Trump's Plans for a Bitcoin Strategic Reserve: Crazy or Great?

Donald Trump's opinion on bitcoin and cryptocurrencies has shifted dramatically over the years. In his first term as president, he openly criticized cryptocurrencies, calling them "not money" and labeling their value as "highly volatile and based on thin air." Fast forward to 2024, and Trump is presenting himself as a staunch advocate for the crypto industry.

During his re-election campaign, Trump took the stage as the main speaker at a prominent bitcoin convention. He also established his own cryptocurrency venture, World Liberty Financial, and has received millions in donations in various cryptocurrencies like bitcoin, ether, and XRP from supporters, including some well-known crypto billionaires. Since he declared his intention to make America the "crypto capital of the planet," his promises of pro-cryptocurrency policies have contributed to significant increases in bitcoin’s value, reaching record highs of up to $108,000 (approximately $173,000) in mid-December.

One of the more controversial aspects of Trump's plans is the idea of creating a "strategic bitcoin reserve." This would involve the United States stockpiling bitcoin to hold for an extended period, though the exact details of how this would be implemented remain unclear.

What Is a Strategic Reserve?

When people hear the term "strategic reserves," they typically think of oil. A notable example is the US Strategic Petroleum Reserve (SPR), created in 1975 during the oil crisis to protect the economy from supply shocks. More recently, the SPR was tapped to release 180 million barrels of crude oil to mitigate the effects of rising prices due to geopolitical tensions.

Other countries, like China, have also established strategic reserves, stockpiling critical industrial metals to safeguard their tech and property sectors. Even Canada has a unique maple syrup reserve, which reached its lowest level in 16 years last year.

These reserves are meant to shield economies from sudden shortages and inflationary pressures. However, there is a fundamental difference between these traditional commodities and bitcoin, which has only existed for about 15 years. Unlike oil, which is essential for fuel in emergencies, bitcoin’s utility in a crisis is less certain. Additionally, while government purchases of bitcoin might boost prices for investors, the broader economic benefits are ambiguous.

The Practicality of a Bitcoin Reserve

At a bitcoin convention in Nashville, Trump assured supporters that if he were re-elected, the government would not sell any bitcoin holdings, adhering to the "cardinal rule" that every bitcoin investor knows: "Never sell your bitcoin." Interestingly, the US government already possesses around 200,000 bitcoin, worth over $21 billion, acquired through seizures related to criminal activities, notably the takedown of the Silk Road marketplace.

Currently, the most concrete proposal for a bitcoin reserve comes from pro-crypto Senator Cynthia Lummis of Wyoming. She introduced a bill that would require the Treasury to purchase 1 million bitcoins over five years, funded by the Federal Reserve's deposits and gold reserves. Under her plan, the US would control about 5% of the total bitcoin supply, which is capped at 21 million, and be required to maintain that reserve for a minimum of 20 years.

However, critics argue that Lummis's proposal could exacerbate the national debt, which currently stands at $36 trillion. Additionally, recent legislative hurdles have revealed that proposals involving increased government spending face significant roadblocks, even from within the Republican Party, leading to skepticism about the bill's viability.

Furthermore, for any bitcoin purchases to happen, the administration might need to introduce new Treasury debt, which could encounter resistance from the Federal Reserve. Recently, Fed Chair Jerome Powell stated that the central bank is not interested in holding bitcoin in its reserves and is not seeking any changes to the laws governing what the Fed can own.

Protection Against Inflation or a 'Crazy' Idea?

Recently, Trump expressed his intention to do something significant with cryptocurrencies, citing concerns that if the US doesn’t acquire bitcoin, rival nations like China will. This argument revolves around the fear of missing out and geopolitical competition, suggesting the potential danger if adversaries accumulate substantial bitcoin reserves.

Lummis argues that her proposal could significantly reduce the US debt over time and serve as a safeguard against inflation, enhancing the US dollar's standing globally. She believes that a bitcoin reserve could act as a stable store of value, despite its short-term volatility.

However, the long-term sustainability of bitcoin as a secure investment remains uncertain. Former Treasury Secretary Larry Summers criticized the reserve plan as "politically motivated," suggesting it serves mainly to inflate bitcoin's value for the benefit of Trump's donors. He questioned the reasoning behind supporting bitcoin through a national reserve, arguing there’s little justification for such an action beyond appealing to special interests.

While bitcoin’s price has been on the rise, it has also experienced extreme fluctuations, including a significant drop of over 70% between November 2021 and November 2022. Though it has rebounded above $100,000, the long-term outcome for bitcoin—and the future of Trump’s policies—remains unpredictable, with the potential for taxpayer-funded bitcoin purchases to pose risks to US financial stability instead of enhancing it.

Trump, Bitcoin, Reserve