Recently, the concept of Bitcoin Strategic Reserve (SBR) has begun to attract widespread attention. Trump advocates continuing to hold Bitcoin seized by the U.S. government, but some proposals go further, such as Senator Lummis’ recent draft legislation proposing that the U.S. government purchase 1 million Bitcoins over five years.
Bitcoin enthusiasts believe that the strategic reserve claim is almost a foregone conclusion. But I think this is unlikely and Bitcoin strategic reserve is not a good idea. Please allow me to explain.
Are we talking about inventories, sovereign wealth funds or reserves?
First of all, it is necessary to clarify the concept of Bitcoin “reserve”. In his speech at the Bitcoin Conference in Nashville, Trump promised: "I declare that if I are elected, it will be the policy of my government, the United States of America, that all Bitcoin currently held by the United States government or acquired in the future will be retained... …This will actually become the core of the national Bitcoin strategic reserve.”
I strongly support the idea of the US government keeping Bitcoin in stock, but I do not support buying more Bitcoin. Some proposals suggest governments purchasing Bitcoin in large quantities: from about 800,000 Bitcoins (BPI), to 1 million Bitcoins (Lummis), to 4 million Bitcoins (RFK Jr).
Senators Lummis, Michael Saylor, and the Bitcoin Policy Institute, among others, have been talking about a “Bitcoin Strategic Reserve (SBR).”
Under Senator Lummis’s structure, the U.S. government would purchase 1 million Bitcoins over five years and hold them for at least 20 years. His logic is to "strengthen the financial position of the United States and hedge against economic uncertainty and currency instability." Lummis' bill explicitly states that the SBR would "strengthen the position of the dollar," comparing it to gold's role in previous monetary eras.
It’s important to distinguish these proposals from what George Selgin said was the idea of buying Bitcoin in a sovereign wealth fund. As far as I know, none of the leading advocates of SBR consider it an asset in the country's portfolio, and they explicitly link Bitcoin to the U.S. dollar and suggest that Bitcoin will actually make the U.S. dollar stronger. This means that they envision a monetary system in which Bitcoin plays an active role. Currently, it plays the same role as foreign exchange reserves, but perhaps in the future it will become the de facto basis for new commodity standards, like the Bretton Woods system. (For those who think I'm exaggerating, just read what SBR advocates have written.)
To be clear, I am not opposed to the idea of keeping existing seized Bitcoin (which I think is a policy Trump will eventually pursue), and I am not even opposed to the idea of putting Bitcoin into a sovereign wealth fund (although The United States does not have a sovereign wealth fund). On the contrary, I am opposed to the idea of creating a strategic reserve of Bitcoin and giving it any form of monetary role.
Bitcoin reserves will weaken, not strengthen, the dollar
My main point is that Bitcoin reserves do not strengthen the US dollar. Unlike other countries, the United States issues the global reserve currency, the U.S. dollar. Other countries can try to buy Bitcoin, and in fact some countries do.
If you're Russia or Iran, it might make sense to consider adding a non-seizable asset to your foreign exchange reserves, especially after the U.S. seizes Russian Treasury bonds in 2022. But the U.S. does not need to hedge its exposure to the U.S. dollar because it issues U.S. dollars itself.
Buying Bitcoin and giving it a currency role (whether as a foreign exchange reserve or a more significant role) would mean that the United States has lost confidence in the current dollar-based system.
This would mean the US government abandoning the standard of inconvertible fiat currency, which would throw the system into chaos. Currently, the U.S. dollar is influenced by the United States' role as global trade manager, the soundness of the U.S. economy, the solvency of the U.S. government, the U.S.'s ability to demonstrate hard and soft power, the depth of U.S. securities markets, and the dollar's prevalence in global trade and finance. Sexual and other aspects of "support".
If the U.S. government suddenly changes its stance and says, "We are reconsidering the entire Washington Consensus," the market will begin to wonder what is wrong with the government. Are they planning to default? Will they dismantle the institutions of Bretton Woods? Are they hinting at huge deficits and high interest rates?
To be clear, I don't think the government is thinking about these things, but bond traders will be immediately worried.
