The U.S. Department of the Treasury, established in 1789, is responsible for managing the federal government's finances, collecting taxes, issuing currency, and overseeing public debt. The core responsibility of this agency is to ensure national financial stability, providing funding for government operations and promoting economic growth.
The Treasury operates by issuing debt instruments such as Treasury bills, notes, and bonds, which are seen as one of the safest investments globally due to full backing by the U.S. government.
The idea of adding Bitcoin, the leading cryptocurrency, to the national treasury was first explored in smaller economies around the world, such as El Salvador, which recognized Bitcoin as legal tender in 2021.
What are Treasury assets?
Treasury assets are holdings that belong to the federal government's financial reserves. These assets typically include cash reserves, gold, and securities. The selection of Treasury assets is based on several important criteria. Below are the criteria and how Bitcoin, in its current state, meets them:
Liquidity
Liquidity is the ability to quickly convert an asset into cash without incurring significant losses. The higher the liquidity, the better the health of the asset typically is. Bitcoin is one of the most liquid digital assets globally, with annual trading volumes reaching into the trillions of dollars. The Treasury could liquidate holdings quickly, although large transactions may affect market prices.
Safety
Assets must have minimal risk of default or devaluation. Assets with high counterparty credit risk or exposure to volatile markets are often unsuitable. Bitcoin is a decentralized and censorship-resistant asset, providing a hedge against political or economic instability. However, accompanying risks include cyberattacks and the need for secure custody solutions.
Stability
Treasury assets should not exhibit excessive price volatility. Bitcoin's volatility remains its largest weakness. Its value can fluctuate dramatically within hours, contrasting with the Treasury's preference for stable assets like U.S. government bonds or gold.
Yield
While safety is the top priority, generating modest returns helps sustain government operations. Unlike traditional Treasury assets, Bitcoin does not generate interest. However, Bitcoin's strong price appreciation over the past decade makes it a promising candidate for capital gains. For example, if Bitcoin's historical annual growth rate (~200%) continues, it could outpace traditional assets.
Bitcoin in the U.S. Treasury
Proponents of adding Bitcoin (BTC) to the U.S. Treasury argue that Bitcoin, with its supply capped at 21 million coins and decentralized nature, can serve as a hedge against inflation and currency devaluation.
Companies like MicroStrategy and Tesla have drawn attention by incorporating Bitcoin into their corporate treasuries, demonstrating its potential as a reserve asset. This strategy is driven by the view that Bitcoin may outperform traditional fiat currency reserves and serve as an uncorrelated asset to hedge against economic uncertainties.
Donald Trump's victory in the U.S. presidential election in November and his nomination of Paul Atkins, a cryptocurrency-friendly figure, as chair of the Securities and Exchange Commission (SEC) played a crucial role in boosting market optimism in the cryptocurrency space, pushing Bitcoin's price to $100,000.
Nashville announcement 2024
In Q3 2024, the Trump administration made a groundbreaking announcement in Nashville, revealing plans to allocate a portion of the U.S. Treasury reserves into Bitcoin. This move aims to diversify the national asset base and leverage the potential benefits of digital assets. Specific details include:
Allocate 2% of Treasury reserves to Bitcoin.
Implement purchases in phases over 24 months to mitigate market impacts.
Custody will be managed by private sector partners, in coordination with government-regulated institutions.
This announcement has sparked lively debates within political and economic circles, with opponents questioning the rationale and potential risks, while supporters praise it as a bold step towards the future of finance.
The Bitcoin bill aims to establish a strategic Bitcoin reserve fund.
Senator Cynthia Lummis introduced the Bitcoin Act of 2024, proposing that the U.S. Treasury establish a national Bitcoin reserve fund by purchasing 1 million BTC over 5 years, with plans to buy 200,000 BTC each year. This initiative aims to position Bitcoin as a strategic asset for hedging against inflation, reducing national debt, and reinforcing the U.S.'s financial leadership globally.
Key highlights to note:
Investment plan
The Treasury is expected to invest approximately $76 billion in Bitcoin, buying gradually over 5 years to mitigate price shocks.
Safe storage
Bitcoin will be stored in digital vaults managed by the Treasury for a minimum of 20 years.
Custody measures and execution partners have not been disclosed but will emphasize high security standards.
Integrate physical and digital infrastructure with the highest level of security for storing Bitcoin.
