Author: Nic Carter, Partner at Castle Island Ventures
Translated by: Luffy, Foresight News
Recently, the concept of a Strategic Bitcoin Reserve (SBR) has gained widespread attention. Trump has advocated for continuing to hold the Bitcoin seized by the U.S. government, but some proposals go further, such as a recent legislative draft by Senator Lummis proposing that the U.S. government purchase 1 million Bitcoins over five years.
Bitcoin enthusiasts believe that the strategic reserve proposal is almost a foregone conclusion. However, I believe this is unlikely, and a Bitcoin strategic reserve is not a good idea. Please allow me to explain.
Are We Talking About Inventory, Sovereign Wealth Funds, or Reserves?
First, we need to clarify the concept of a "Bitcoin reserve." In his speech at the Nashville Bitcoin Conference, Trump promised: "I hereby declare that if I am elected, the policy of my administration, the United States of America, will be that all Bitcoin currently held or hereafter obtained by the U.S. Government will be retained... This will effectively become the core of a national Bitcoin strategic reserve."
I strongly support the idea of the U.S. government maintaining a Bitcoin inventory, but I do not support purchasing more Bitcoin. Some proposals suggest the government should purchase large amounts of Bitcoin: from around 800,000 BTC (BPI), to 1 million BTC (Lummis), to 4 million BTC (RFK Jr).
Senator Lummis, Michael Saylor, and the Bitcoin Policy Institute have been discussing a "Strategic Bitcoin Reserve (SBR)."
Under Senator Lummis' framework, the U.S. government would purchase 1 million BTC over five years and hold them for at least 20 years. His logic is to "strengthen America's financial position, hedge economic uncertainty and monetary instability." Lummis' bill explicitly states that the SBR will "strengthen the position of the dollar" and compares it to the role of gold in previous monetary eras.
It is important to distinguish these proposals from the idea of purchasing Bitcoin within a sovereign wealth fund, as discussed by George Selgin. To my knowledge, the main proponents of the SBR do not view it as an asset in the national investment portfolio; they explicitly link Bitcoin to the dollar and imply that Bitcoin will actually strengthen the dollar. This means they envision a monetary system in which Bitcoin plays an active role, currently serving the same function as foreign exchange reserves, but perhaps in the future becoming the actual basis of a new commodity standard, like the Bretton Woods system. (For those who think I'm exaggerating, you only need to read the writings of the SBR advocates.)
To be clear, I do not oppose the idea of retaining the existing seized Bitcoin (which I think is the policy Trump will ultimately adopt), nor do I oppose the idea of including Bitcoin in a sovereign wealth fund (although the U.S. does not have a sovereign wealth fund). Rather, I oppose the idea of creating a Bitcoin strategic reserve and imbuing it with any form of monetary role.
A Bitcoin Reserve Will Weaken, Not 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 can experiment with purchasing Bitcoin, and some are indeed doing so.
If you are Russia or Iran, considering adding an unseizable asset to your foreign exchange reserves may be reasonable, especially after the U.S. seized Russian sovereign debt in 2022. But the U.S. does not need to hedge its exposure to the dollar, as it issues the dollar itself.
Purchasing Bitcoin and imbuing it with a monetary role (whether as a foreign exchange reserve or in a more prominent role) would signal that the U.S. has lost confidence in the current dollar-based system.
This would mean the U.S. government abandoning the non-convertible fiat currency standard, which would plunge the system into chaos. Currently, the dollar is "supported" by the U.S.'s role as the global trade manager, the robustness of the U.S. economy, the U.S. government's solvency, the U.S.'s ability to project hard and soft power, the depth of U.S. securities markets, and the ubiquity of the dollar in global trade and finance.
If the U.S. government suddenly pivoted and said, "We are reconsidering the entire Washington Consensus," the markets would immediately start wondering what's going on. Are they planning a default? Are they going to dismantle the Bretton Woods institutions? Are they hinting at massive deficits and high interest rates?
To be clear, I don't think the government is considering these things, but bond traders would immediately become concerned.
You might protest, "We're not talking about a shift to some new gold standard, where the dollar is pegged to Bitcoin. We're just talking about purchasing some Bitcoin and putting it on the U.S. balance sheet."
