The narrative around bitcoin, once dominated by speculation and controversy, is gradually evolving. There is a growing interest in exploring its potential to positively impact the U.S. economy, championed by several pro-crypto politicians. Most recently, this perspective has also been actively promoted by the Republican presidential nominee Donald Trump, prompting broader public debate.
This momentum offers a good opportunity to assess whether this idea holds real economic merit. A closer examination reveals that bitcoin holds potential to reduce the U.S. national debt, diversify the country’s reserves, and help its oil industry.
Bitcoin Bitcoin +1.3% Could Help Reduce National Debt
Speaking at the Bitcoin 2024 conference in Nashville, Republican Senator Cynthia Lummis introduced an ambitious proposal to establish a strategic bitcoin reserve. Her bill, which she described as “our Louisiana Purchase moment,” outlines a plan to acquire 1 million BTC over five years. The senator also claimed that such a reserve would “serve as an additional store of value to bolster America’s balance sheet.”
The U.S. balance sheet is indeed in dire need of bolstering. With the national debt now towering at $35 trillion, the country is spending $0.95 trillion annually just to service it. Compounding the problem is the declining dominance of the dollar, which exacerbates the situation by reducing demand for Treasury securities – leaving the government with fewer resources to borrow and refinance the debt.
The recent European Central Bank report highlights this trend. While the euro’s share of global foreign exchange reserves has remained steady at around 20% over the past two decades, the US dollar’s share has dropped from over 70% to below 59%. Meanwhile, the share of “other currencies” has surged from 9% to almost 22%.
Rising debt and shrinking borrowing capacity form a troubling trend, and one of these trajectories must be reversed. Reducing debt seems like the more feasible option, as the dollar’s decline is driven by factors beyond economics, notably the U.S. weaponizing the dollar, which has prompted many countries to reduce their over-reliance on it.
Reducing national debt traditionally involves unpopular political decisions, such as raising taxes and cutting social spending, making it seem particularly difficult in the current political climate. So, desperate times call for desperate – or creative – measures, and bitcoin might just be the answer.
Bitcoin appeals to people for the same reasons the dollar does not: free from the influence of any single nation's politics, it is provably scarce and enables borderless and relatively cheap transactions (especially with its layer-2 Lightning Network). Furthermore, with a market cap of just $1 trillion, bitcoin price has room for growth – a potential that could be realized rather quickly if the world’s largest economic power were to embrace it. By creating a strategic BTC reserve, the U.S. could trigger a bandwagon effect, potentially driving up the coin’s price and enabling the Treasury to pay down part of the national debt through capital gains.
The Impact Of A Bitcoin National Reserve
Diversification is key to financial resilience, whether in personal portfolios or national reserves. From this perspective, bitcoin stands out as a unique asset class that operates independently of traditional financial systems.
As shown by The Block, bitcoin’s correlation with stock indexes and gold fluctuates between 0.9 (highly correlated) and -0.9 (negatively correlated). This variability underscores its diversification potential, which the U.S. foreign reserves could strategically leverage.
Indeed, the U.S. foreign reserves are rather unvaried and modest given the scale of the American economy. Composed primarily of gold, special drawing rights with the IMF, and foreign currencies like the euro and yen, the U.S. official reserve assets now stand at only $246 billion ($908 billion if gold were recalculated at the current market price).
Enter bitcoin. By diversifying the foreign reserves, the leading cryptocurrency could help better manage external economic shocks that might threaten the dollar's stability, such as fluctuations in other reserve assets. A stronger, more diversified reserve would also enhance confidence in the dollar.
Additionally, a more robust foreign reserve would be invaluable in times of crisis. Black swan events often come without warning, and it’s generally wiser to put your eggs in different baskets to ensure you have some for tomorrow.
Sustainable Bitcoin Mining To Boost Oil Industry
The U.S. is probably the country where embracing bitcoin at a national level could produce the most significant catalytic impact. After China’s mining ban in 2021, America became a major hub for bitcoin mining, producing almost 38% of the total hashrate, according to the latest available data from CBECI (2022). Additionally, 13 out of the world’s 24 largest mining companies are registered in the U.S., as per CompaniesMarketCap.
Bitcoin mining involves using specialized rigs to secure the blockchain with large amounts of electricity in exchange for newly created BTC and transaction fees. Since miners are location-agnostic, they can be set up virtually anywhere with abundant and inexpensive energy. This flexibility drives innovation, and one of the most promising avenues for bitcoin mining in the U.S. today is capturing flared gas, a by-product of oil extraction. American oil producers like ExxonMobile and ConocoPhillips are already partnering with bitcoin mining companies that install their rigs in North Dakota oil fields. The higher bitcoin’s price climbs, the more profitable such operations become, while also reducing harmful emissions, boosting economic activity, and creating an additional wealth source for the country.
The Risks Of Adopting Bitcoin
For a seasoned bitcoiner who has maintained confidence in the asset through market’s ups and downs, the economic benefits of bitcoin may seem obvious. However, most people would question whether is it wise – or safe – for a country to gamble with its reserves?
These concerns are not without merit, and it’s crucial to map the risks before taking any important decision. Indeed, for the above scenario to hold, bitcoin must fulfill its initial promises. The blockchain must function as intended and real adoption must grow to ensure that U.S. market intervention does not simply inflate the coin’s price. Furthermore, the officials must consider issues like volatility, liquidity, and security very seriously.
While the risks are real, the potential rewards of adopting bitcoin on a national level could be transformative for the economy. Some countries, like El Salvador or Bhutan, have already recognized this.
Bitcoin In El Salvador And Bhutan
El Salvador is famous for becoming the first country to adopt bitcoin as legal tender, integrating it into several national projects aimed at stimulating economic growth and reducing debt. However, shortly after the introduction of the Bitcoin Law, the IMF warned the country of the risks on “financial stability, financial integrity, and consumer protection”, urging it to remove the legal tender status. El Salvador refused.
Three years in, El Salvador holds 5,875 BTC, now worth 34.5% more than the average purchase price. The country has also begun mining Bitcoin using geothermal energy from its volcanoes and has seen its bonds outperform the Invesco Emerging Markets Sovereign Debt ETF (PCYInvesco Emerging Markets Sovereign Debt ETF 0.0%) in 2023, benefiting from the momentum around Bitcoin spot ETFs. Even the IMF now cannot help but concede that “on bitcoin, many of the risks have not yet materialized”.
Overall, despite the grassroot bitcoin adoption remaining low at 12%, President Nayib Bukele views the project as a success. “It gave us branding, it brought us investments, it brought us tourism,” he said in a recent interview for Time Magazine.
With far less fanfare, the Asian nation of Bhutan has been quietly mining bitcoin since 2019. Arkham Intelligence’s recent research reveals that the country now holds 13,036 BTC - an impressive amount equivalent to over a quarter of its GDP. For one of the world's most isolated countries, bitcoin could be the way to bolster its financial independence, while its abundant hydroelectric resources provide a sustainable way to do so.
The U.S. has different economic goals from El Salvador or Bhutan, but investing in bitcoin aligns with them too. Moreover, given its immense economic power, even a relatively small investment could have an outsized return. While Bhutan holds 27% of its GDP in bitcoin and El Salvador 1%, Senator Lummis’ proposed purchase of 1 million BTC would represent just 0.2% of the U.S. GDP (at current prices). Yet, such a move by the world's largest economy could potentially send bitcoin’s price “to the moon” and help address some of the country's serious economic challenges.
