Author: Nic Carter, Partner at Castle Island Ventures.
Translated by: Luffy, Foresight News
Recently, the concept of a Strategic Bitcoin Reserve (SBR) has begun to gain widespread attention. Trump advocates for continuing to hold Bitcoins confiscated by the U.S. government, but some proposals go further, such as Senator Lummis's recent legislative draft proposing the U.S. government purchase 1 million Bitcoins within five years.
Bitcoin enthusiasts believe the case for strategic reserves is nearly a done deal. But I think this is unlikely; a Bitcoin strategic reserve is not a good idea. Let me explain.
Are we talking about inventories, sovereign wealth funds, or reserves?
First, let’s clarify the concept of Bitcoin 'reserves'. Trump promised in his speech 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 effectively become the core of the national Bitcoin strategic reserve.'
I strongly support the idea of the U.S. government maintaining Bitcoin reserves, but I do not support purchasing more Bitcoin. Some proposals suggest the government buy 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 'Strategic Bitcoin Reserves (SBR)'.
According to Senator Lummis's framework, the U.S. government would purchase 1 million BTC within five years and hold it for at least 20 years. His logic is to 'strengthen America's financial position and hedge against economic uncertainty and monetary instability.' Lummis's bill clearly states that SBR will 'strengthen the position of the dollar' and compares it to the role of gold in earlier monetary eras.
It is important to distinguish these proposals from the idea of purchasing Bitcoin in sovereign wealth funds as mentioned by George Selgin. To my knowledge, the main advocates of SBR do not view it as an asset in a national investment portfolio; they explicitly link Bitcoin to the dollar and imply that Bitcoin will actually strengthen the dollar. This suggests they envision a monetary system in which Bitcoin plays a positive role. Currently, it serves the same purpose as foreign currency reserves, but perhaps in the future, it will become the actual basis for a new commodity standard, similar to the Bretton Woods system. (For those who think I am exaggerating, you only need to read the writings of SBR advocates.)
It should be clear that I do not oppose the idea of holding existing confiscated Bitcoins (I believe this will ultimately be the policy Trump adopts), and I do not even oppose the idea of placing Bitcoin in a sovereign wealth fund (though the U.S. does not have a sovereign wealth fund). Rather, I oppose the idea of creating a Bitcoin strategic reserve and assigning it any form of monetary role.
Bitcoin reserves would weaken rather than strengthen the dollar.
My main point is that Bitcoin reserves will not strengthen the dollar. Unlike other countries, the United States issues the global reserve currency—the dollar. Other countries can try to buy Bitcoin, and in fact, some are doing so.
If you are Russia or Iran, considering adding an unseizable asset to your foreign exchange reserves might make sense, especially after the U.S. confiscated Russian Treasuries in 2022. But the U.S. does not need to hedge its exposure to dollar risk because it issues dollars itself.
Purchasing Bitcoin and assigning it a monetary role (whether as foreign exchange reserves or a more significant role) signifies that the U.S. has lost confidence in the current dollar-based system.
This means that the U.S. government would abandon the irredeemable fiat currency standard, which would throw the system into chaos. Currently, the dollar is supported by various factors: the role of the U.S. as a global trade manager, the robustness of the U.S. economy, the creditworthiness of the U.S. government, the ability of the U.S. to project hard and soft power, the depth of the U.S. securities market, and the ubiquity of the dollar in global trade and finance.
If the U.S. government suddenly shifts its stance and states, 'We are reconsidering the entire Washington consensus,' the markets will begin to question what is wrong with the government. Are they planning a default? Will they dismantle the institutions of the Bretton Woods system? Are they hinting at massive deficits and high interest rates?
It needs to be stated that I believe the government has not considered these matters, but bond traders would be immediately concerned.
You might protest, 'We are not talking about transitioning to some new gold standard, with the dollar as a weight for Bitcoin. We are just talking about buying some Bitcoin and placing it on the U.S. balance sheet.'
The market will not view it this way. If Bitcoin on the balance sheet is merely symbolic, then 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 end up purchasing these Bitcoins at $1 million each, which means spending $1 trillion. This is a significant expenditure that should be allocated to other more meaningful things.
I suspect the market will not view the purchase of Bitcoin as merely symbolic but rather as the first step towards a return to a new commodity standard supported by Bitcoin.
Austin Campbell states that this will 'accelerate the decline of the dollar, as it will send a signal to the world that the U.S. does not intend to manage its finances properly, and may at some point revalue in Bitcoin.'
Assuming the probability of the Lummis SBR proposal starts to converge to 1, you would see financial markets collapse. Interest rates would soar because U.S. debt investors would begin to doubt whether the U.S. is considering a complete departure from the Bretton Woods II system.
The cost of capital for everyone on the planet will rise sharply, and inflation may worsen. With financial markets crashing and Bitcoin soaring, there will be massive wealth redistribution.
In other words, the U.S. is considering abandoning its currently relatively stable monetary system in the short term and replacing it with a currency standard based on a highly volatile emerging asset instead of gold, which will cause complete panic among its creditors.