The markets won't see it that way. If the Bitcoin on the balance sheet is just a symbolic gesture, then it will be an extremely expensive symbolic gesture. At current prices, 1 million Bitcoin would cost $100 billion. Of course, it's well known that the U.S. government is an insensitive buyer to price, so the U.S. may ultimately end up purchasing these Bitcoins at $1 million per coin, meaning a cost of $1 trillion. This is a massive expenditure that should be directed towards more meaningful purposes.
I suspect the markets would not view the Bitcoin purchase as symbolic, but rather as the first step towards a dollar reanchored to a Bitcoin-based new commodity standard.
As Austin Campbell stated, this would "accelerate the demise of the dollar, as it would signal to the world that the U.S. is not going to manage its fiscal affairs responsibly and may at some point re-price in Bitcoin."
Assume the probability of the Lummis SBR proposal starts converging to 1. You would see financial markets plunge into collapse. Interest rates would spike dramatically, as U.S. debt investors would start to doubt whether the U.S. is considering a complete abandonment of the Bretton Woods II system.
The cost of capital for everyone on the planet would skyrocket, and inflation could potentially accelerate. With a market crash and a Bitcoin surge, there would be a massive redistribution of wealth.
In other words, the U.S. considering abandoning the relatively stable current monetary system in the short term and replacing it with a monetary standard based not on gold but on a highly volatile emerging asset would provoke utter panic among its creditors.
In my view, if the Lummis-style reserve ever gets close to its target, the markets will go into a frenzy, and Trump will be forced to walk back the policy.
While the BSR supporters may claim they are not advocating for a Bitcoin-based new gold standard, the intentions they state are so radical that if the reserve ever neared reality, the bond market would be in a state of sheer panic.
From a Political Perspective, the SBR is Unwise
I believe any legislation proposing a Bitcoin strategic reserve is completely unworkable in Congress. Just a few weeks ago, I visited some pro-crypto members of Congress in Washington, and the political landscape is grim, with the Republicans holding only a slim majority. They cannot ram through a bill on partisan lines, and I'm not sure the Republicans would even vote for it.
The reserve proponents insist that the executive branch can fund the reserve strategy without legislation. Of course, the executive branch can also spend money without prior Congressional authorization. Bitcoin supporters have proposed various methods. But these methods completely miss the point. A Bitcoin reserve imposed by executive order is undemocratic and likely to be reversed in subsequent administrations if not voted through Congress.
The executive branch can unilaterally decide to wage a costly foreign war and divert funds through various secret programs. But such actions would be highly unpopular, as they would be seen as undemocratic. The balance of powers in our republic dictates that the president takes action, but Congress grants the power (and appropriations). We do not have a despot in charge.
Because Congress controls the purse strings, the American public will be consulted when major spending decisions are made.
Here is the English translation:In other words, in a family, the husband may not mind if his wife occasionally uses his credit card to shop. But if she decides to buy a new car or a house, he will certainly be more willing to be consulted. Of course, mechanically speaking, if the limit is high enough, she may be able to buy a car using her husband's credit card. But that misses the point. She should consult her husband when making such major decisions. The President should consult Congress (and thereby the American people) on any major expenditure, and the Bitcoin reserve is certainly one of those.
You may say "but Trump has the power". That is not the case. He does not have the power to spend hundreds of billions of dollars to establish a Bitcoin strategic reserve. The Bitcoin strategic reserve did not appear in the campaign debates, nor did it appear meaningfully in the media.
In his speech in Nashville, he talked about a Bitcoin reserve (i.e. holding the existing seized Bitcoin), not the government buying additional Bitcoin. Trump is trying to bypass Congress to spend government funds on Bitcoin, which is extremely unpopular politically. This will deplete his limited political capital. Trump's agenda goes far beyond Bitcoin. I expect that even if he is momentarily excited about the concept of the reserve, political logic will ultimately make him clear-headed.
Another problem with using an executive order to force the purchase of Bitcoin is that what is easy to do is also easy to undo. If such a policy is unpopular, a future Democratic administration will undoubtedly immediately sell off the reserve, causing chaos in the Bitcoin market.