You might protest, “We’re not talking about moving to some new gold standard where the U.S. dollar is the weight of Bitcoin. We’re just talking about buying some Bitcoin and putting it on the U.S. balance sheet.”
The market won't see it that way. If Bitcoin on a balance sheet were just a symbol, it would be an extremely expensive symbol. At current prices, one million Bitcoins would cost $100 billion. Of course, the U.S. government is known to be a price-insensitive buyer, so the U.S. could end up buying these Bitcoins for $1 million each, which would mean spending $1 trillion. This is a significant expense that should be spent on other more meaningful things.
I suspect the market will view the Bitcoin purchase not as symbolic but as the first step in a return to a new commodity standard for the dollar backed by Bitcoin.
Austin Campbell said that this would “accelerate the demise of the dollar because it would signal to the world that the United States does not intend to properly manage its finances and may at some point return to denomination in Bitcoin.”
Suppose the probability of the LummisSBR proposal starts to converge to 1. You're going to see financial markets going into meltdown. Interest rates will soar as U.S. debt investors will begin to wonder whether the U.S. is considering leaving Bretton Woods II altogether.
The cost of capital for everyone on the planet will rise dramatically, and inflation will likely increase. As financial markets plummet and Bitcoin skyrockets, a massive redistribution of wealth will occur.
In other words, the United States considering abandoning its current relatively stable monetary system in the short term and replacing it with a monetary standard based not on gold but on highly volatile emerging assets would cause outright panic among its creditors.
It seems to me that if Lummis-style reserves get close to their target, markets will start going crazy and Trump will be forced to roll back the policy.
While BSR proponents may claim not to advocate a new gold standard based on Bitcoin, their stated intentions are so radical that the Treasury market would panic if the reserve came close to becoming a reality.
From a political perspective, SBR is unwise
I believe that any legislation proposing the creation of a Bitcoin strategic reserve is completely unworkable in Congress. I experienced this firsthand just a few weeks ago in Washington, D.C., visiting with some pro-crypto members of Congress. The situation in Congress is grim, with Republicans only gaining a slim majority. They can't force a bill through on partisan grounds, and I don't know if Republicans will vote on it.
Supporters of the reserve strategy insist that the executive branch can raise funds for the reserve strategy without passing laws. Of course, the executive branch can also spend money without prior authorization from Congress. Bitcoin supporters have proposed a variety of approaches. But these approaches completely miss the point. A Bitcoin reserve imposed by executive order is undemocratic and will likely be repealed in a subsequent administration if Congress does not vote to pass it.
The executive branch could unilaterally decide to launch a costly foreign war and divert funds through a variety of secret schemes. But such action would be highly unpopular because it would be seen as undemocratic. The balance of power in our republic dictates that the president takes action, but Congress delegates authority (and appropriations). We have no tyrants in power.
Because Congress controls the purse strings, American citizens are consulted when major spending decisions are made.
In other words, in a family, the husband may not mind the wife using his credit card to make purchases occasionally. But if she decides to buy a new car or a house, he would definitely prefer to be consulted. Of course, mechanically, she might be able to use her husband's credit card to buy a car if the limit was high enough. But this misses the point. She should seek her husband's advice when making such a major decision. The president should consult Congress (and by extension the American people) on any major spending, and Bitcoin Reserve certainly falls into that category.
You might say "but Trump has the power." This is not the case. He does not have the authority to spend hundreds of billions of dollars building a strategic reserve of Bitcoin. The Bitcoin Strategic Reserve did not feature in the campaign debates or appear meaningfully in the media.
In his speech in Nashville, he talked about Bitcoin reserves (i.e., holding existing seized Bitcoin) rather than additional government purchases of Bitcoin. Trump’s attempt to bypass Congress and spend government funds on Bitcoin is extremely politically unpopular. This will drain his limited political capital. Trump’s agenda goes far beyond Bitcoin. I predict that even if he is temporarily excited about the concept of reserves, political logic will eventually make it clear to him.
Another problem with mandating Bitcoin purchases via executive order is that what is easy to do is also easy to undo. If such a policy is unpopular, a future Democratic administration will undoubtedly sell off reserves immediately, causing chaos in the Bitcoin market.
