I) in the future. (If anyone thinks I'm exaggerating, just read the writings of the SBR advocates themselves.)
It should be made clear that I do not oppose simply holding already seized Bitcoins (I think this is a policy that Trump will ultimately adopt), nor do I oppose the idea of placing Bitcoin into a sovereign wealth fund (although the U.S. currently does not have such a fund). What I oppose is creating a 'strategic' Bitcoin reserve and granting it any form of monetary role.
A Bitcoin reserve would weaken, not support, the dollar
My main point is that a Bitcoin reserve will not enhance the dollar's status. Unlike other countries, the U.S. is the issuer of the global reserve currency. Other countries may try to incorporate Bitcoin into their foreign exchange reserves, and some have already begun to do so.
For countries like Russia or Iran, considering incorporating non-seizable assets into foreign exchange reserves may make sense, especially after the U.S. seized Russian bonds in 2022. But the U.S. does not need to hedge against risks to the dollar, as it is the issuer of the dollar.
If the U.S. buys Bitcoin and gives it some form of monetary role—whether as foreign exchange reserves or a more significant role—it would imply a loss of confidence in the current dollar-based system.
If the U.S. government clearly indicates a desire to abandon the non-redeemable fiat currency standard, it will cause chaos in the system. Currently, the 'support' for the dollar comes from the following sources:
The role of the U.S. as a global trade manager;
The robust resilience of the U.S. economy;
The U.S. government's solvency;
The projection capabilities of U.S. hard and soft power;
The depth of the U.S. securities market;
The widespread use of the dollar in global trade and finance.
If the U.S. government suddenly announced, 'We are reconsidering the entire Washington Consensus,' the market would begin to question what the government knows.
Are they planning to default?
Is there a plan to dismantle the institutions of the Bretton Woods system?
Is there an expectation of huge deficits and soaring interest rates?
It should be made clear that I do not think the U.S. government is considering these things, but I do think bond traders would immediately feel concerned.
"But we are not moving to some new gold standard where the value of the dollar depends on Bitcoin. We are just discussing buying some Bitcoin and including it on the U.S. government's balance sheet," you might protest.
However, the market would not see it this way. If Bitcoin is merely a symbolic asset on the balance sheet, it would be an extremely expensive symbol. A million Bitcoins at the current price would cost $100 billion—moreover, if the U.S. government were perceived as an insensitive buyer, it might end up acquiring these Bitcoins at $1 million each, spending $1 trillion on reserves. This is an extremely significant expenditure that should be spent elsewhere.
I suspect the market would view the purchase of Bitcoin as a symbol, rather than as a first step back to a new commodity standard where the dollar is based on Bitcoin instead of gold.
Austin Campbell says this will 'accelerate the decline of the dollar, as it will signal to the world that the U.S. does not intend to manage its fiscal situation well and may at some point revalue in Bitcoin.'
Assuming the possibility of a Lummis-style Bitcoin reserve is actually approaching 1. You would know because the financial markets would enter a disaster. Investors in U.S. debt would begin to question whether the U.S. is considering severing ties with the Bretton Woods system, and interest rates would soar dramatically.
The capital costs for everyone globally would skyrocket. Inflation could worsen. A massive redistribution of wealth would occur, as financial markets would collapse, and Bitcoin would soar.
In other words, if the U.S. considers abandoning its current relatively stable monetary system in the short term and replacing it with a monetary standard that relies not on gold but on a highly volatile emerging asset, this will cause complete panic among its creditors.
In my view, even if we approach a Lummis-style reserve, the market would preemptively begin to spiral out of control, and Trump would be forced to rescind the policy.
While advocates of a Bitcoin reserve may claim they are not advocating for a completely new gold standard based on Bitcoin, their intentions (again, just read their proposals) are radical enough that if the reserve moves closer to becoming a reality, they would significantly disrupt the U.S. Treasury market.
A Bitcoin reserve would be politically unwise
For me, any legislation proposing a Bitcoin reserve in Congress would be completely ineffective. I draw this conclusion from personal experience, having visited some cryptocurrency-supporting members of Congress in Washington a few weeks ago. The current situation in Congress is delicate, with the Republicans holding a slim majority. They cannot push something through based on party lines, and I don’t even think the Republicans would vote as a whole on this issue.
Supporters of the reserve insist that the executive branch can find funds to establish a reserve without legal authorization. Indeed, the executive branch can find ways to spend money without prior authorization from Congress. But this completely misses the point. A Bitcoin reserve imposed by executive law would be undemocratically imposed, and if Congress does not vote to support it, this situation may be overturned in subsequent administrations.
Think of it this way. The executive branch could unilaterally decide to launch an expensive foreign war and find cash through various obscure schemes. Such initiatives would be extremely unpopular, as the people would rightly see this as very undemocratic. The power structure of our republic stipulates that the president exercises functions, but Congress authorizes (and approves). We do not have a dictator in power.