Liquidation guidelines
The proposal puts forth strict regulations on liquidation, allowing sales only in specific cases. For example, digital assets from forks or airdrops in the strategic Bitcoin reserve fund cannot be sold or handled within 5 years unless permitted by law.
These restrictions aim to stabilize market impact and maintain Bitcoin's value as a hedge against economic downturns.
Transparency and oversight
The act requires transparent reporting and a secure custody framework.
A blockchain-based monitoring system and independent audits will be implemented.
Quarterly reports on transactions and balances of the Bitcoin reserve fund are mandatory.
The bill has attracted attention due to political connections in Congress and support from industry leaders. It aims to position the U.S. as a global leader in cryptocurrency, while also raising debates about the economic risks and volatility associated with cryptocurrencies.
Source: X Impact on the risk profile of the U.S. Treasury
Price volatility risk: Bitcoin's price is significantly more volatile than traditional Treasury assets. The Treasury will need robust risk management strategies to cope with potential price fluctuations.
Liquidity considerations: Although Bitcoin has much higher liquidity than many assets, large Treasury transactions could disrupt market prices. In the long term, Bitcoin has shown sensitivity to supply and demand shocks, influenced by its position in the market cycle.
Inflation hedge: Bitcoin's limited supply makes it an attractive option for hedging against inflation, while also providing diversification for the Treasury's reserve strategy.
Impact on U.S. public debt
Credit rating agencies may reassess the risk profile of the U.S. Treasury. Holding Bitcoin could be seen as speculative, posing a risk to the U.S.'s AAA credit rating. Bitcoin does not meet the liquidity, safety, and stability criteria like gold.
Therefore, any downgrade in credit ratings could lead to higher interest rates on Treasury bonds, increasing the cost of servicing public debt. However, if Bitcoin performs well, it could strengthen the Treasury's financial position, offsetting this risk.
U.S. debt instruments, which are considered safe-haven assets, may face scrutiny from cautious investors. In contrast, institutional investors supporting Bitcoin may increase demand. Another argument for alleviating scrutiny is that only 2% of the Treasury's total assets is expected to be invested in Bitcoin, according to the announcement from Nashville.
Impact on Bitcoin prices
A large purchase from the U.S. Treasury could trigger a sharp price increase in Bitcoin, reinforcing its position as a macro asset. Even before the U.S. Treasury begins large-scale Bitcoin purchases, the announcement that the Federal Reserve is evaluating Bitcoin as a reserve currency could create a supply shock, leading to a significant price increase.
The approval of spot Bitcoin ETFs in the U.S. has brought the necessary legitimacy and credibility to this asset class. The U.S. Treasury's move to hold Bitcoin as a reserve asset could drive acceptance from institutions globally, reinforcing Bitcoin's legitimacy in financial markets.
As the U.S. Treasury becomes a significant holder and major countries and corporations buy Bitcoin, this leading crypto asset could see reduced volatility over time, similar to gold in previous decades.
U.S. national debt and Bitcoin reserves
The national debt of the U.S. government, exceeding $33 trillion in 2024, is an urgent economic issue. The idea of using Bitcoin reserves to alleviate the debt burden opens up exciting possibilities. If Bitcoin's price rises sharply, the Treasury could sell part of its holdings to reduce debt.
Assuming the U.S. holds $50 billion in Bitcoin reserves with an average purchase price of $30,000 per coin. If the price of Bitcoin rises to $150,000 per coin, the value of the reserves would reach $250 billion, generating a profit of $200 billion.
Although this amount may only reduce a small portion of the total national debt, it could significantly contribute to specific financial programs or interest payments. Bitcoin reserves could serve as a financial and geopolitical tool, reducing reliance on fiat currency reserves and diversifying away from traditional assets vulnerable to inflationary pressures. Additionally, Bitcoin may help counterbalance deficits in situations where inflation erodes the value of the U.S. dollar.
In the short term, Bitcoin is unlikely to become the primary tool for managing national debt. Its role will be supplementary, providing diversification and inflation hedging capabilities. However, if Bitcoin matures into a stable reserve asset accepted globally, similar to gold, it could play a larger role in fiscal strategies.
Currently, Bitcoin's real contribution lies in modernizing the Treasury's asset management approach, demonstrating openness to innovation while remaining focused on long-term fiscal sustainability.
