Original title: I don't support a Strategic Bitcoin Reserve, and neither should you
Original author: Nic Carter, Partner at Castle Island Ventures
Original translation by: Luffy, Foresight News
Recently, the concept of a Strategic Bitcoin Reserve (SBR) has begun to attract 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 proposal suggesting that the U.S. government purchase 1 million Bitcoins over five years.
Bitcoin enthusiasts believe that the case for a strategic reserve is almost a foregone conclusion. But I think that is unlikely; a Bitcoin strategic reserve is not a good idea. Let me explain.
Are we talking about inventory, sovereign wealth funds, or reserves?
First, let’s clarify the concept of a Bitcoin "reserve". In his speech at the Nashville Bitcoin Conference, Trump promised: "I announce that if I am elected, my government, the United States, will adopt a policy that all Bitcoin currently held or acquired in the future by the U.S. government will be kept... this will effectively become the core of a national Bitcoin strategic reserve."
I strongly support the idea of the U.S. government maintaining a Bitcoin stock, but I do not support purchasing more Bitcoin. Some proposals suggest the government buy large amounts of Bitcoin: from about 800,000 BTC (BPI), to 1 million BTC (Lummis), to 4 million BTC (RFK Jr.).
Senator Lummis, Michael Saylor, and the Bitcoin Policy Institute have been discussing the "Strategic Bitcoin Reserve (SBR)."
According to Senator Lummis's framework, the U.S. government will purchase 1 million BTC over the next five years and hold them for at least 20 years. His logic is "to strengthen America's financial position, hedge against economic uncertainty, and currency instability." Lummis's bill explicitly states that 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 what George Selgin suggests regarding purchasing Bitcoin within sovereign wealth funds. To my knowledge, the main advocates of SBR do not view it as an asset in the national portfolio; they explicitly link Bitcoin to the dollar and imply that Bitcoin would actually strengthen the dollar. This suggests they envision a monetary system where Bitcoin plays a positive role. Currently, it serves the same role as foreign exchange reserves, but perhaps in the future, it will become the actual basis of a new commodity standard, like the Bretton Woods system. (For those who think I am exaggerating, just read the texts written by SBR advocates.)
It should be clarified that I do not oppose the idea of retaining existing seized Bitcoins (I believe this is a policy Trump will ultimately adopt), nor do I even oppose the idea of putting Bitcoin into a sovereign wealth fund (though the U.S. has no sovereign wealth fund). Rather, I oppose the idea of creating a Bitcoin strategic reserve and assigning it any form of monetary role.
Bitcoin reserves will weaken rather than strengthen the dollar
My main point is that a Bitcoin reserve will not reinforce the dollar. Unlike other countries, the U.S. issues the global reserve currency—the dollar. Other countries can attempt to buy Bitcoin; in fact, some are already 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. seized Russian treasury bonds in 2022. But the U.S. does not need to hedge its exposure to the dollar risk because it issues dollars itself.
Purchasing Bitcoin and assigning it a currency role (whether as a forex reserve or a more significant role) implies that the U.S. has lost faith in the current dollar-based system.
This would mean that the U.S. government is abandoning an irredeemable fiat currency standard, which would throw the system into chaos. Currently, the dollar is supported by various factors, including the U.S.'s role as the 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 the U.S. securities market, and the dollar's universality in global trade and finance.
If the U.S. government suddenly shifts its position and says, "We are reconsidering the entire Washington consensus," the market will start to wonder what is wrong with the government. Are they planning to default? Will they dismantle the institutions of the Bretton Woods system? Are they hinting at huge deficits and high interest rates?
It should be noted that I believe the government has not considered these matters, but bond traders would immediately feel concerned.
You might protest, "We're not talking about shifting to some new gold standard where Bitcoin is weighted against the dollar. We're just talking about purchasing some Bitcoin and putting it on the U.S. balance sheet."
The market will not view it this way. If Bitcoin on the balance sheet is merely symbolic, it will be an extremely expensive symbol. At current prices, a 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 buy these Bitcoins at $1 million each, amounting to a total of $1 trillion. This is a significant expenditure that should be spent on other more meaningful things.
I suspect the market will not view the purchase of Bitcoin as symbolic but rather as the first step towards a return to a new commodity standard based on Bitcoin backing the dollar.
Austin Campbell states that this will "accelerate the demise of the dollar, as it will signal to the world that the U.S. does not intend to manage its finances properly and may at some point reprice in Bitcoin."
