Original title: I don't support a Strategic Bitcoin Reserve, and neither should you.
Original author: Nic Carter, Partner at Castle Island Ventures.
Original translation: Luffy, Foresight News.
Recently, the concept of a Strategic Bitcoin Reserve (SBR) has begun to gain widespread attention. Trump advocates for continuing to hold Bitcoin seized by the U.S. government, but some proposals go further, such as Senator Lummis's recent legislative proposal for the U.S. government to purchase 1 million Bitcoins over five years.
Bitcoin enthusiasts believe the case for a strategic reserve is almost a done deal. But I think this is unlikely; a Bitcoin strategic reserve is not a good idea. Allow me to explain.
Are we talking about reserves, sovereign wealth funds, or inventories?
First, let's clarify the concept of a Bitcoin 'reserve.' During his speech at the Nashville Bitcoin Conference, Trump promised: 'I announce that if I am elected, my government, the United States, will adopt the policy that all Bitcoin currently held or acquired by the U.S. government will be retained... this will essentially become the core of the national Bitcoin strategic reserve.'
I strongly support the idea of the U.S. government maintaining Bitcoin holdings, but I do not support purchasing more Bitcoin. Some proposals suggest the government buy a large amount of Bitcoin: from about 800,000 BTC (BPI), to 1 million BTC (Lummis), to 4 million BTC (RFK Jr.).
Senators Lummis, Michael Saylor, and the Bitcoin Policy Institute have been discussing the concept of a 'Strategic Bitcoin Reserve' (SBR).
According to Senator Lummis's framework, the U.S. government would purchase 1 million BTC over five years and hold it for at least 20 years. His logic is 'to strengthen America's financial position, hedge against economic uncertainty and monetary instability.' Lummis's bill explicitly states that the SBR will 'strengthen the dollar's position' and compares it to the role of gold in previous monetary eras.
It is important to distinguish these proposals from the idea put forth by George Selgin of purchasing Bitcoin for sovereign wealth funds. To my knowledge, the main proponents of the SBR do not view it as an asset in a national investment portfolio; they explicitly tie Bitcoin to the dollar and imply that Bitcoin would actually strengthen the dollar. This means they envision a monetary system in which Bitcoin plays a positive role. Currently, it serves the same purpose as foreign exchange reserves, but perhaps in the future, it will become the actual basis of a new commodity standard, much like the Bretton Woods system. (For those who think I am exaggerating, just read the writings of SBR advocates.)
It needs to be made clear that I am not opposed to retaining existing seized Bitcoin (I believe this is a policy Trump will ultimately adopt), nor am I against the idea of including Bitcoin in a sovereign wealth fund (even though the U.S. does not have a sovereign wealth fund). Rather, I oppose the idea of creating a Bitcoin strategic reserve and conferring it any form of monetary role.
The Bitcoin reserve will weaken rather than strengthen the dollar.
My main point is that a Bitcoin reserve will not strengthen the dollar. Unlike other countries, the U.S. issues the global reserve currency—the dollar. Other countries may try to buy Bitcoin; in fact, some countries are doing so.
If you are Russia or Iran, it may make sense to consider adding an unseizable asset to your foreign exchange reserves, especially after the U.S. seized Russian debt in 2022. But the U.S. does not need to hedge its exposure to dollar risk because it issues dollars itself.
Buying Bitcoin and conferring it a monetary role (whether as foreign exchange reserves or a more significant role) implies that the U.S. has lost confidence in the current dollar-based system.
This means the U.S. government would abandon the non-convertible fiat money standard, which would throw the system into chaos. Currently, the dollar is supported by many aspects, including the role of the U.S. as a global trade manager, the robustness of the U.S. economy, the solvency of the U.S. government, the ability of the U.S. to project hard and soft power, the depth of U.S. capital markets, and the dollar's ubiquity in global trade and finance.
If the U.S. government suddenly changes its stance, indicating, ‘We are reconsidering the entire Washington consensus,’ the markets will begin to wonder what is wrong with the government. Are they planning to default? Will they dismantle the institutions of the Bretton Woods system? Are they signaling massive deficits and high interest rates?
It should be noted that I believe the government does not consider these matters, but bond traders would immediately feel concerned.
