Bitcoin reserves: Making or breaking the dollar's global position?

Recently, the concept of "strategic Bit reserves" has begun to generate heated discussion among Bit enthusiasts. Trump had proposed retaining a batch of confiscated Bits, and some proposals have gone even further. Currently, legislative drafts such as the "Bit Act" (BITCOIN Act) proposed by Senator Lummis suggest that the U.S. government acquire 1 million Bits within five years.

Among Bit enthusiasts, the establishment of a "strategic reserve" is almost seen as a matter of course. But I don't think this is likely to happen, nor do I think it's a good idea.

Let me explain.

Are we talking about hoarding, sovereign wealth funds, or reserves?

First, on the concept of "hoarding" Bits. Trump, in a pre-election speech in Nashville, promised: "I hereby declare that if I am elected, the policy of the U.S. government will be to retain 100% of all the Bits we currently hold or acquire in the future. [...] These Bits will form the core of the national strategic Bit reserve."

But that's not what I'm talking about. (In fact, I strongly support the idea of hoarding.) What I'm referring to is the U.S. government actually acquiring more Bits. The scope of various proposals ranges from acquiring about 800,000 Bits (BPI), to 1 million (Lummis), to 4 million (Robert F. Kennedy II).

Senator Lummis, Michael Saylor, and the Bit Policy Institute (and many others) have been discussing the idea of establishing a "strategic Bit reserve".

Under Senator Lummis' framework, the U.S. government would acquire 1 million Bits within five years and hold them for at least 20 years. The explicit logic of this reserve is to "strengthen the U.S. fiscal position, providing a hedge against economic uncertainty and monetary instability." Lummis' bill specifically states that the SBR (Strategic Bit Reserve) will "reinforce the status of the dollar" and equate it with the role of gold in the past monetary era.

It's important to note that these proposals differ from the concept mentioned by George Soros of acquiring Bits through a sovereign wealth fund. As far as I know, the main proponents of the SBR do not view it as an asset in the national investment portfolio - they explicitly link Bits to the dollar and claim that Bits will actually strengthen the dollar's position. This means they envision a monetary system in which Bits play some kind of active role - currently similar to the role of foreign exchange reserves, but potentially becoming the actual basis of a new commodity standard (like Bretton Woods I) in the future. (If anyone thinks I'm exaggerating, just read the words written by the SBR advocates themselves.)

To be clear, I'm not opposed to simply holding the confiscated Bits (which I think is the policy Trump will ultimately adopt), nor am I opposed to putting Bits in a sovereign wealth fund (although the U.S. currently doesn't have such a fund). What I oppose is the creation of a "strategic" Bit reserve and the conferring of any form of monetary role upon it.

Bit reserves will weaken, not support, the dollar

My main point is that Bit reserves will not strengthen the dollar's position. Unlike other countries, the U.S. is the issuer of the global reserve currency. Other countries can try to incorporate Bits into their foreign exchange reserves, and some have already done so.

For countries like Russia or Iran, it may be reasonable to consider incorporating non-confiscatable assets into their foreign exchange reserves, especially after the U.S. confiscated Russia's sovereign debt in 2022. But the U.S. does not need to hedge its exposure to the dollar, as it is the issuer of the dollar itself.

If the U.S. purchases Bits and confers upon them some monetary role - whether as a foreign exchange reserve or a more prominent role - this will imply that the U.S. has lost confidence in the current dollar-based system.

If the U.S. government explicitly states that it is reconsidering the entire Washington Consensus, it will cause systemic disruption. Currently, the "support" for the dollar comes from:

• The U.S.'s role as the global trade manager;
• The robust resilience of the U.S. economy;
• The creditworthiness of the U.S. government;
• The projection of U.S. hard and soft power;
• The depth of the U.S. securities market;
• The widespread use of the dollar in global trade and finance.

If the U.S. government suddenly announces "we are reconsidering the entire Washington Consensus," the markets will start to wonder what the government knows.

• Are they planning to default?
• Are they going to dismantle the Bretton Woods institutions?
• Do they anticipate massive deficits and soaring interest rates?

