Author: Arunkumar Krishnakumar
Compiled by: Deep Tide TechFlow
Key Points
The U.S. Treasury plans to invest $76 billion in Bitcoin over the next five years, using it as a long-term hedge against inflation and economic instability.
Bitcoin will be stored in a secure vault managed by the Treasury with strict custodial measures to ensure asset security and transparency.
Incorporating Bitcoin has the potential to reduce U.S. debt and serve as a diversification tool, although its volatility and market impact remain key concerns.
This plan may solidify Bitcoin's legitimacy and promote global institutional adoption, potentially stabilizing its price in the long run.
The U.S. Treasury was established in 1789 and is responsible for managing the federal government's financial affairs, including collecting taxes, issuing currency, and overseeing public debt. Its main responsibilities include maintaining the country's financial stability, providing funding for government operations, and promoting economic growth. The Treasury operates by issuing government bonds, notes, and bills, which are considered some of the safest investments globally, supported fully by the U.S. government.
The idea of incorporating Bitcoin into government finances was initially explored by smaller economies like El Salvador, which adopted Bitcoin as legal tender in 2021.
What are Fiscal Assets?
Fiscal assets are part of the federal government's financial reserves, typically including cash reserves, gold, and securities. Several key criteria are considered when selecting fiscal assets. Here are these criteria and how Bitcoin meets them in its current state.
Liquidity
Liquidity refers to the ability to quickly convert an asset into cash without significant loss. Higher liquidity usually means better asset health. Bitcoin is one of the most liquid digital assets globally, with annual trading volumes in the trillions. The Treasury can quickly liquidate holdings, although large transactions may impact market prices.
Security
Assets must have minimal default or depreciation risk. Assets with high counterparty credit risk or exposure to turbulent markets may be unsuitable. Bitcoin is decentralized and censorship-resistant, offering a hedge against political or economic instability. However, risks include cyberattacks and the need for secure custodial solutions.
Stability
Fiscal assets should not exhibit extreme valuation volatility. Bitcoin's volatility remains its biggest drawback. Its value can fluctuate significantly within hours, contrasting with the Treasury's preference for stable assets such as U.S. bonds or gold.
Returns
While security is crucial, generating moderate returns helps sustain government operations. Unlike traditional fiscal assets, Bitcoin does not generate interest. However, its price appreciation over the past decade makes it a strong candidate for capital gains. For instance, if Bitcoin's historical annual growth rate of around 200% continues, it could far exceed traditional assets.
Bitcoin in the U.S. Treasury
Proponents of incorporating Bitcoin into the U.S. Treasury argue that Bitcoin, with its hard cap supply of 21 million coins and decentralized nature, can serve as a hedge against inflation and currency devaluation.
Companies like MicroStrategy and Tesla have gained attention for incorporating Bitcoin into their corporate finances, demonstrating its potential as a reserve asset. The driving force behind this strategy is the belief that Bitcoin can outperform traditional fiat reserves and serve as an uncorrelated asset to hedge against economic uncertainty.
Donald Trump's victory in the November U.S. presidential election and his nomination of cryptocurrency supporter Paul Atkins as SEC Chair played a key role in the crypto market, driving Bitcoin's price to $100,000.
2024 Nashville Announcement
In the third quarter of 2024, the Trump administration announced a significant plan in Nashville to allocate a portion of the U.S. Treasury reserves to Bitcoin. This move aims to diversify the national asset portfolio and leverage the potential advantages of digital assets. Specific details include:
Invest 2% of fiscal reserves in Bitcoin
Phased purchasing over 24 months to minimize market impact.
Custody is jointly overseen by private sector partners and government regulatory agencies.
This announcement has sparked vigorous discussions in the political and economic arenas, with critics questioning its rationale and potential risks, while supporters view it as a bold step towards the financial future.
Bitcoin Bill for Establishing Strategic Bitcoin Reserves
Senator Cynthia Lummis introduced the 2024 Bitcoin Bill, proposing that the U.S. Treasury establish a national Bitcoin reserve, planning to acquire 1 million Bitcoins over five years, buying 200,000 coins each year. This move aims to position Bitcoin as a strategic asset to combat inflation, reduce national debt, and enhance the United States' global financial leadership.
The following are key points of the plan:
Investment Plan
The Treasury plans to gradually invest about $76 billion in Bitcoin over five years to mitigate the impact of price fluctuations.
Secure Storage
Bitcoin will be stored in a digital vault managed by the Treasury for at least 20 years.