What Bitcoin users should hope for is a democratic consensus that a Bitcoin reserve or stockpile is a good idea, and to implement this policy through bipartisan legislation or even a constitutional amendment. Generally, meaningful monetary reform is achieved through legislation, such as the Gold Reserve Act of 1934 or the Gold Clause Resolution of 1977 after Nixon ended the Bretton Woods I system.
Bitcoin users should hope that a Bitcoin reserve can be lasting, not a flash in the pan. Policies based on executive orders by a new Trump administration will not last.
Government Purchase of Bitcoin Will Severely Alienate the Public
Undoubtedly, the SBR policy will be seen as a massive wealth transfer from American taxpayers to wealthy Bitcoin holders. This will be a retrogression that will not be welcomed by the public. Bitcoin holders are a relatively small group. The Federal Reserve found in 2022 that only 8% of American adults hold cryptocurrencies, with a higher proportion of the wealthy.
Even if the funding for SBR comes from some kind of "neutral" fiscal means (such as selling some gold), it will still be seen as undeserved for Bitcoin holders. These funds could be used for anything else, rather than being allocated to Bitcoin holders.
A major monetary policy change that benefits a small portion of Americans will make all non-Bitcoin holders oppose Bitcoin holders. And I suspect many Americans will not understand the logic of SBR, as the dollar is not currently in obvious crisis.
If de-dollarization accelerates, the US falls into some kind of default predicament, interest rates soar, and many other countries start adopting Bitcoin as a reserve asset, people's attitudes may be different ten or twenty years from now. But that is not the case today.
If you remember, student loan forgiveness was quite unpopular, as it was seen as a bailout for the upper-middle-class Americans who were able to go to college and get 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 larger group than Bitcoin holders. Viewed in this light, the uproar over a Bitcoin reserve would be even more severe.
Currently, the financial world is becoming interested in Bitcoin due to its gradual organic adoption. The reserve strategy will pit ordinary Americans against Bitcoin holders, which will severely impact Bitcoin's adoption.
The Bitcoin Reserve Lacks a "Strategic" Purpose
The terminology of SBR is confusing, especially the word "strategic". The US government holds many commodities for truly strategic purposes. The most important of these is the Strategic Petroleum Reserve, which is a means of stabilizing the oil market.
Commendably, Biden has actually sold off a lot of oil at high prices and then bought it back, thereby profiting. We also hold or have stockpiled large quantities of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium, and other rare minerals and medical equipment.
The common thread is that these commodities have some industrial use, and the government has an interest in retaining them for emergencies or to maintain market stability.
In contrast, Bitcoin has no industrial use. The US government does not "need" Bitcoin to trade at any particular price level. It makes no difference to the government whether the trading price of Bitcoin is $1 or $1 million. Bitcoin also does not generate cash flow, so holding a reserve would not help pay interest on future debts.
The only "strategic" role Bitcoin could play is akin to the US government's existing reserve assets like gold and foreign exchange. That is to say, none at all. As George Selgin has painstakingly explained, the US's foreign exchange reserves are actually relatively small compared to other developed countries. This is because the dollar is a true free-floating currency, and the US does not manage this peg at all. The approximately 8,130 tons of gold the US has held since 1971 have no relevant use. They are purely historical legacy, held only out of tradition. The last major intervention in managing the dollar exchange rate occurred in the 1980s.
Supporters of a Bitcoin reserve strategy often greatly overestimate the role of gold in the dollar system. Ultimately, when it comes to the universality of the dollar system, the US government's balance sheet is almost irrelevant.
What really underpins the dollar is:
- US GDP growth, generating tax liabilities that can only be paid in dollars
- The credibility and stability of the US government and monetary policy
- The US capital markets being the world's most attractive and liquid, making it the global investment hub
- Network effects from the dollar's dominance in trade settlement, commodity markets, foreign exchange markets, and debt markets
- The US continuing to play the role of global hegemon and provider of global trade and security
Gold and Bitcoin are fundamentally irrelevant in today's US monetary system. Perhaps they will play a role someday, but the current non-convertible standard is in no way built on a foundation of commodity reserves.
Not Bitcoin or Nothing?
Why hold Bitcoin? Why not something else? Bitcoin holders have not provided a compelling answer. You might say that Bitcoin has significant value (a market cap of around $2 trillion), global liquidity, and is held by many people. But 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 stock?