Because Congress controls fiscal spending, American citizens are effectively consulted in major spending decisions.
In other words, in a family, a husband may not mind his wife using his credit card for small purchases. But if she decides to buy a new car or a house, he would certainly want to be consulted. Mechanically, she could use her husband's credit card to buy a car as long as the limit is high enough. But that misses the point. She should consult her husband on such significant decisions. The president should consult Congress (indirectly representing the American people) on any major expenditures. And a Bitcoin reserve certainly falls into this category.
"But Trump has an authorization," you might say. But that is not true. He has no authorization to spend hundreds of billions to establish a Bitcoin reserve. Trump did not mention this issue during his campaign. It did not gain attention in debates or the news.
He mentioned in his speech in Nashville a Bitcoin reserve (for example, holding existing seized Bitcoins), rather than additional purchases of Bitcoin by the government. Trump attempting to bypass Congress to use government funds for Bitcoin would be extremely unpopular. This would consume his limited political capital. And Trump's agenda is far more than just the Bitcoin issue. I think this political logic will ultimately become clear to him, even if he is momentarily excited about the idea of a reserve.
The problem with forcibly purchasing Bitcoin through executive orders (assuming this is even feasible) is that once such a practice is imposed, it can easily be overturned. If this policy is unpopular—and I believe it would be unpopular—the next Democratic administration would certainly sell the reserve immediately, leading to chaos in the Bitcoin market.
Bitcoin holders should hope for a bipartisan legislative agreement, or even a constitutional amendment, to reach a democratic consensus that a Bitcoin reserve or Bitcoin ownership is a good policy. Generally speaking, major changes in monetary policy are achieved through legislation, such as the Gold Reserve Act of 1934, or the gold clause resolution of 1977, following Nixon's suspension of the Bretton Woods system I.
Bitcoin holders should hope that a Bitcoin reserve will be lasting rather than fleeting. Policies implemented by a new Trump administration through executive orders based on statutory authority will not last.
The U.S. government purchasing Bitcoin would greatly alienate the public.
There is no doubt that a Bitcoin reserve (SBR) policy would be seen as a massive wealth transfer from American taxpayers to Bitcoin holders who already have wealth. This would be extremely unfair and unpopular. According to a 2022 survey, the Federal Reserve found that only 8% of American adults view cryptocurrency as an investment, even among those groups with relatively high wealth.
Even if the SBR is funded in a 'fiscally neutral' manner (for example, by reassessing the market price of gold and selling some gold), it would still be seen as an unearned gift to Bitcoin holders. These funds could be used for any purpose—they would be specifically earmarked for Bitcoin.
A large-scale monetary change that benefits only a very few Americans would alienate those who do not hold Bitcoin from Bitcoin holders. I doubt many Americans can understand the logic of the SBR, as there is currently no apparent crisis for the U.S. dollar.
If you remember, the student loan forgiveness policy was quite unpopular because it was seen as a relief for the middle class and upper class who could afford to go to college and obtain useless liberal arts degrees. (Interestingly, Elizabeth Warren proposed a one-time expenditure of $640 billion in 2019/20 without congressional approval to wipe out student loans. I doubt Bitcoin holders would have a different attitude.)
Biden's student loan forgiveness plan will benefit about 43 million Americans, a group much larger than Bitcoin holders. The intense opposition to a Bitcoin reserve would be even more severe.
Currently, the financial world is gradually and organically accepting Bitcoin. If there were a reserve policy, it would make ordinary Americans hostile towards Bitcoin holders, which would significantly complicate the acceptance process of Bitcoin.
A Bitcoin reserve has no 'strategic' purpose
The term 'strategic Bitcoin reserve' is actually confusing, particularly the 'strategic' part. The U.S. government holds certain commodities for genuine strategic purposes. Most importantly, the Strategic Petroleum Reserve is a means to stabilize oil markets.
Biden did well in this regard, as he sold a large amount of oil at high prices and later bought it back at lower prices, making a profit. We have also reserved or previously reserved large amounts of heating oil, natural gas, grains, dairy products, rare minerals like cobalt, titanium, tungsten, helium, and medical equipment.
What these commodities have in common is that they have some instrumental use, and the government is interested in keeping these commodities for emergencies or market stabilization.
In contrast, Bitcoin has no industrial use. The U.S. government does not 'need' Bitcoin to trade at any specific price level. The government does not care about the trading price of Bitcoin, whether it is $1 or $1 million. Bitcoin also does not generate cash flow, so a Bitcoin reserve does not help with future interest payments on debt.