Custodial measures and partnerships have not yet been disclosed, but will ensure strict security standards.
The storage of Bitcoin will utilize the highest levels of physical and digital security infrastructure.
Clearing Guidelines
The proposal stipulates strict clearing rules, allowing sales only under specific circumstances. For example, digital assets from forks or airdrops in the strategic Bitcoin reserve cannot be sold or disposed of within five years unless legally authorized.
These restrictions aim to stabilize market impact and maintain the value of Bitcoin as a hedge against economic downturns.
Transparency and Monitoring
The bill requires transparent reporting and a secure custody framework.
A blockchain-based monitoring system and independent audits will be implemented.
Quarterly reporting of transactions and Bitcoin reserve balances is required.
The bill is gaining momentum due to political support in Congress and advocacy from industry leaders. It aims to position the U.S. as a global leader in cryptocurrency while sparking discussions about the economic risks and volatility associated with cryptocurrencies.
Impact on U.S. Treasury Risk Profile
Volatility risk: The price volatility of Bitcoin is significantly higher than that of traditional financial assets. The Treasury needs to develop strong risk management strategies to address potential price fluctuations.
Liquidity considerations: Although Bitcoin is more liquid than many assets, large-scale transactions by the Treasury could disrupt market prices. Over time, this asset exhibits sensitivity to supply and demand shocks in market cycles.
Inflation hedge: Bitcoin's limited supply makes it an ideal tool for combating inflation, providing diversification options for the Treasury's reserve strategy.
Impact on U.S. government debt
Credit rating agencies may reassess the risk profile of the U.S. Treasury. Holding Bitcoin might be viewed as speculative behavior, potentially impacting the U.S.'s AAA credit rating. Bitcoin may not satisfactorily meet the three criteria of liquidity, security, and stability as gold does.
Therefore, any downgrade in credit ratings could lead to an increase in Treasury yields, raising debt service costs. However, if Bitcoin performs well, it may strengthen the Treasury's financial condition, offsetting this risk.
Traditionally safe-haven U.S. debt instruments may come under scrutiny from conservative investors. Conversely, institutional investors with pro-Bitcoin stances may increase demand. Another argument against serious scrutiny is that, according to the Nashville announcement, it is expected that only 2% of the entire Treasury assets will exist in Bitcoin form.
Impact on Bitcoin Prices
Large purchases by the U.S. Treasury may trigger significant increases in Bitcoin prices, solidifying its status as a macroeconomic asset. However, even before the Treasury begins large-scale purchases of Bitcoin, news of the Federal Reserve evaluating Bitcoin as a reserve currency may lead to supply shocks and cause prices to surge.
The approval of a U.S.-based spot Bitcoin exchange-traded fund (ETF) has brought much-needed legitimacy and credibility to the asset and its asset class. The Treasury's move to adopt BTC as a reserve asset may further drive institutional adoption globally, reinforcing Bitcoin's legitimacy in financial markets.
As the U.S. Treasury becomes a significant holder, along with major nations and corporations purchasing Bitcoin, this top crypto asset may see reduced volatility over time, similar to gold in its early decades.
U.S. Treasury Bonds and Bitcoin Reserves
By 2024, the U.S. government debt will exceed $33 trillion, posing an urgent economic issue. The idea of using Bitcoin reserves to alleviate this debt presents intriguing possibilities. If Bitcoin experiences significant appreciation, the Treasury could sell part of its holdings to reduce debt.
Assuming the United States holds a Bitcoin reserve worth $50 billion, with an average purchase price of $30,000 per coin. If the price of Bitcoin rises to $150,000 per coin, these reserves would be worth $250 billion, generating a profit of $200 billion.
While this will have only a slight impact on overall debt, it can make a meaningful contribution to specific fiscal plans or interest payments. Bitcoin reserves can serve as a geopolitical and financial tool, reducing reliance on fiat reserves and diversifying from traditional assets affected by inflationary pressures. Additionally, Bitcoin may help balance deficits in situations where inflation erodes the value of the dollar.
In the short term, Bitcoin is unlikely to become the primary tool for managing national debt. Its role will be more supplementary, providing diversification and potential inflation hedging. However, if Bitcoin matures into a globally recognized stable reserve asset similar to gold, it may play a greater role in fiscal strategy.
Currently, Bitcoin's true contribution lies in modernizing the Treasury's asset management approach, indicating an openness to innovation while maintaining a focus on long-term fiscal sustainability.