To be clear, I don't think the U.S. government is considering these things, but I do believe bond traders would immediately feel concerned.

"But we're not talking about a new gold standard, the dollar's value depends on Bits. We're just talking about buying some Bits and putting them on the U.S. government's balance sheet." You might protest.

But the market won't see it that way. If Bits are merely symbolic on the balance sheet, then it will be an extremely expensive symbol. One million Bits at current prices would cost $100 billion - and if the U.S. government is perceived as an insensitive buyer, the U.S. may end up acquiring these Bits at $1 million each, costing $1 trillion for the reserve. This is an extremely significant expenditure that should be spent elsewhere.

I suspect the market will view the purchase of Bits as a symbolic gesture, rather than as the first step in a return to a new commodity standard with the dollar based on Bits rather than gold.

As Austin Campbell said, this will "accelerate the decline of the dollar, as it will signal to the world that the U.S. does not intend to manage its fiscal affairs well and may at some point re-price in Bits."

Assume the possibility of something like a Lummis-style Bit reserve actually starts to approach 1. You would know, because financial markets would enter a state of disaster. Investors in U.S. debt would start to doubt whether the U.S. is considering severing ties with the Bretton Woods system, and interest rates would spike dramatically.

The cost of capital for everyone globally would rise sharply. Inflation may intensify. Massive redistribution of wealth would occur as financial markets collapse and Bits skyrocket.

In other words, if the U.S. considers abandoning the relatively stable monetary system in the short term and replacing it with a currency standard not based on gold, but on a highly volatile, emerging asset, it will cause utter panic among its creditors.

In my view, even if we approach something like a Lummis-style reserve, the markets will preemptively start to spin out of control, and Trump will be forced to rescind this policy.

While the advocates of Bit reserves may claim they are not advocating for a fully new gold standard based on Bits, their intentions (again, just read their proposals) are radical enough that if the reserve gets closer to reality, they will severely disrupt the U.S. Treasury market.

Bit reserves would be politically unwise

To me, any legislation proposing a Bit reserve would be completely ineffective in Congress. This is a conclusion I've drawn from personal experience, having visited some pro-crypto members of Congress in Washington a few weeks ago. The current situation in Congress is delicate, with the Republicans holding a slim majority. They cannot push through partisan initiatives, and I don't even think the Republicans will vote as a unified bloc on this issue.

The reserve's supporters insist that the executive branch can find funding to establish a reserve without legislation. It's true that the executive branch can find ways to spend money without prior Congressional authorization. But this completely misses the point. A Bit reserve imposed by executive action would be undemocratically imposed, and if Congress doesn't vote to support it, this situation may be overturned in subsequent administrations.

It can be thought of this way. The executive branch can unilaterally launch a costly foreign war and find cash through various opaque schemes. Such measures would be highly unpopular, as the people would rightly see them as undemocratic. The power structure of our republic stipulates that the President exercises functions, but Congress authorizes (and approves) them. We do not have a dictator in power.

Because Congress controls fiscal spending, American citizens are effectively consulted on major spending decisions.

In other words, in a household, a husband may not mind his wife using his credit card for small purchases. But if she decides to buy a new car or a house, he would certainly want to be consulted. Of course, mechanically, she might be able to use her husband's credit card to buy a car, as long as the limit is high enough. But that misses the point. She should consult her husband for such major decisions. The President should consult Congress (indirectly representing the American people) for any major expenditure. And a BIT reserve would certainly fall into this category.

"But Trump had an authorization," you might say. But that is not the case. He did not have authorization to spend hundreds of billions of dollars to establish a BIT reserve. Trump did not discuss this issue in his campaign. It did not receive attention in debates or the news.

He mentioned a BIT reserve (e.g., holding existing forfeited BITs) in his Nashville speech, rather than additional government purchases of BIT. Trump is trying to bypass Congress to use government funds for BIT, which would be extremely unpopular. It would consume his limited political capital. And Trump's agenda is far beyond just the BIT issue. I think this political logic will ultimately become clear to him, even if he is momentarily excited about the idea of a reserve.