The only Bitcoin that might have 'strategic' use would be equivalent to the existing reserve assets of the U.S. government, such as gold and foreign exchange – in other words, of no use at all. As George Selgin has detailed, the U.S. actually holds relatively little in foreign exchange reserves. This is because the dollar is a truly freely floating currency, and the U.S. does not manage exchange rates at all. Since 1971, the approximately 8,130 tons of gold held by the U.S. have had no practical use; they are merely held for traditional reasons. The last major intervention to manage the dollar's exchange rate was in the 1980s.
Discussions among Bitcoin holders about a Bitcoin reserve often overestimate the role of gold in the dollar system. Ultimately, the U.S. government's balance sheet is nearly irrelevant in the universality of the dollar system.
The real factors supporting the dollar are:
U.S. GDP growth, creating a tax burden that can only be repaid in dollars
The U.S. government's credibility and stability, as well as monetary policy
The U.S. capital markets are the most attractive and liquid in the world, making them a 'pool' for global investment (measured in dollars)
The network effects of the dollar's dominance in trade settlement, commodity markets, foreign exchange markets, and debt markets
The ongoing role of the U.S. as a global hegemon and guarantor of global trade and security
Gold and Bitcoin currently have no practical significance in the U.S. monetary equation. Perhaps one day they will play a role, but the current non-redeemable standard is not based on any commodity reserve.
There is no unique argument for the SBR designated for Bitcoin.
Why reserve Bitcoin? Why not choose something else? Bitcoin advocates have yet to provide a compelling answer. You might say Bitcoin is valuable (approximately $2 trillion), highly liquid globally, and held by many people. Well, Bitcoin is not the only one in this regard. If the arguments for a Bitcoin reserve apply, they could equally apply to stocks of companies like Apple or Nvidia.
"Well," you might say, "these are corporate cash flow claims, not ticket assets. Bitcoin is special because it cannot be seized or interfered with." However, the U.S. does not face the risk of its assets and intellectual property being seized by itself. This would become an argument against another country acquiring U.S. corporate equity reserves. But we are discussing the U.S. government.
There is no reason to reserve Bitcoin without including gold. If you want to remonetize a hard asset and use it as the basis for the monetary system, gold is clearly the preferred choice. If we want to be 'ahead' of other countries in terms of reserve assets (this is a common argument supporting SBR), gold is perfect because we have more than anyone else. Just remonetizing gold (repricing it from the official price to the current market price), we are already ahead.
Gold is also a 'ticket' asset, as ownership is not a claim against anything else, but simply owning gold bars and ingots. If Bitcoiners successfully persuade the U.S. government that we should exit the Bretton Woods II standard and return to a commodity-based standard before 1971, then gold is indeed a better choice. It has a longer track record, is owned by more people (thus remonetizing it would alienate fewer people), its value is about nine times that of Bitcoin, is much less volatile, and we already own it, so monetizing it would be far cheaper (if not free).
If you oppose gold because it is not a 'high growth' asset like Bitcoin, then you might consider fast-growing (and productive) assets like NVIDIA, Apple, or Microsoft. If we consider the commodities the U.S. might strategically invest in, my preference would be AI data centers or chip manufacturing. They have an obvious strategic significance and economic productivity. However, we then enter into a discussion about 'industrial policy' using fiscal or Federal Reserve resources.
Most conservatives and libertarians are skeptical of the government allocating resources this way, preferring to let the private sector handle it. I do not like Biden's massive infrastructure spending because I find it extremely wasteful, so I do not support further government intrusion into the private sector, especially through direct money printing.
Typically, the U.S. government does not intervene in the market by setting interest rates; its role is to establish the rules of the game and maintain system stability, rather than actively injecting government funds into commodities for day trading. (This is also why many are skeptical about Biden's release from the Strategic Petroleum Reserve.) We are a market-oriented capitalist economy, not a centrally planned economy. The government should not manage a commodity hedge fund.
This work should be done by the private sector, with the government stepping in only during certain urgent strategic necessities to enhance reserves of specific essential commodities. Ultimately, the U.S. government still benefits from investments in commodities and assets by the U.S. private sector through capital gains taxes.
I would trust fund managers and capital allocators to do this rather than bureaucrats.
There’s no argument for acquiring an SBR today
Why is there a need to establish a Bitcoin reserve now? Is there a particular moment that makes it urgent to establish a Bitcoin reserve right now? There is no particular reason. The dollar is not collapsing—in fact, it is thriving. The dollar index has been rising over the past 15 years, which may not be favorable for U.S. manufacturing and foreign countries holding dollar liabilities.
The U.S. GDP is growing relative to other countries, particularly Europe, which is slowly declining, and China, which is facing its first serious economic crisis since Deng. U.S. stocks have performed far better globally than those of other countries, with the U.S. stock market accounting for about 50% of the global total. There are no signs that these trends will not continue.