"Well," you might say, "those are claims on corporate cash flows, not bearer assets. Bitcoin is special because it cannot be seized." However, it is doubtful that Apple or NVIDIA would face the risk of their assets and intellectual property being confiscated. This would be another reason for other countries to oppose the US government acquiring their company stock as a reserve, but we are talking about the US government.
Choosing a Bitcoin reserve over gold also makes no sense. If you want to re-monetize hard assets and use them as the foundation of a monetary system, gold is the obvious choice. If we want to "lead" other countries in reserve assets (a common argument in support of SBR), gold is the perfect choice, as we have more of it than anyone else. Just re-monetize the gold, and we are already ahead.
1. Gold is also a "bearer" asset, as ownership is simply possession of gold bars and ingots, not a claim on anything. If Bitcoin holders successfully convince the US government to exit the Bretton Woods II standard and return to the pre-1971 commodity standard, then gold would indeed be a better choice. It has a longer history, more people own it, its value is about 9 times that of Bitcoin, its volatility is much lower, and we already own it, so monetizing it would be much cheaper. 2. If you don't like gold because it's not a "high-growth" asset like Bitcoin, you can consider fast-growing assets like NVIDIA, Apple, or Microsoft stocks. If we consider what commodities the US might invest in for strategic purposes, my top picks would be AI data centers or chip manufacturing. They serve clear strategic purposes and would also be economically productive. 3. Most conservatives and liberals are skeptical of the government allocating resources in this top-down way, preferring to let the private sector solve the problem. I don't like Biden's massive infrastructure spending, as I think it's very wasteful, so I don't support the government further intruding into the private sector, especially through outright dollar issuance. 4. Typically, the US government does not really use monetary tools to actively intervene in markets beyond setting interest rates; its role is to set rules and maintain system stability, not to actively invest government funds in commodities for intraday trading. (This is why many are skeptical of Biden selling the Strategic Petroleum Reserve.) 5. Creating a Bitcoin reserve makes no sense right now. The dollar is not collapsing, in fact it is thriving. The dollar index has been rising for the past 15 years, which may hurt US manufacturing and other countries with dollar debts. Relative to the rest of the world, the US GDP is growing, especially compared to Europe's slow decline and China's first serious economic crisis since reform and opening up. 6. The only reason to seriously discuss a Bitcoin reserve today is Trump's electoral victory. Bitcoin enthusiasts seized on this for political expediency, hoping he would not only introduce more favorable regulation, but actually become a national-level Bitcoin buyer. 7. But Bitcoin's scale and liquidity are still far from enough to have any impact on the US reserve portfolio, and under a gold standard, it is certainly not ready to become a monetary commodity like gold. Its current value is only about $2 trillion, while gold is worth about $17 trillion. Bitcoin is still extremely volatile and clearly unsuitable as a unit of account. 8. The truth is, there is no need to establish any form of Bitcoin reserve. The US can simply wait patiently and will not suffer any loss. If Bitcoin continues to monetize and ultimately challenge gold, and other countries start using Bitcoin as part of their sovereign wealth funds or even "backing" their national currencies with Bitcoin, the US will still have plenty of time to take action. 9. If the US government really wants Bitcoin, they have ample means to obtain it at any time, whether through open market purchases, price ceilings, banning private ownership and forcing conversion of US-held Bitcoin, or simply confiscating Bitcoin held on domestic platforms. 10. If I were to decide, I would focus on addressing the long-term solvency concerns of the US government, such as reducing the debt-to-GDP ratio, interest costs, and federal net spending as a share of GDP. Strengthening the fundamentals of the US economy and dollar would be a more prudent approach than creating a Bitcoin reserve.- Do everything possible to increase GDP growth. This means cheaper energy, nurturing high-growth industries like artificial intelligence, and opening up the private sector
- Reduce the size of government spending to reduce the deficit, as government spending is far more wasteful than an equivalent amount of capital in private markets
- Limit political interference in the US dollar market, for example, recognizing that the dollar's sanction power is at odds with its international utility
- Allow inflation to persist for a period of time to reduce the real debt burden
The good news is that the incoming Finance Minister, Scott Bessent, has basically implemented this with his 3-3-3 plan. We don't need Bit.