The problem with unilaterally purchasing BIT through executive order (assuming this is even feasible) is that if this practice is imposed, it will be very easy to overturn. If this policy is unpopular - and I believe it will be - a future Democratic administration will certainly immediately sell off that reserve, causing chaos in the BIT market.

BIT holders should hope for a democratic consensus, either through bipartisan legislation or even a constitutional amendment, that a BIT reserve or BIT holding is a good policy. Major monetary policy changes are generally achieved through legislation, such as the Gold Reserve Act of 1934 or the Gold Clause Resolution of 1977, after Nixon's suspension of the Bretton Woods I system.

BIT holders should hope for a BIT reserve that is durable, not ephemeral. Policies implemented by a new Trump administration based on statutory authority through executive order will not be durable.

A US government purchase of BIT would greatly alienate the public

Undoubtedly, a BIT reserve (SBR) policy will be seen as a massive wealth transfer from American taxpayers to already wealthy BIT holders. This would be extremely unfair and unpopular. According to a 2022 survey, the Federal Reserve found that only 8% of American adults hold crypto assets, even among this group with relatively higher wealth.

Even if the SBR is financed in a "fiscally neutral" way (e.g., by revaluing the market price of gold and selling some gold), it will still be seen as a gratuitous gift to BIT holders. These funds could be used for any purpose - they will be earmarked for BIT.

A major monetary change that benefits only a tiny minority of Americans will make those who do not hold BIT resentful of BIT holders. I doubt many Americans will be able to understand the logic of the SBR, as the US dollar is not currently in obvious crisis.

If you recall, the student loan forgiveness policy was quite unpopular, as it was seen as a bailout for the middle and upper classes who were able to go to college and obtain useless liberal arts degrees. (Interestingly, Elizabeth Warren proposed a $640 billion one-time expenditure without Congressional approval in 2019/20 to completely eliminate student loans. I suspect BIT holders would have a different attitude.)

Biden's student loan forgiveness plan will benefit around 43 million Americans, a much larger group than BIT holders. The fierce opposition to a BIT reserve will be even more severe.

Currently, the financial world is gradually and organically accepting BIT. If there is a reserve policy, it will make ordinary Americans hostile to BIT holders, which will seriously complicate the acceptance process of BIT.

A BIT reserve has no "strategic" purpose

The actual term "strategic BIT reserve" is confusing, especially the "strategic" part. The US government holds some commodities for genuine strategic purposes. Most importantly, the Strategic Petroleum Reserve is a means to stabilize the oil market.

Biden has done well in this regard, selling large amounts of oil when prices were high and buying it back at lower prices later, making a profit. We also hold or have held large stockpiles of heating oil, natural gas, grains, dairy products, rare minerals like cobalt, titanium, tungsten, helium, and medical equipment.

The common feature of these commodities is that they have some utilitarian use, and the government has an interest in maintaining these commodities for emergencies or market stabilization.

In contrast, BIT has no industrial use. The US government does not "need" BIT at any particular price level. The government is indifferent to the trading price of BIT, whether it is $1 or $1 million. BIT also does not generate cash flow, so a BIT reserve would not help with future interest payments on debt.

The only possible "strategic" use of BIT would be equivalent to the US government's existing reserve assets, such as gold and foreign exchange - in other words, useless. As George Selgin has detailed, the US actually holds relatively little foreign exchange reserves. This is because the dollar is a truly free-floating currency, and the US does not manage exchange rates at all. The approximately 8,130 tons of gold held by the US since 1971 have had no practical use whatsoever, they are just held for traditional reasons. The last major intervention to manage the dollar exchange rate was in the 1980s.

BIT holders discussing a BIT reserve often overstate the role of gold in the dollar system. Ultimately, the US government's balance sheet is almost irrelevant in the broader context of the dollar system.

The real factors supporting the dollar are:

• US GDP growth, creating tax burdens that can only be paid in dollars
• The credibility and stability of the US government and monetary policy
• The attractiveness and liquidity of US capital markets globally, making it the "sink" for global investment (in dollars)
• Network effects from the dollar's dominance in trade settlement, commodity markets, foreign exchange markets, and debt markets
• The US's continued role as the global hegemon and guarantor of global trade and security

Gold and BIT currently have no practical significance in the US monetary equation. Perhaps one day they will play a role, but the current non-convertible standard is not based on any commodity reserve.