You might protest, 'We are not talking about transitioning to some new gold standard where Bitcoin is weighted against the dollar. We are merely discussing purchasing 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 an unprice-sensitive buyer, so the U.S. might eventually buy these Bitcoins at $1 million each, meaning it would cost $1 trillion. This is a significant expenditure that should be spent on other more meaningful things.
I suspect the market will not view the purchase of Bitcoin as symbolic but rather as the first step toward the dollar returning to a new commodity standard supported by Bitcoin.
Austin Campbell states this would 'accelerate the dollar's demise, as it would 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 begins to converge toward 1, you would see financial markets collapse. Interest rates would soar as U.S. debt investors would start to doubt whether the U.S. is considering a complete departure from the Bretton Woods II system.
The capital costs for everyone on Earth will skyrocket, and inflation may intensify. With a crash in financial markets and a surge in Bitcoin, there will be a massive redistribution of wealth.
In other words, the U.S. is considering abandoning the current relatively stable monetary system in favor of a currency standard based on a highly volatile new emerging asset, which would cause complete panic among its creditors.
In my view, if Lummis's reserve comes close to its target, the market will go crazy, and Trump will be forced to retract the policy.
While BSR supporters may claim not to advocate establishing a new gold standard based on Bitcoin, their stated intentions are very radical, and if reserves come close to reality, the bond market will panic.
From a political standpoint, the SBR is unwise.
I believe that any legislation proposing the establishment of a Bitcoin strategic reserve would be completely unworkable in Congress. A few weeks ago, I visited some cryptocurrency-supporting members of Congress in Washington, and this was my firsthand experience. The congressional landscape is bleak, with the Republicans holding a slim advantage. They cannot force a bill through on the grounds of party rivalry, and I am unclear whether the Republicans would even vote on it.
Supporters of the reserve strategy insist that the executive branch can raise funds for the 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 embark on an expensive foreign war and misappropriate funds through various secretive plans. But such actions would be highly unpopular, as people would view it as undemocratic. The power balance in our republic specifies that the president takes actions, but Congress grants powers (and appropriations). We do not have a tyrant in power.
Since Congress controls the purse strings, American citizens will be consulted when significant spending decisions are made.
In other words, in a household, a husband might not mind his wife occasionally shopping with his credit card. But if she decides to buy a new car or a house, he would certainly prefer to be consulted. Of course, mechanistically, if the limit is high enough, she could potentially buy a car with her husband's credit card. But that misses the point. She should consult her husband when making such significant decisions. The president should consult Congress (and thereby the American people) on any significant expenditures, and the Bitcoin reserve certainly falls into that category.
You might say, 'But Trump has the power.' That's 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 the campaign debates and has not appeared meaningfully in the media.
He spoke about the Bitcoin reserve (i.e., holding existing seized Bitcoin) in Nashville, rather than the government purchasing additional Bitcoin. Trump is trying to bypass Congress to spend government funds on Bitcoin, which is politically extremely unpopular. This would exhaust his limited political capital. Trump's agenda is far broader than just Bitcoin. I expect that even if he momentarily feels excited about the concept of reserves, political logic will ultimately bring clarity to him.
Another problem with forcing the purchase of Bitcoin through executive order is that what is easy to do can also be easily undone. If such a policy is unpopular, future Democratic administrations would undoubtedly sell off reserves immediately, leading to chaos in the Bitcoin market.
What Bitcoin users should hope for is a democratic consensus that a Bitcoin reserve or inventory is a good idea and implement this policy through bipartisan legislation or even a constitutional amendment. In general, meaningful monetary reforms are achieved through legislation, such as the 1934 Gold Reserve Act or the 1977 Gold Clause Resolution after Nixon suspended the Bretton Woods I system.
Bitcoin users should hope that a Bitcoin reserve can endure, rather than being a flash in the pan. Policies based on executive order from a 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 seen as a massive wealth transfer from American taxpayers to wealthy Bitcoin holders. This would be a regression, and it would not be welcomed by the public. Bitcoin holders are a relatively small group. The Fed found in 2022 that only 8% of American adults held cryptocurrency, with a higher proportion being wealthy individuals.
Even if the funding source for the SBR were some kind of fiscally 'neutral' method (for example, selling part of the gold), it would still be seen as something Bitcoin holders do not deserve. These funds could be used for anything else, rather than being allocated to Bitcoin holders.
