Author:Arunkumar Krishnakumar
Compiled by: TechFlow
Key Points
The US Treasury Department plans to invest $76 billion in Bitcoin over the next five years, using it as a long-term hedge against inflation and economic instability.
Bitcoin will be stored in secure, Treasury-managed vaults, with strict custody measures to ensure the security and transparency of the assets.
Incorporating Bitcoin could potentially reduce US debt and serve as a diversification tool, although its volatility and market impact remain a concern.
This plan could solidify Bitcoin's legitimacy and promote institutional adoption, potentially stabilizing its price in the long run.
The US Treasury Department, established in 1789, is responsible for managing the federal government's financial affairs, including tax collection, currency issuance, and public debt oversight. Its primary duty is to maintain the nation's financial stability, provide funding for government operations, and promote economic growth. The Treasury operates through the issuance of government bonds, bills, and securities, which are considered among the safest investments globally due to the full backing of the US government.
The idea of incorporating the top cryptocurrency BTC into government finances was initially explored by smaller economies like El Salvador, which adopted Bitcoin as legal tender in 2021.
What are Treasury Assets?
Treasury assets are part of the federal government's financial reserves, typically including cash reserves, gold, and securities. Several key criteria are considered when selecting Treasury assets. Here's how Bitcoin currently measures up to these criteria.
Liquidity
Liquidity refers to the ability to quickly convert an asset into cash without significant loss. The higher the liquidity, the healthier the asset is typically considered. Bitcoin is one of the most liquid digital assets globally, with annual trading volume in the trillions. The Treasury could quickly liquidate its holdings, although large transactions may impact market prices.
Security
Assets must have a minimal risk of default or depreciation. Assets with high counterparty credit risk or exposure to volatile markets may not be suitable. Bitcoin is decentralized and censorship-resistant, providing a hedge against political or economic instability. However, risks include network attacks and the need for secure custody solutions.
Stability
Treasury assets should not exhibit extreme valuation volatility. Bitcoin's volatility remains its biggest drawback. Its value can fluctuate significantly within hours, in contrast with the Treasury's preference for stable assets like US Treasuries or gold.
Yield
While security is paramount, generating moderate returns helps sustain government operations. Unlike traditional Treasury assets, Bitcoin does not produce interest. However, its price appreciation over the past decade makes it a strong candidate for capital gains. For example, if Bitcoin's historical annualized growth rate of around 200% continues, it could far outpace traditional assets.
Bitcoin in the US Treasury
Proponents of incorporating Bitcoin into the US Treasury argue that Bitcoin, with its 21 million hard supply cap and decentralized nature, can serve as a hedge against inflation and currency devaluation.
Companies like MicroStrategy and Tesla have gained attention for adding Bitcoin to their corporate treasuries, demonstrating its potential as a reserve asset. The driving factor behind this strategy is the belief that Bitcoin can outperform traditional fiat reserves and serve as an uncorrelated asset to hedge economic uncertainty.
The victory of Donald Trump in the November US presidential election and his nomination of Paul Atkins, a crypto-friendly candidate, as the SEC chair, played a crucial role in the crypto market, driving Bitcoin prices to $100,000.
The 2024 Nashville Announcement
In the third quarter of 2024, the Trump administration announced a major plan in Nashville to allocate a portion of the US Treasury's reserves to Bitcoin. This move aimed to diversify the nation's asset portfolio and leverage the potential advantages of digital assets. The specific details include:
Investing 2% of the Treasury's reserves in Bitcoin
Phased purchases over 24 months to minimize market impact
Custody to be shared between private sector partners and government regulatory agencies.
This announcement sparked heated discussions in the political and economic spheres, with critics questioning its rationale and potential risks, while supporters viewed it as a bold step towards the financial future.
The Bitcoin Reserve Act of 2024
Senator Cynthia Lummis proposed the Bitcoin Reserve Act of 2024, which suggests that the US Treasury establish a national Bitcoin reserve, aiming to acquire 1 million Bitcoins over five years, at a rate of 200,000 per year. This move is intended to position Bitcoin as a strategic asset to combat inflation, reduce national debt, and strengthen the US's global financial leadership.
Here are the key points of this plan:
Investment Plan
The Treasury plans to gradually invest around $76 billion in Bitcoin over five years to mitigate the impact of price volatility.
Secure Storage
Bitcoin will be stored in Treasury-managed digital vaults, with a minimum holding period of 20 years.