Assuming the probability of the Lummis SBR proposal starts to converge to 1. You would see the financial markets collapse. Interest rates would soar as U.S. debt investors begin to doubt whether the U.S. is considering a complete exit from the Bretton Woods II system.
The capital costs for everyone on Earth will rise sharply, and inflation may worsen. A massive redistribution of wealth will occur as financial markets crash and Bitcoin surges.
In other words, the U.S. is considering abandoning its current relatively stable monetary system in favor of a currency standard based not on gold but on a highly volatile emerging asset, which would cause complete panic among its creditors.
In my view, if a Lummis-style reserve gets close to its target, the market will start to go crazy, and Trump will be forced to withdraw that policy.
While BSR supporters may claim not to advocate establishing a new gold standard based on Bitcoin, their stated intentions are very radical, and if the reserve comes close to reality, the bond market will panic.
From a political standpoint, SBR is unwise
I believe that any proposal to establish a Bitcoin strategic reserve in Congress is completely unfeasible. Just weeks ago, I visited some cryptocurrency-supporting members of Congress in Washington, and this was my personal experience. The situation in Congress is dire, with the Republicans holding only a slim advantage. They cannot force a bill through on party lines, and I am not clear whether the Republicans would even vote on it.
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. Imposing a Bitcoin reserve through executive order is undemocratic, and if Congress does not vote to approve it, it is likely to be abolished in subsequent administrations.
The executive branch can unilaterally decide to launch an expensive foreign war and misallocate funds through various secret programs. But such actions would be highly unpopular, as people would perceive them as undemocratic. The balance of power in our republic dictates that the president must act, but Congress grants power (and appropriations). We do not have a tyrant in power.
Since Congress controls the purse strings, American citizens would be consulted when making significant spending decisions.
In other words, in a household, a husband might not mind if his wife occasionally shops with his credit card. But if she decides to buy a new car or a house, he would certainly prefer to be consulted. Of course, mechanistically, if the limit is high enough, she might be able to purchase a car with her husband's credit card. But that misses the point. She should consult her husband before making such a significant decision. The president should consult Congress on any significant expenditures (and thus consult the American people), and Bitcoin reserves definitely fall into that 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 of dollars establishing a Bitcoin strategic reserve. The Bitcoin strategic reserve has not appeared in campaign debates nor has it meaningfully surfaced in the media.
He talked about Bitcoin reserves (i.e., holding existing seized Bitcoins) in his Nashville speech, not about the government additionally purchasing Bitcoin. Trump's attempt to bypass Congress to spend government funds on Bitcoin is extremely unpopular politically. This would deplete his limited political capital. Trump's agenda goes far beyond Bitcoin. I expect that even if he is momentarily excited about the concept of reserves, political logic will eventually make it clear to him.
Another problem with forcibly purchasing Bitcoin through executive order is that things that are easy to do are also easy to reverse. If such a policy is unpopular, a future Democratic government will undoubtedly sell off reserves immediately, leading to chaos in the Bitcoin market.
Bitcoin users should hope for a democratic consensus that a Bitcoin reserve or stock is a good idea, and that this policy is implemented through bipartisan legislation or even a constitutional amendment. Generally speaking, meaningful monetary reform is achieved through legislation, like the 1934 (Gold Reserve Act) or the 1977 (Gold Clause Resolution) after Nixon suspended the Bretton Woods I system.
Bitcoin users should hope that Bitcoin reserves can endure rather than being a flash in the pan. Policies based on executive orders implemented by a new Trump administration will not be lasting.
The U.S. government's purchase of Bitcoin would severely alienate the public.
There is no doubt that the SBR policy will be seen as a massive wealth transfer from U.S. taxpayers to wealthy Bitcoin holders. This will be a regression that will not be welcomed by the public. Bitcoin holders are a relatively small group. The Federal Reserve found in 2022 that only 8% of U.S. adults held cryptocurrencies, with a higher proportion of wealthy individuals.
Even if the funding source for SBR is some sort of fiscally "neutral" method (such as selling part of the gold reserves), it will still be seen as something that Bitcoin holders do not deserve. These funds could be used for anything else instead of being allocated to Bitcoin holders.
A significant monetary policy change that benefits a small portion of Americans will turn all non-Bitcoin holders against Bitcoin holders. And I suspect many Americans will not understand the logic of SBR, as there is currently no obvious crisis with the dollar.
If de-dollarization accelerates, the U.S. falls into some form of default predicament, interest rates soar, and many other countries begin to adopt Bitcoin as a reserve asset, then people's attitudes may change in ten or twenty years. But that is not the case today.