A significant monetary policy change that benefits a small portion of Americans will make everyone who does not hold Bitcoin oppose Bitcoin holders. And I suspect many Americans will not understand the logic of the SBR, as there is currently no obvious crisis with the dollar.
If de-dollarization accelerates, and the U.S. finds itself in some default predicament, with soaring interest rates and many other countries starting to adopt Bitcoin as a reserve asset, then people's attitudes may change 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 go to college and obtain worthless liberal arts degrees. (Interestingly, Elizabeth Warren proposed a unilateral $640 billion plan 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. In this light, the uproar caused by a Bitcoin reserve would be even more severe.
Currently, due to the gradual organic adoption of Bitcoin, there is growing interest in Bitcoin within the financial community. The reserve strategy would pit ordinary Americans against Bitcoin holders, which would severely impact Bitcoin's adoption.
The Bitcoin reserve does not have a '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 is a means of stabilizing 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 held significant reserves of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium, and other rare minerals and medical equipment.
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 specific price level. Whether Bitcoin trades at $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 approximately 8,130 tons of gold held by the U.S. have no relevant use. They are purely historical relics, held simply 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 vastly overestimate the role of gold in the dollar system. Ultimately, when it comes to the ubiquity of the dollar system, the U.S. government's balance sheet is almost irrelevant.
What truly backs the dollar is:
· U.S. GDP growth generates tax liabilities that 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 effect generated by the dollar's dominance in trade settlements, commodity markets, forex markets, and debt markets.
· The U.S. continues to play the role of global hegemon and the guarantor of global trade and security.
Gold and Bitcoin are fundamentally unimportant in today's American monetary system. Perhaps one day they will play a role, but the current non-convertible standard is not in any way based on commodity reserves.
Bitcoin or nothing?
Why reserve Bitcoin? Why not something else? Bitcoin holders have yet to provide a convincing answer. You might say Bitcoin is valuable (with a market cap of around $2 trillion), has global liquidity, and is held by many people. Yet, Bitcoin is not unique in this regard. Can you make an argument for a Bitcoin reserve that does not also apply to Apple or NVIDIA stocks?
‘Well,’ you might say, ‘these are claims on corporate cash flows, not anonymous assets. Bitcoin is special because it cannot be seized.’ However, it is assumed that Apple or NVIDIA would not face the risk of having their assets and intellectual property seized. This would be another reason for another country to oppose acquiring equity in American companies as reserves, but we are talking about the U.S. government.
Choosing a Bitcoin reserve over gold also makes no sense. If you want to remonetize hard assets and use them as the foundation of a monetary system, gold is the obvious choice. If we want to 'get ahead' of other countries in terms of reserve assets (a common argument in support of SBR), gold is the perfect choice since we have more gold than anyone else. Simply remonetizing gold would put us ahead.
Gold is also a 'non-anonymous' asset in that ownership is not a claim on anything but simply ownership of gold bars and ingots. If Bitcoin holders successfully persuade the U.S. government to abandon the Bretton Woods II standard and return to a commodity standard prior to 1971, then gold would indeed be a better choice. It has a longer history, more people own it, its value is about nine times that of Bitcoin, its volatility is much lower, and we already possess it, so monetizing it would be much cheaper.
If you don't like gold because it is not a 'high-growth' asset like Bitcoin, you might consider fast-growing assets like NVIDIA, Apple, or Microsoft stocks. If we consider what commodities the U.S. might invest in for strategic purposes, my top choice would be AI data centers or chip manufacturing. They serve obvious strategic purposes and would also be economically productive. We would then start discussing the use of Treasury or Fed resources for 'industrial policy.'
Most conservatives and libertarians are skeptical of the government allocating resources top-down in this manner, preferring to leave it to the private sector to solve the problem. I do not like Biden's massive infrastructure spending; I find it very wasteful, so I do not support further government intrusion into the private sector, especially through blatant dollar issuance.
Typically, the U.S. government does not really use monetary tools to intervene in the market beyond setting interest rates; its role is to establish rules and maintain system stability, rather than actively deploying government funds into commodities for intraday trading. (This is why many are skeptical of Biden selling 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 will only intervene when there is an urgent strategic need to increase reserves of some 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.
Establishing an SBR now makes no sense.
Why create a Bitcoin reserve now? What is so special about the current moment 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 could harm American manufacturing and other countries holding dollar debt.