"But the dollar is declining relative to hard assets, like gold," you might say. "Its purchasing power is declining, which can be evidenced by the relatively high inflation and unstable inflation environment we are in." But there is no apparent crisis for the dollar.
Interest rates are slightly higher than they were in the past decade, but no one is panicking about the U.S. government's solvency. The dollar's share in global foreign exchange reserves has declined over the past few decades, but there is no real crisis there either. The dollar still dominates globally, and there is no clear competitor anywhere. The stagnant euro or (managed) renminbi has neither the capacity nor the ambition to challenge the dollar as the global preferred reserve asset.
The only reason SBR is being discussed today is Trump's electoral victory. Bitcoin supporters have seized on this because it is politically advantageous, hoping that he will not only introduce more favorable regulations but also actually become a national-level Bitcoin purchaser.
But Bitcoin is not large enough or liquid enough to hold a place in the U.S. reserve asset portfolio, nor is it suitable to become a currency under a gold standard like gold. Its market capitalization is only $2 trillion today, while gold's market capitalization is $17 trillion. Bitcoin remains extremely volatile and is clearly not suitable as a unit of account (if we were to transition to some Bitcoin-denominated dollar system).
Bitcoin supporters just need to be more patient. Bitcoin has performed well in its short 15-year lifespan and is gradually becoming a globally significant monetary asset. It has undergone comprehensive institutionalization, with ETFs being its ultimate major confirmation.
Over time, its volatility will diminish (market capitalization and liquidity will increase), and it will become a more suitable asset for the government to consider in its portfolio. But as of now, it has no significant role in the U.S. monetary system.
Be careful what you wish for
The fact is, there is no urgency to establish any form of reserve. The U.S. has no reason not to wait. If Bitcoin continues to monetize and eventually challenges gold, other countries will incorporate Bitcoin as part of their sovereign wealth, or even begin to 'back' their currencies with Bitcoin, then the U.S. has ample time to take action.
Institutions, investors, and individuals in the U.S. hold more Bitcoin than anyone else. The U.S. government has ample means to acquire Bitcoin at any time if they truly desire it.
They could buy Bitcoin on the open market. Most likely, I think they would choose the price cap option, banning private ownership and mandating a conversion of Bitcoin held by the U.S., just as they did with gold in 1933.
They could also simply seize Bitcoin held on domestic platforms—the U.S. custodians are the largest. The U.S. government could nationalize miners. Capital gains taxes could be raised and payments could be required in kind. They could arrest known holders of large amounts of Bitcoin and confiscate their funds. They could invest resources to develop sufficient quantum computing to steal those ~4 million Bitcoins that are quantum vulnerable.
"Wait a minute… that’s not how it works." But that’s the problem. You do not have the right to dictate how the U.S. government acquires Bitcoin. If you successfully persuade them of Bitcoin's merits, and they really set a goal in their minds, they will do it in the most politically convenient way.
This does not necessarily align with what is best for U.S. Bitcoin holders. If the choice is to purchase 1 million Bitcoins at a price of $1 million each ($1 trillion), or simply confiscate 1 million Bitcoins in other ways, they would choose the more efficient method.
How should we support the dollar if not with Bitcoin?
The long-term solvency of the U.S. government is indeed a concern. The debt-to-GDP ratio is close to a historic high of 120%. The interest cost as a percentage of GDP has reached a 60-year high and is still rising. Federal net spending as a percentage of GDP is also at a century-high, second only to levels during and after World War II.
Although the deficit has declined from its peak during the pandemic, it remains high, and there will be little buffer space if the economy falls into recession. The wanton spending over the past four years (in which both parties reached a consensus) has led to an outbreak of inflation that we are still dealing with.
The dollar's share of global foreign exchange reserves has fallen from 70% to 60% over the past 25 years (although no other currency has gained meaningful shares individually). Some debt buyers are now uneasy about purchasing U.S. Treasury bonds, especially after the U.S. seized Russia's reserves in 2022.
All of this points to the long-term potential problems with the dollar, although there seems to be no crisis at the moment. If we experience an economic recession and the government finds itself unable to engage in large-scale stimulus spending due to already high interest rates and operating large deficits, the situation could change.
If it were me, I would do the following:
Increase GDP growth by any possible means. This means allowing energy to be cheaper, promoting high-growth industries like artificial intelligence, and generally liberating the private sector.
Cut the scale of government spending, which is more wasteful than capital in the private market, to reduce the deficit.
Limit political interference in the dollar market, such as recognizing the trade-offs between the usefulness of the dollar's sanctioning power internationally and its value.
Let inflation run high for a period to reduce the real burden.
The good news is that Treasury Secretary Scott Bansen's 3-3-3 plan essentially does this. No need for Bitcoin.