Custody arrangements and partnerships are yet to be announced, but will ensure strict security standards.
Bitcoin storage will utilize the highest levels of physical and digital security infrastructure.
Liquidation Guidelines
The proposal outlines strict liquidation rules, allowing sales only under specific circumstances. For example, digital assets from forks or airdrops in the strategic Bitcoin reserve cannot be sold or disposed of within five years, unless legally authorized.
These restrictions aim to stabilize market impact and maintain the value of Bitcoin as an economic downturn hedge.
Transparency and Monitoring
The bill requires transparent reporting and a secure custody framework.
A blockchain-based monitoring system and independent audits will be implemented.
Quarterly reporting of transactions and Bitcoin reserve balances is mandated.
With the political support in Congress and the push from industry leaders, this bill is gaining momentum. It aims to position the US as a global leader in cryptocurrency, while sparking discussions on the economic risks and volatility associated with cryptocurrencies.
Impact on the US Treasury's Risk Profile
Volatility Risk: Bitcoin's price volatility is significantly higher than traditional Treasury assets. The Treasury will need to develop a robust risk management strategy to address potential price fluctuations.
Liquidity Considerations: While Bitcoin is more liquid than many assets, large-scale Treasury transactions could disrupt market prices. Over time, this asset has shown sensitivity to supply and demand shocks in the market cycle.
Inflation Hedge: Bitcoin's limited supply makes it an ideal tool to combat inflation, providing the Treasury with a diversified option for its reserve strategy.
Impact on U.S. Government Debt
Credit rating agencies may reassess the risk profile of the U.S. Treasury. Holding Bitcoin may be viewed as speculative, potentially impacting the U.S.'s AAA credit rating. Bitcoin may not be able to satisfactorily meet the three criteria of liquidity, safety, and stability like gold.
Any downgrade in credit ratings could therefore lead to an increase in government bond yields, raising debt servicing costs. However, if Bitcoin performs well, it could strengthen the Treasury's financial position, offsetting this risk.
Traditional U.S. debt instruments, historically seen as safe-haven assets, may face scrutiny from conservative investors. Conversely, institutions with a pro-Bitcoin stance may increase demand. Another argument against serious scrutiny is that, according to the Nashville Announcement, only an estimated 2% of the entire Treasury's assets are expected to exist in the form of Bitcoin.
Impact on Bitcoin Price
Large-scale purchases by the U.S. Treasury could trigger a significant rise in Bitcoin prices, cementing its status as a macroeconomic asset. However, even before the U.S. Treasury begins large-scale Bitcoin purchases, news of the Federal Reserve evaluating Bitcoin as a reserve currency could lead to supply shocks, causing prices to surge abruptly.
The approval of a spot Bitcoin exchange-traded fund (ETF) in the U.S. would bring much-needed legitimacy and credibility to the asset and its asset class. The U.S. Treasury's move to hold BTC as a reserve asset could further drive global institutional adoption, strengthening Bitcoin's legitimacy in financial markets.
With the U.S. Treasury becoming a significant holder, as well as major countries and large companies purchasing Bitcoin, this top-tier crypto asset may become less volatile over time, similar to the early decades of gold.
U.S. Debt and Bitcoin Reserves
By 2024, the U.S. government's national debt exceeds $33 trillion, posing an urgent economic issue. The idea of using Bitcoin reserves to alleviate this debt presents interesting possibilities. If Bitcoin experiences significant appreciation, the Treasury could sell a portion of its holdings to reduce debt.
Assuming the U.S. holds a $50 billion Bitcoin reserve at an average purchase price of $30,000 per coin. If the Bitcoin price rises to $150,000 per coin, these reserves would be worth $250 billion, creating $200 billion in profits.
While this would only have a minor impact on the overall debt, it could make a meaningful contribution to specific fiscal programs or interest payments. Bitcoin reserves could serve as a geopolitical and financial tool, reducing reliance on fiat reserves and diversifying from traditional assets under inflationary pressure. Additionally, Bitcoin may help balance deficits in the event of the dollar's value being eroded by inflation.
In the short term, Bitcoin is unlikely to become a primary tool for managing national debt. Its role will be more supplementary, providing diversification and potential inflation hedging. However, if Bitcoin matures into a globally recognized stable reserve asset akin to gold, it could play a larger role in fiscal strategy.
Currently, Bitcoin's true contribution lies in modernizing the Treasury's asset management approach, demonstrating an openness to innovation while maintaining a focus on long-term fiscal sustainability.
