The idea of a Strategic Bitcoin Reserve has been gaining traction among Bitcoin enthusiasts, with proposals like Senator Lummis’ BITCOIN Act suggesting that the US government acquire 1 million BTC over five years. While some see this as a way to strengthen the financial condition of the United States, others, like myself, have reservations about the idea.
Firstly, it’s important to distinguish between a stockpile of seized Bitcoins, which I support, and the actual acquisition of additional Bitcoins by the US government. The latter proposals suggest that Bitcoin could play a role in strengthening the dollar, potentially even serving as the basis for a new commodity standard. This is concerning because the US issues the global reserve currency and does not need to hedge its exposure to the dollar.
Acquiring Bitcoins and giving them a monetary role would signal a lack of confidence in the current dollar-based system, which could lead to market uncertainty and speculation. The US dollar is backed by various factors, including America’s role in global trade, the strength of the US economy, and the stability of the US government. Any move away from this system could have far-reaching consequences.
Furthermore, the cost of acquiring 1 million Bitcoins would be significant, potentially reaching $1 trillion if prices continue to rise. This money could be better spent on other priorities, rather than on a symbolic gesture that could be misinterpreted by the market. The market might see the acquisition of Bitcoins as a step towards a new commodity standard for the dollar, with Bitcoin replacing gold as the backing.
Overall, while the idea of a Strategic Bitcoin Reserve may seem appealing to some, it could have unintended consequences for the US dollar and the global economy. It’s important to carefully consider the implications of such a move before proceeding with any plans to acquire large amounts of Bitcoin for the US government. Interest rates would spike dramatically as investors in US debt would start to wonder if the US was considering a hard break with Bretton Woods II. The cost of capital for everyone on the planet would rise sharply. Inflation would likely ramp up. A massive redistribution of wealth would occur, as financial markets tumbled, and Bitcoin skyrocketed.
Put another way, the US considering a near term abandonment of the current, relatively stable monetary system and replacing it with a monetary standard not based on gold, but a highly volatile, emerging asset, would cause utter panic among its creditors.
In my view, if we even got close to a Lummis-style reserve, markets would anticipatorily start to go berserk, and Trump would be forced to withdraw the policy.
While BSR advocates may claim not to be advocating a full neo-gold standard with Bitcoin as the basis, their stated intentions (again, simply read their proposals) are aggressive enough that they would seriously spook the Treasury markets if the reserve came anywhere near to being a reality.
An SBR would be politically imprudent
It’s obvious to me that any piece of legislation proposing a Strategic Bitcoin Reserve would be a complete non-starter in Congress. I’m speaking from first-hand experience having visited a number of pro-crypto members of Congress in Washington mere weeks ago. Congress is finely poised, with the Republicans having a slim majority. They couldn’t jam something through on a partisan basis, nor is it clear to me that the Republicans would even vote as a single bloc on this anyway.
Proponents of the reserve insist that the executive can find the funds for a reserve without passing a law. Certainly, there are ways in which the executive could spend money without prior authorization from Congress. Bitcoiners have proposed a variety of methods. But these completely miss the point. A Bitcoin reserve imposed by executive fiat would be imposed undemocratically, and would likely be undone in subsequent administrations if not voted on by Congress.
Think of it like this. The executive could decide unilaterally to wage a costly foreign war and find ways to appropriate the cash through various esoteric schemes. But such an undertaking would be incredibly unpopular, as the people would rightly consider it highly undemocratic. The balance of power in our Republic specifies that the President acts, but Congress authorizes (and appropriates). We don’t have a tyrant in charge.
Because Congress controls the purse strings, American citizens are effectively consulted for major spending decisions.
Put another way, in a household, the husband may not mind if his wife uses his credit card for incidental purchases. But if she decides to buy a new car, or a house, he would certainly prefer to be consulted. Of course, mechanically, she might be able to buy a car with her husband’s credit card if the limit is high enough. But that misses the point. She should consult her husband for a major decision like that. The President should consult Congress (and by extension, the American people) for any major outlay. And a Bitcoin reserve would certainly fall into that category.