What Bitcoin users should hope for is a democratic consensus that Bitcoin reserves or inventories are a good idea, with bipartisan legislation or even a constitutional amendment to implement this policy. Typically, meaningful monetary reform is achieved through legislation, such as the 1934 (Gold Reserve Act) or the 1977 (Gold Clause Resolution) after Nixon suspended Bretton Woods I.
Bitcoin users should hope that their Bitcoin reserves are long-lasting, not fleeting. The executive order-based policies implemented by the new Trump administration will not last.
The U.S. government’s purchase of Bitcoin will seriously alienate the public
There is no doubt that the SBR policy will be viewed as a massive wealth transfer from US taxpayers to wealthy Bitcoin holders. This would be a step backwards and it would not be popular with the people. Bitcoin holders are a relatively small group. The Federal Reserve found in 2022 that only 8% of U.S. adults held cryptocurrency, with a higher proportion of wealthy individuals.
Even if the SBR is funded in some fiscally "neutral" way (such as selling some gold), it will still be considered undeserved by Bitcoin holders. These funds can be used for anything other than being allocated to Bitcoin holders.
A major monetary policy change that benefits a small group of Americans would turn everyone who doesn’t own Bitcoin against Bitcoin holders. And I suspect many Americans will not understand the logic of the SBR, as there is currently no clear crisis in the dollar.
If de-dollarization accelerates and the U.S. gets into some kind of default predicament, interest rates spike, and many other countries start adopting Bitcoin as a reserve asset, then attitudes may be different in ten or twenty years. But that's not the case today.
If you recall, student loan forgiveness was fairly unpopular because it was seen as a bailout for middle- and upper-class Americans who could afford to go to college and get a worthless liberal arts degree. (Interestingly, Elizabeth Warren proposed a plan to unilaterally spend $640 billion to cancel student loans in 2019/2020, which was ultimately rejected by Congress.)
Biden’s student loan relief plan would benefit approximately 43 million Americans, a group larger than Bitcoin holders. From this point of view, the turmoil caused by Bitcoin reserves will be even more serious.
Currently, the financial world is taking an interest in Bitcoin due to its gradual and organic adoption. The reserve strategy pits ordinary Americans against Bitcoin holders, which will severely impact Bitcoin adoption.
Bitcoin reserves have no “strategic” purpose
SBR’s terminology is confusing, especially the word “strategy.” The U.S. government holds many commodities that are truly used for strategic purposes. The most important of these is that the Strategic Petroleum Reserve is a means of stabilizing the oil market.
To his credit, Biden actually sold a lot of oil when prices were high and later bought it back at a profit. We also hold or have stockpiled large amounts of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium and other rare minerals and medical equipment.
The common denominator is that these goods have some industrial use and governments are interested in retaining them for emergencies or to maintain market stability.
In contrast, Bitcoin has no industrial use. The U.S. government does not “require” Bitcoin to trade at any specific price level. It makes no difference to the government whether Bitcoin trades for $1 or $1 million. Bitcoin also doesn’t generate cash flow, so reserves won’t help pay interest on future debt.
The only "strategic" role that Bitcoin can play is equivalent to the US government's existing reserve assets, such as gold and foreign exchange. That is, it has no effect. As George Selgin painstakingly explains, America's foreign exchange reserves are actually relatively small compared to other developed countries. This is because the U.S. dollar is a truly free-floating currency and the United States does not manage the peg at all. Since 1971, approximately 8,130 tons of gold have been held by the United States without any related use. They are purely historical relics, held only because of tradition. The last major intervention to manage the dollar exchange rate occurred in the 1980s.
Proponents of the Bitcoin reserve strategy tend to greatly overestimate the role of gold in the dollar system. Ultimately, the U.S. government's balance sheet is almost irrelevant when it comes to the universality of the dollar system.
What really supports the dollar is:
As U.S. GDP grows, the resulting tax liabilities can only be paid with U.S. dollars.
The credibility and stability of the U.S. government and monetary policy
The U.S. capital market is the most attractive and liquid market in the world, making it a gathering place for global investment
Network effects arising from the U.S. dollar’s dominance in trade settlements, commodity markets, foreign exchange markets, and debt markets
The United States continues to play the role of global hegemon and guarantor of global trade and security
Gold and Bitcoin simply don’t matter in today’s U.S. monetary system. Perhaps one day they will come into play, but the current standards of inconvertibility are not based in any way on commodity reserves.