If you recall, student loan forgiveness was quite unpopular as it was seen as a bailout for middle-class Americans who could afford to go to 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. Viewed in this light, the uproar caused by Bitcoin reserves would be even more severe.
Currently, due to the gradual organic adoption of Bitcoin, the financial sector is beginning to take an interest in Bitcoin. A reserve strategy would pit ordinary Americans against Bitcoin holders, which would seriously impact Bitcoin adoption.
Bitcoin reserves have no "strategic" purpose
The term SBR is confusing, especially the word "strategic." The U.S. government holds many commodities that are genuinely used for strategic purposes. Among them, the Strategic Petroleum Reserve is a means to stabilize oil markets.
It is commendable that Biden actually sold a large amount of oil at high prices and later repurchased it, making a profit. We also hold or have held large amounts of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium, and 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 market stabilization.
In contrast, Bitcoin has no industrial use. The U.S. government does not "need" Bitcoin to trade at any specific 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 will not help pay the interest on future debt.
The only "strategic" role Bitcoin can play is equivalent to that of the U.S. government's existing reserve assets, such as gold and foreign exchange. In other words, it plays no role at all. As George Selgin painstakingly explains, compared to other developed countries, the U.S.'s foreign exchange reserves are actually relatively small. This is because the dollar is a truly freely floating currency, and the U.S. does not manage such pegs at all. Since 1971, the approximately 8,130 tons of gold held by the U.S. have no relevant use. They are purely a historical relic, held out of tradition. The last significant intervention in managing 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 dollar system's universality, the U.S. government's balance sheet is almost irrelevant.
What truly supports the dollar is:
· U.S. GDP growth, with tax liabilities generated that 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 global trade and security guarantor
Gold and Bitcoin are fundamentally unimportant in today's U.S. monetary system. Perhaps one day they will play a role, but the current irredeemable standard is not based on commodity reserves in any way.
No Bitcoin, no way?
Why reserve Bitcoin? Why not something else? Bitcoin holders have yet to provide a compelling answer. You might say that Bitcoin is valuable (with a market cap of about $2 trillion), globally liquid, and held by many. But Bitcoin is not unique in that regard. Can you make an argument to support Bitcoin reserves that does not also apply to Apple or NVIDIA stocks?
"Well," you might say, "these are claims on corporate cash flows, not anonymously held assets. Bitcoin is special because it cannot be seized." However, presumably, Apple or NVIDIA would not face risks of asset and intellectual property confiscation. This would be another reason for other countries to oppose acquiring U.S. company equities as reserves, but we are talking about the U.S. government.
Choosing Bitcoin reserves instead of gold makes no sense either. If you want to remonetize hard assets and use them as the basis for a monetary system, gold is the obvious choice. If we want to "lead" other countries in terms of reserve assets (a common argument in favor of SBR), gold is the perfect choice, as we have more gold than anyone else. Simply remonetizing gold puts us ahead.
Gold is also an "anonymously" held asset, as ownership is not a claim to anything, but simply a matter of possessing gold bars and coins. If Bitcoin holders successfully persuade the U.S. government to exit the Bretton Woods II standard and return to a commodity standard before 1971, then gold is indeed a better choice. It has a longer history, is more widely held, its value is approximately 9 times that of Bitcoin, its volatility is much lower, and we already own it, so monetizing it would be much cheaper.
If you don't like gold because it does not serve as a "high-growth" asset like Bitcoin, then you might consider fast-growing assets like NVIDIA, Apple, or Microsoft stocks. If we think about which 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 productive. We would then start discussing the use of Treasury or Federal Reserve resources for "industrial policy."
Most conservatives and libertarians are skeptical about the government allocating resources in this top-down manner and prefer to let the private sector solve this issue. I do not support Biden's massive infrastructure spending, as I find it very wasteful, so I do not support further government encroachment into the private sector, especially through blatant dollar issuance.
Typically, the U.S. government does not truly use monetary tools to intervene in the market aside from setting interest rates; its role is to set rules and maintain system stability, not to actively invest government funds into commodities for day trading. (This is why many people are skeptical about Biden's sale of the Strategic Petroleum Reserve.) We are a market-based capitalist economy, not a centrally planned economy. Managing commodity hedge funds is not the job of the government.
This is left to the private sector, and the government would only intervene in the event of an urgent strategic need to increase reserves of a certain important commodity. Ultimately, if the U.S. private sector invests in appreciating commodities and assets, the U.S. government will still benefit from capital gains taxes.