“But Trump has a mandate,” you might say. But this isn’t true. He doesn’t have a mandate to spend hundreds of billions of dollars on a Strategic Bitcoin Reserve. He didn’t campaign on this. It didn’t come up in the debates or meaningfully in the press.
He talked about a Bitcoin stockpile (as in, holding existing seized Bitcoins) in his speech in Nashville, not the additional purchase of Bitcoins for the government. Trump trying to find an end-around around Congress for the purpose of spending government funds on Bitcoin would be supremely politically unpopular. It would exhaust most of his finite political capital. And Trump has an agenda that’s far broader than just Bitcoin stuff. I expect that this political logic will eventually become clear to him, even if he is momentarily excited by the notion of a reserve.
The other problem with forcing through Bitcoin purchases by executive order (assuming this is even doable) is that something that is easily done is easily undone. If such a policy were unpopular – and I believe it would be – a future Democratic administration would undoubtedly sell off the reserve immediately, causing chaos in Bitcoin markets.
What Bitcoiners should want is a democratic consensus that a Bitcoin reserve or stockpile is a good idea, and to effectuate this policy through bipartisan legislation, or even a constitutional amendment. Generally, meaningful monetary changes are done through legislation, like the 1934 Gold Reserve Act, or the Gold Clause Resolution in 1977 following Nixon’s suspension of Bretton Woods I.
Bitcoiners should want a Bitcoin Reserve to be enduring, rather than a flash in the pan. An executive-order based policy done by fiat by the new Trump admin would not last.
US Government purchases of Bitcoin would massively alienate the general public
Without a doubt, an SBR policy would be seen as a massive wealth transfer from US taxpayers to already wealthy Bitcoiners. This would be massively regressive and unpopular. Bitcoiners are a relatively small group. The Fed found in 2022 that only 8 percent of US adults hold any crypto as an investment, with wealthier individuals being over-represented in that cohort.
Even if the SBR was funded in a kind of fiscally “neutral” way (for instance, by revaluing gold to its market rate, and selling off some of the gold), it would still be seen as an undeserved handout for Bitcoiners. Those funds could be used for anything – and they would be appropriated to Bitcoiners.
A major monetary change which benefits a tiny group of Americans would turn everyone who doesn’t hold Bitcoin against the Bitcoiners. And I doubt many Americans would see the logic of the SBR, since there is no apparent crisis with the US dollar at present.
Attitudes might be different in ten or twenty years if de-dollarization accelerates, the US enters some kind of default situation, rates skyrocket, many other countries start to adopt Bitcoin as a reserve asset. But that’s not the world we live in today. Student loan forgiveness has been a contentious topic in recent years, with many people arguing that it would only benefit middle and upper-class Americans who could afford to go to college in the first place. However, President Biden’s student loan forgiveness plan aimed to help around 43 million Americans, a much larger group than Bitcoin holders. The idea of a Bitcoin reserve, on the other hand, has sparked even more controversy.
The term “strategic Bitcoin reserve” is puzzling to many, as Bitcoin does not have any industrial use or instrumental value that would benefit the US government in times of emergency or market stabilization. Unlike commodities like oil, grain, or rare minerals, Bitcoin does not serve any practical purpose other than being a store of value. Additionally, Bitcoin does not generate cash flows, making it an unlikely asset for a government reserve.
Economist George Selgin has pointed out that the US government already holds modest reserves of foreign currency and gold, which have had no relevant use since the 1970s. The strength of the US dollar comes from factors like GDP growth, government stability, and the dominance of US capital markets, rather than from commodity reserves. Gold and Bitcoin are simply not relevant to the American monetary system today.
Supporters of a Bitcoin reserve argue that Bitcoin’s unique properties, such as its global liquidity and resistance to seizure, make it a valuable asset for the US government to hold. However, critics point out that there is no compelling reason to choose Bitcoin over other assets like gold or equities. If the goal is to remonetize a hard asset, gold would be a more traditional and stable choice. If the goal is to invest in high-growth assets, equities in companies like Apple or NVIDIA would be more productive and economically beneficial.