Must Bitcoin?
Why hoard Bitcoin? Why not something else? Bitcoin holders have yet to give a convincing answer. You might say that Bitcoin is worth a lot of money (market cap is about $2 trillion), is globally liquid, and is held by many people. Well, Bitcoin is not unique in this regard. Can you make an argument in favor of Bitcoin reserves that wouldn't also apply to Apple or NVIDIA stocks?
"Well," you might say, "these are claims on the company's cash flows, not bearer assets. Bitcoin is special because it cannot be seized." Presumably, though, Apple or NVIDIA won't face asset and Risk of intellectual property confiscation. This would be another country's objection to acquiring stakes in U.S. companies for reserves, but this is the U.S. government we're talking about.
There is also no reason to choose Bitcoin over gold for your reserves. If you want to remonetize a hard asset and use it as the basis of 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 the SBR), gold is the perfect choice because we have more of it than anyone else. Just remonetize gold and we're already ahead of the curve.
Gold is also a "bearer" asset because ownership is not a claim to anything, just simple possession of gold bars and gold ingots. If Bitcoin holders succeed in convincing the U.S. government to exit Bretton Woods II standards and return to pre-1971 commodity standards, then gold will indeed be a better choice. It has a longer history, more people own it, it’s about 9 times more valuable than Bitcoin, it’s much less volatile, and we already own it, so monetizing it will be much cheaper.
If you don't like gold because it's not a "high growth" asset like Bitcoin, then you might consider fast-growing assets like NVIDIA, Apple, or Microsoft stocks. If we think about what goods the United States might invest in for strategic purposes, my top choices would be AI data centers or chip manufacturing. They serve a clear strategic purpose and will also be economically productive. We then started talking about using Treasury or Fed resources for "industrial policy."
Most conservatives and libertarians are skeptical of government allocating resources top-down in this way, preferring to let the private sector solve the problem. I don't like Biden's massive infrastructure spending, which I find extremely wasteful, so I don't support further government intrusion into the private sector, especially through naked dollar issuance.
Normally, the U.S. government does not really use monetary tools to intervene in the market other than setting interest rates; its role is to set rules and maintain system stability, rather than actively pouring government funds into commodities for day trading. (This is why many are skeptical of Biden selling the Strategic Petroleum Reserve.) We are a market-based capitalist economy, not a centrally planned economy. It’s not the government’s job to manage commodities hedge funds.
This is left to the private sector, with governments stepping in only when there is an urgent strategic need to increase reserves of some important commodity. The bottom line is that if the U.S. private sector invests in commodities and assets that appreciate in value, the U.S. government still benefits from capital gains taxes.
There is no point in setting up SBR now
Why Create a Bitcoin Reserve Now? What’s so special about Bitcoin right now that makes it a priority to reserve it? No. The dollar is not collapsing, in fact it is booming. The U.S. dollar index has been rising for the past 15 years, which could hurt U.S. manufacturing and other countries with U.S. dollar debt.
Relative to the rest of the world, U.S. GDP is growing. Europe, in particular, is in slow decline, while China is facing its first serious economic crisis since reform and opening up. U.S. equities are beating the rest of the world, with U.S. equities accounting for about 50% of global equities, and these trends are set to continue.
You might say, "But the dollar is falling relative to hard assets like gold. Its purchasing power is declining and we're in a volatile era of high inflation." But the dollar doesn't seem to be facing a crisis.
Interest rates are slightly higher than they have been over the past decade, but no one is panicking about the U.S. government's solvency. The U.S. dollar's share of global foreign exchange reserves has declined over the past few decades, but there has been no real crisis. The dollar remains absolutely dominant globally, with no potential challengers anywhere. Neither the moribund euro nor the (managed) renminbi have the capacity or ambition to challenge the dollar’s status as the world’s preferred reserve asset.
The only reason for serious discussion of SBR today is Trump’s election victory. Bitcoin enthusiasts latched on to this out of political expediency, hoping that it would not only usher in more favorable regulation, but actually become a national-level buyer of Bitcoin.