In my view, if a Lummis-style reserve gets close to its target, the market will start to panic, and Trump will be forced to retract that policy.
While BSR supporters may claim not to advocate building a new gold standard based on Bitcoin, their stated intentions are very radical, and if reserves come close to becoming a reality, the bond market will panic.
From a political perspective, SBR is unwise.
I believe that any legislative proposal to establish a Bitcoin strategic reserve will be completely unworkable in Congress. A few weeks ago, I visited some pro-cryptocurrency members of Congress in Washington, which I witnessed firsthand. The situation in Congress is severe, with Republicans holding only a slim advantage. They cannot force a bill through on the grounds of partisan conflict, and I am unclear if the Republican Party would even vote on this.
Proponents of reserve strategies insist that the executive branch can fund a 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 abolished in subsequent administrations if Congress does not vote to approve it.
The executive branch can unilaterally decide to launch an expensive foreign war and misappropriate funds through various secret plans. But such actions would be very unpopular as people would perceive them as undemocratic. Our republic's balance of power dictates that the president takes action, but Congress grants powers (and appropriations). We do not have a tyrant in charge.
Since Congress controls the purse strings, American citizens will be consulted when making significant spending decisions.
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. Of course, mechanically, if the limit is high enough, she might be able to buy the 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 (and thus the American people) on any major expenditure, 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 to establish a Bitcoin strategic reserve. The Bitcoin strategic reserve did not come up in campaign debates, nor did it meaningfully appear in the media.
In his Nashville speech, he talked about Bitcoin reserves (i.e., holding existing confiscated Bitcoins), not the government purchasing additional Bitcoins. Trump is attempting to bypass Congress to spend government funds on Bitcoin, which is politically extremely unpopular. This would deplete his limited political capital. Trump's agenda extends far beyond Bitcoin. I expect that even if he is momentarily excited about the concept of reserves, political logic will ultimately clarify things for him.
Another issue with forcing Bitcoin purchases through executive orders is that things that are easy to do 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 Bitcoin reserves or stockpiles are a good idea and to implement this policy through bipartisan legislation or even a constitutional amendment. Generally, meaningful monetary reform is achieved through legislation, such as the Gold Reserve Act of 1934 or the Gold Clause Resolution of 1977 after Nixon ended Bretton Woods I.
Bitcoin users should hope that Bitcoin reserves can last, rather than being a flash in the pan. The policies based on executive orders implemented by the new Trump administration will not endure.
The U.S. government's purchase of Bitcoin would severely alienate the public.
Undoubtedly, the SBR policy will be seen as a massive transfer of wealth from U.S. taxpayers to wealthy Bitcoin holders. This would be a regression, and it would not be well received by the public. Bitcoin holders are a relatively small group. The Federal Reserve discovered in 2022 that only 8% of U.S. adults hold cryptocurrency, with a higher proportion being wealthy individuals.
Even if the funding source for SBR is some sort of fiscally 'neutral' method (such as selling some gold), it will still be seen as something Bitcoin holders should not receive. These funds could be used for any number of other things 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 because there is currently no apparent crisis for the dollar.
If de-dollarization accelerates, the U.S. finds itself in some default predicament, interest rates soar, and many other countries start adopting Bitcoin as a reserve asset, then people's attitudes may be different 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 attend college and obtain worthless liberal arts degrees. (Interestingly, Elizabeth Warren proposed a unilateral plan to spend $640 billion 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 caused by Bitcoin reserves would be even more severe.
Currently, due to the gradual organic adoption of Bitcoin, the financial community is developing an interest in Bitcoin. A reserve strategy would pit ordinary Americans against Bitcoin holders, which would severely affect Bitcoin's adoption.
Bitcoin reserves have no 'strategic' purpose.
The terminology of SBR is perplexing, especially the word 'strategic'. The U.S. government holds many commodities that are genuinely used for strategic purposes. The most important of these is the Strategic Petroleum Reserve, which stabilizes the oil market.
It is commendable that Biden actually sold a large amount of oil at high prices and later bought it back, making a profit. We also hold or have previously stored substantial amounts of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium, and other rare minerals and medical devices.
The commonality is that these commodities have some industrial use, and the government has an interest in retaining them for emergencies or market stability.
In contrast, Bitcoin has no industrial use. The U.S. government does not 'need' Bitcoin to trade at any particular price level. Whether Bitcoin's trading price is $1 or $1 million makes no difference to the government. Bitcoin also does not generate cash flow, so reserves will not help pay interest on future debts.
The only 'strategic' role Bitcoin can play is equivalent to the existing reserve assets of the U.S. government, such as gold and foreign exchange. In other words, it has no role. As George Selgin painstakingly explains, compared to other developed countries, U.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 this peg at all. Since 1971, the roughly 8,130 tons of gold held by the U.S. has no relevant use. They are purely a historical remnant, held only 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 universality of the dollar system, the U.S. government's balance sheet is almost irrelevant.
What truly underpins the dollar is:
U.S. GDP is growing, and the tax liabilities generated 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, the commodity market, the foreign exchange market, and the debt market.