Ultimately, the idea of a Bitcoin reserve raises questions about the role of government in allocating resources and the potential risks of holding volatile assets. While Bitcoin may have its merits as a store of value, it is unclear whether it is suitable for inclusion in a government reserve. As discussions about the future of the US monetary system continue, it is important to consider all options carefully and weigh the potential benefits and drawbacks of each. There are valid concerns about the long-term solvency of the US government, with debt to GDP ratios nearing historical highs at 120%. Interest costs as a share of GDP are also at a 60-year high and are projected to increase. However, the solution to shoring up the dollar and ensuring the stability of the US economy does not necessarily lie in acquiring Bitcoin as a reserve asset.
While Bitcoin has shown tremendous growth and institutional acceptance over its short lifespan, it is still too volatile and illiquid to be considered a viable reserve asset for a government the size of the United States. Instead, there are other measures that can be taken to address the concerns about the dollar without resorting to acquiring Bitcoin.
One option is to focus on reducing government spending and addressing the structural issues that are driving up debt levels. This could involve reforming entitlement programs, cutting unnecessary government expenditures, and increasing efficiency in government operations. By reducing the debt burden, the government can alleviate concerns about its long-term solvency and strengthen the dollar.
Another option is to focus on increasing economic growth and productivity. By investing in infrastructure, education, and innovation, the government can stimulate economic activity and create a more competitive workforce. This can lead to higher GDP growth, increased tax revenues, and a stronger dollar.
Furthermore, the government can work to strengthen the dollar by promoting policies that attract foreign investment and support a stable macroeconomic environment. This can involve maintaining a credible monetary policy, ensuring price stability, and fostering a business-friendly regulatory environment.
In conclusion, while there are valid concerns about the long-term solvency of the US government and the stability of the dollar, acquiring Bitcoin as a reserve asset may not be the most effective solution. Instead, the government can focus on reducing debt levels, promoting economic growth, and implementing policies that support a stable macroeconomic environment. By addressing these issues, the government can strengthen the dollar and ensure the long-term stability of the US economy. Federal net outlays as a share of GDP are currently at historically high levels, only surpassed by the levels seen during and after World War II. While the deficit has decreased from its peak during the Covid pandemic, it remains elevated, leaving little room for maneuver in the event of a recession. The excessive spending of the past few years, which was supported by both parties, has contributed to a surge in inflation that continues to impact the economy.
Furthermore, the dollar’s share of global foreign exchange reserves has declined from 70% to 60% over the past 25 years, with no other currency making significant gains. Some investors are now hesitant to purchase US Treasuries after the US seized Russia’s reserves in 2022. These developments raise concerns about the long-term stability of the dollar, although a crisis does not appear imminent. However, if a recession were to occur and the government were unable to provide substantial stimulus due to high interest rates and a large deficit, the situation could worsen.
In light of these challenges, it is essential to consider several key actions. Firstly, efforts should be made to boost GDP growth through various means, such as promoting cheaper energy and supporting high-growth industries like artificial intelligence. Additionally, reducing government expenditures, which are often less efficient than capital deployed in the private sector, can help lower the deficit. It is also important to limit political interference in dollar markets to ensure the currency’s international standing remains strong. Finally, allowing inflation to temporarily rise can help reduce the real value of the debt burden.
Fortunately, the proposed 3-3-3 plan put forward by incoming Treasury Secretary Scott Bessent aligns with these recommendations. This plan focuses on stimulating economic growth, reducing government spending, and maintaining the dollar’s stability without the need for alternative currencies like Bitcoin.
In conclusion, addressing the current economic challenges requires a combination of strategic measures aimed at promoting growth, reducing wasteful spending, and safeguarding the dollar’s global position. By implementing prudent policies and fostering a favorable economic environment, the US can navigate through the current uncertainties and ensure long-term stability and prosperity.
This article was written by Nic Carter and does not necessarily reflect the views of BTC Inc or Bitcoin Magazine.