Relative to the rest of the world, U.S. GDP is growing. Europe, in particular, is slowly declining, while China is facing its first severe economic crisis since the reforms. The U.S. stock market is outperforming other regions, accounting for about 50% of the global market, and these trends will continue.
You might say, 'But the dollar is falling against 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 have been over the last decade, but no one is panicking about the U.S. government's solvency. The dollar's share of global foreign exchange reserves has declined over the past few decades, but there is no genuine crisis. The dollar still holds absolute dominance globally, and there are no potential challengers anywhere, whether it's the dying euro or the managed yuan; neither has the ability or ambition to challenge the dollar's status as the preferred global reserve asset.
The only reason to seriously discuss SBR today is due to Trump's electoral victory. Bitcoin enthusiasts seized upon this politically expedient moment, hoping he would not only introduce more favorable regulations but also actually become a national-level Bitcoin buyer.
But Bitcoin's scale and liquidity are still far from sufficient to impact the U.S. reserve portfolio, and it is certainly not ready to become a monetary commodity like gold under a gold standard. Its current value is only about $2 trillion, while gold's value is about $17 trillion. Bitcoin remains extremely unstable and is clearly unsuitable as a unit of account.
Bitcoin holders should be more patient. Bitcoin has performed exceptionally well in its brief 15-year existence and is becoming an important global currency asset.
Over time, its volatility will ease (its market cap and liquidity will grow), and it will become a more suitable asset for the government to consider in its portfolio. But for now, it plays no meaningful role in the U.S. monetary system.
A Bitcoin reserve is 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 will not incur any losses. If Bitcoin continues to monetize and eventually challenges gold, and other countries start to include Bitcoin as part of their sovereign wealth funds or even begin to 'back' their national currencies with Bitcoin, then the U.S. still has ample time to act.
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 could buy Bitcoin through the open market. In my view, it is more likely that they would choose a cheaper way, such as setting price caps, banning private ownership, and forcing the exchange of Bitcoin held by Americans, much like they did with gold in 1933.
They could also simply seize Bitcoin held on domestic platforms, where American custodians are by far the largest custodians. They could nationalize Bitcoin mining operations. They could raise capital gains taxes and insist on payment in kind. They could arrest known individuals holding large amounts of Bitcoin and seize their funds. They could invest resources in developing quantum computing enough to steal about 4 million Bitcoins that are 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 Bitcoin's merits and they truly commit to reserving Bitcoin, they will do so in the most politically advantageous way.
This may not necessarily align with the best interests of American Bitcoin holders. If faced with the choice between buying 1 million BTC at $1 million each and seizing 1 million Bitcoins through other means, they would choose the more effective method.
Without Bitcoin, how should we support the dollar?
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%. Interest costs as a percentage of GDP are at their highest level in 60 years and continue to rise. Federal net spending as a percentage of GDP is at its highest level in the past century, second only to the levels during and immediately after World War II.
While the deficit has declined from its pandemic highs, it remains elevated, and we have little room to maneuver if a recession hits. The reckless spending of the past four years has led to an outbreak of inflation that we are still grappling with.
In the past quarter-century, the dollar's share of global foreign exchange reserves has fallen from 70% to 60%. Following the U.S. seizing Russian reserves in 2022, certain buyers are now cautious about purchasing U.S. Treasury bonds.
All of this suggests that the dollar may have long-term issues, even if there does not seem to be an imminent crisis. If we enter a recession and the government finds itself unable to conduct large-scale stimulus spending, this situation may change, as 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 increase GDP growth. This means cheaper energy, fostering high-growth industries like AI, and freeing up the private sector.
· Reduce the size of government spending to decrease the deficit because the level of waste in government spending is far higher than that of equivalent capital in the private market.
· Limit political interference in the dollar market, for example, recognizing that the dollar's sanctioning power conflicts with its international utility.
· Allow inflation to persist for a time to reduce the real debt burden.
The good news is that the incoming Treasury Secretary Scott Bessent's 3-3-3 plan essentially achieves this. We do not need Bitcoin.
Original link
Welcome to join the official BlockBeats community:
Telegram subscription group: https://t.me/theblockbeats
Telegram group chat: https://t.me/BlockBeats_App
Official Twitter account: https://twitter.com/BlockBeatsAsia