The U.S. continues to play the role of global hegemon and guarantor of global trade and security.
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.
Is Bitcoin indispensable?
Why reserve Bitcoin? Why not something else? Bitcoin holders have yet to provide a compelling answer. You might argue that Bitcoin is valuable (with a market cap of about $2 trillion), has global liquidity, and is held by many. However, Bitcoin is not unique in this respect. Can you make an argument supporting Bitcoin reserves that does not also apply to Apple or NVIDIA stock?
"Well," you might say, "these are claims against corporate cash flows, not unencumbered assets. Bitcoin is special because it cannot be seized." However, it is presumed that Apple or NVIDIA would not face the risk of asset and intellectual property confiscation. This would be another reason for a foreign nation to oppose acquiring U.S. corporate 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 the 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 in favor of SBR), gold is perfect because we have more gold than anyone else. Simply remonetizing gold puts us ahead.
Gold is also an 'unencumbered' asset, as ownership does not claim against anything, just a simple ownership of gold bars and coins. If Bitcoin holders successfully convince the U.S. government to abandon the Bretton Woods II standard and revert to a commodity standard before 1971, then gold is indeed a better choice. It has a longer history, is owned by more people, has a value approximately nine times that of Bitcoin, and is much less volatile. Furthermore, we already have it, so monetizing it would be much cheaper.
If you do not like gold because it is not a 'high-growth' asset like Bitcoin, you might consider rapidly growing assets such as NVIDIA, Apple, or Microsoft stocks. If we think about what goods 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 discussing allocating resources from the Treasury or the Federal Reserve to 'industrial policy'.
Most conservatives and liberals are skeptical of the government distributing resources in this top-down manner and prefer the private sector to solve this issue. I do not support Biden's massive infrastructure spending; I find it very wasteful, and thus I do not support further government encroachment into the private sector, especially through blatant dollar issuance.
Generally speaking, the U.S. government does not really use monetary tools to intervene in the market outside of setting interest rates; its role is to establish rules and maintain system stability, not to actively inject government funds into commodities for day trading. (This is why many are skeptical of Biden's sale of 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 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 SBR right 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 for 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. Especially in Europe, it is slowly declining, while China is facing its first severe 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 global stock markets, and these trends will continue.
You might say, 'But the dollar is falling relative to hard assets like gold. Its purchasing power is declining, and we are in an era of volatile high inflation.' Yet 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 ability to repay. The dollar's share of global foreign exchange reserves has declined over the past few decades, but there is no real crisis. The dollar still holds absolute dominance globally, and there are 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 SBR today is Trump's election victory. Bitcoin enthusiasts seized on this politically expedient opportunity, hoping he would not only introduce more favorable regulations but also genuinely become a national-level Bitcoin buyer.
However, Bitcoin's scale and liquidity are still far from making any impact on the U.S. reserve portfolio, and under a gold standard, it is certainly not ready to function as a monetary commodity like gold. Its current value is only about $2 trillion, while gold's value is about $17 trillion. Bitcoin remains extremely volatile and clearly unsuitable to serve as a unit of account.
Bitcoin holders should be more patient. Bitcoin has performed remarkably 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), making it a more suitable asset for governments to consider in their portfolios. But for now, it plays no 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 reserve. The U.S. just needs to be patient, and there will be no losses. If Bitcoin continues to be monetized and ultimately challenges gold, if other countries incorporate Bitcoin into their sovereign wealth funds or even start using Bitcoin to 'back' their currencies, then 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 genuinely wants 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, 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 Bitcoins held on domestic platforms; U.S. custodians are by far the largest custodians. They could nationalize Bitcoin mining companies. They could raise capital gains taxes and insist on physical payments. They could arrest known individuals holding large amounts of Bitcoin and seize their funds. They could invest resources in developing quantum computing sufficient to steal about 4 million Bitcoins vulnerable to quantum attacks.
"Wait... not like that." But that is the issue. 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 U.S. Bitcoin holders. If forced to choose between buying one million BTC at $1 million each and confiscating one million Bitcoins in other ways, they would opt for the more efficient approach.
How should we support the dollar without Bitcoin?
The long-term solvency of the U.S. government is undoubtedly a concern. The debt-to-GDP ratio is nearing a historic high of 120%. The share of interest costs in GDP has reached 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.
Although the deficit has decreased from its pandemic highs, it remains elevated, and if a recession hits, we have very little breathing room. The reckless spending of the past four years has led to an inflationary surge, 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. Treasuries.
All of this indicates that the dollar may face long-term issues, although there does not appear 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 might change, given that 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, nurturing high-growth industries like AI, and unleashing the private sector.
Reduce the size of government spending to lower the deficit, as the wastefulness of government spending is far greater than equivalent capital in the private market.
Limit political interference in the dollar market, for example, recognizing that the dollar's power of sanctions contradicts its international utility.
Allow inflation to persist for a period to reduce the real debt burden.
The good news is that the incoming Treasury Secretary Scott Bessent's 3-3-3 plan effectively achieves this. We do not need Bitcoin.