There is no point in establishing an SBR now
Why create a Bitcoin reserve now? What is so special about the present that makes a Bitcoin reserve urgent? Nothing. The dollar is not collapsing; in fact, it is thriving. The dollar index has been rising over the past 15 years, which may harm U.S. manufacturing and other countries holding dollar debt.
Relative to the rest of the world, U.S. GDP is growing. In particular, Europe is slowly declining, while China is facing its first serious economic crisis since the reform and opening up. The U.S. stock market is outperforming 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 declining against hard assets like gold. Its purchasing power is decreasing, and we are in a volatile high-inflation era." Yet the dollar does not seem to be facing a crisis.
Interest rates are slightly higher than they were over the past decade, 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 has not been a real crisis. The dollar still holds absolute dominance globally, with no potential challengers anywhere. Neither the dying euro nor the (managed) yuan has the capability or ambition to challenge the dollar's status as the global preferred reserve asset.
The only reason to seriously discuss SBR today is due to Trump's election victory. Bitcoin enthusiasts seized upon this politically expedient moment, hoping that he would not only introduce more favorable regulations but also become a national-level Bitcoin purchaser.
However, the scale and liquidity of Bitcoin are still far from sufficient to impact the U.S. reserves portfolio, and under a gold standard, it is certainly not ready to serve as a monetary commodity like gold. Its current value is only around $2 trillion, while gold's value is approximately $17 trillion. Bitcoin remains extremely volatile and is clearly unsuitable as a unit of account.
Bitcoin holders should be more patient. Bitcoin has performed exceptionally well in its short 15-year lifespan and is becoming an important global monetary asset.
Over time, its volatility will ease (its market cap 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.
A Bitcoin reserve may not necessarily be what you want.
The fact is that there is no need to establish any form of Bitcoin reserve. The U.S. just needs to wait patiently, and there will be no losses. If Bitcoin continues to be monetized and eventually challenges gold, and other countries start to adopt Bitcoin as part of their sovereign wealth funds or even begin to "back" their currencies with Bitcoin, the U.S. will still have plenty of time to act.
U.S. institutions, investors, and individuals hold more Bitcoin than anyone else. If the U.S. government truly wants Bitcoin, it has ample means to acquire it at any time.
They could acquire Bitcoin through open market purchases. In my view, it is more likely that they would choose a cheaper way, such as setting a price cap, prohibiting private ownership, and forcing the exchange of Bitcoins held by Americans, just as they did with gold in 1933.
They could also simply confiscate the Bitcoin held on domestic platforms, as 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 known individuals holding large amounts of Bitcoin and confiscate their funds. They could allocate resources to develop quantum computing capable of stealing about 4 million Bitcoins vulnerable to quantum attacks.
"Wait... not like that." But that's the issue. You cannot dictate how the U.S. government acquires Bitcoin. If you successfully persuade them of Bitcoin's merits and they are truly determined to stockpile Bitcoin, they will do so in the politically most advantageous way.
This does not necessarily align with the best interests of American Bitcoin holders. If given the choice between purchasing 1 million BTC at $1 million each and confiscating 1 million Bitcoins through other means, they would choose the more effective method.
How should we support the dollar without Bitcoin?
The long-term solvency of the U.S. government is undoubtedly concerning. The debt-to-GDP ratio is close to a historic high of 120%. The proportion of interest costs relative to GDP is at its 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 decreased from the highs during the COVID-19 pandemic, it remains elevated, and if an economic recession strikes, we have little breathing room. The reckless spending over the past four years has led to an inflationary outbreak that we are still grappling with.
Over the past quarter-century, the dollar's share of global foreign exchange reserves has decreased from 70% to 60%. After the U.S. seized 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, even though there does not seem to be an imminent crisis. If we experience an economic recession, the government may find itself unable to conduct large-scale stimulus spending, a situation that 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 boost GDP growth. This means cheaper energy, fostering high-growth sectors like artificial intelligence, and deregulating the private sector
· Reduce government spending to decrease the deficit, as the level of waste in government spending is far higher than equivalent capital in the private market
· Limit political interference in the dollar market, for example, recognizing that the dollar's sanctioning power conflicts with its international utility
· Allow inflation to persist for a while to reduce the real debt burden
The good news is that incoming Treasury Secretary Scott Bessent's 3-3-3 plan essentially achieves this. We do not need Bitcoin.
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