But Bitcoin is nowhere near large enough or liquid enough to have any impact on the U.S. reserve mix, and it’s certainly not ready to become a monetary commodity like gold under a gold standard. It is now worth only about $2 trillion, compared with gold's value of about $17 trillion. Bitcoin remains extremely unstable and clearly unsuitable as a unit of account.
Bitcoin holders should be more patient. Bitcoin has performed extremely well in its short 15-year lifespan and is becoming a significant global monetary asset.
Over time, its volatility will moderate (its market capitalization and liquidity will grow) and it will become a more appropriate asset for governments to consider in their investment portfolios. But for now, it plays no meaningful role in the U.S. monetary system.
Bitcoin Reserves Don’t Have to Be What You Want
The truth is, there is no need to build any kind of Bitcoin reserve. The United States has nothing to lose simply by waiting patiently. If Bitcoin continues to monetize and eventually challenge gold, and other countries adopt Bitcoin as part of their sovereign wealth funds, or even begin to use Bitcoin to "back" their own currencies, then the United States will still have enough time to take action.
U.S. institutions, investors, and individuals hold more Bitcoin than anyone else. If the U.S. government really wants Bitcoin, they have ample means to acquire it at any time.
They can buy Bitcoin through the open market. It seems more likely to me that they will go the cheaper route of capping prices, banning private ownership, and forcing redemption of Bitcoin held by Americans, just like they did with gold in 1933 That way.
They can also simply confiscate Bitcoin held on domestic platforms, with U.S.-based custodians being by far the largest. They could nationalize Bitcoin mining companies. They could raise capital gains taxes and insist on payment in kind. They can arrest individuals known to hold large amounts of Bitcoin and seize their funds. They could devote resources to developing quantum computing, enough to steal about 4 million Bitcoins that are vulnerable to quantum attacks.
"Wait...it's not like that." But that's the problem. You don't get to decide how the US government gets its hands on Bitcoin. If you succeed in convincing them of the merits of Bitcoin, and they are truly determined to stockpile Bitcoin, they will do so in the most politically expedient way.
This is not necessarily in the best interest of U.S. Bitcoin holders. If given a choice between buying 1 million Bitcoins for $1 million each and confiscating 1 million Bitcoins through other means, they would choose the more efficient method.
How should we support the US dollar without Bitcoin?
The long-term solvency of the U.S. government is undoubtedly a concern. The debt-to-GDP ratio is near an all-time high of 120%. Interest costs as a share of GDP are at a 60-year high and continue to rise. Net federal spending as a share of GDP is at its highest level in the past century, surpassed only by levels during and after World War II.
While the deficit has declined from COVID-19 highs, it remains high, leaving us with little breathing room if a recession hits. The last four years of reckless spending have led to an explosion of inflation that we are still dealing with.
Over the past quarter-century, the U.S. dollar’s share of global foreign exchange reserves has fallen from 70% to 60%. Some buyers are now wary of buying U.S. Treasuries after the U.S. confiscated Russian reserves in 2022.
All of this points to possible long-term problems for the U.S. dollar, although there does not appear to be an imminent crisis. If we have a recession and the government finds itself unable to do massive stimulus spending, that could change because interest rates are already quite high and we're facing huge deficits.
If it were up to me, I would do the following:
Do everything possible to increase GDP growth. That means cheaper energy, nurturing high-growth industries like artificial intelligence, and liberalizing the private sector
Cut government spending to reduce the deficit because government spending is far more wasteful than equivalent capital in the private market
Limit political interference in U.S. dollar markets, for example, by recognizing that the U.S. dollar’s sanctions powers conflict with its international utility
Allowing inflation to continue for a period of time to reduce the real debt burden
The good news is that incoming Treasury Secretary Scott Bessent’s 3-3-3 plan largely does just that. We don't need Bitcoin.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: (Foresight News)
Original author: Nic Carter, Partner at Castle Island Ventures
“Trump’s political views are not OK! Experts oppose "U.S. Reserve Bitcoin": Fear of weakening the U.S. dollar" This article was first published on "Crypto City"