There is no compelling argument for a unique SBR for BIT

Why hold BIT? Why not choose something else? BIT proponents have yet to provide a convincing answer. You might say BIT is highly valued (around $2 trillion) and highly liquid globally, and held by many people. Well, BIT is not unique in this regard. If you support the argument for a BIT reserve, the same could apply to, say, Apple or Nvidia stock.

"Well," you might say, "those are claims on corporate cash flows, not just a token asset. BIT is special because it cannot be seized or interfered with." But the US does not face the risk of its own assets and intellectual property being confiscated. This would be an argument against another country acquiring a reserve of US corporate stock. But we are talking about the US government.

There is no reason to hold Bit rather than including gold. If you want to remonetize a hard asset and use it as the basis of a monetary system, gold is clearly the preferred choice. If we want to "lead" other countries in terms of reserve assets (a common argument in support of an SBR), gold is perfect, as we have more of it than anyone else. We just need to remonetize gold (reprice it from the official price to the current market price), and we are already ahead.

Gold is also a "title" asset, as ownership is not a claim on anything else, but simply owning bars and ingots. If Bit proponents succeed in convincing the US government that we should exit the Bretton Woods II standard and return to a pre-1971 commodity-based standard, then gold is indeed a better choice. It has a longer track record, is more widely held (so remonetizing it will alienate fewer people), its value is about nine times that of Bit, it is much less volatile, and we already own it, so monetizing it will be far cheaper (if not free).

If you object to gold because it is not a "high-growth" asset like Bit, then you can consider fast-growing (and productive) assets like NVIDIA, Apple, or Microsoft. If we consider commodities the US might strategically invest in, my preference would be AI data centers or chip manufacturing. They have an obvious strategic significance and also economic productivity. However, we then enter a discussion of using fiscal or Federal Reserve resources for "industrial policy".

Most conservatives and liberals are skeptical of the government's way of allocating resources in this manner, preferring to let the private sector solve it on its own. I don't like Biden's massive infrastructure spending because I think it is extremely wasteful, so I don't support further government intrusion into the private sector, especially through direct money printing.

Typically, the US government does not intervene in markets in ways other than setting interest rates; its role is to set the rules of the game and maintain system stability, not actively invest government funds into commodities for day trading. (This is also why many are skeptical of Biden releasing from the Strategic Petroleum Reserve.) We are a market-oriented capitalist economy, not a centrally planned one. The government should not manage a commodity hedge fund.

That work should be left to the private sector, with the government only stepping in for certain urgent strategic necessities to bolster reserves of critical commodities. Ultimately, the US government still benefits from the private sector's investment in commodities and assets, through capital gains taxes.

I would trust fund managers and capital allocators to do this, not bureaucrats.

There's no argument for acquiring an SBR today

Why do we need to establish a Bit reserve now? What is the particular moment that makes establishing a Bit reserve an urgent priority right now? There is no particular reason. The dollar is not collapsing - in fact, it is thriving. The US dollar index has been rising for the past 15 years, which may be detrimental to US manufacturing and foreign countries holding dollar liabilities.

The US's GDP relative to the rest of the world is growing, especially in Europe, which is slowly declining, and China, which is facing its first serious economic crisis since Deng. US stocks have vastly outperformed other countries globally, with the US stock market accounting for about 50% of the global total. There is no sign these trends will not continue.

"But the dollar is declining relative to hard assets like gold," you might say. "Its purchasing power is declining, as evidenced by the relatively high inflation and volatile inflationary environment we are in." But the dollar is not in obvious crisis.

Interest rates are a bit higher than the past decade, but no one is panicking about the US government's solvency. The dollar's share of global foreign exchange reserves has declined over the past few decades, but there is no real crisis there either. The dollar still dominates globally, with no clear competitors anywhere. The stagnant euro or (managed) renminbi have neither the capability nor the ambition to challenge the dollar as the global reserve asset of choice.

The only reason to discuss an SBR today is Trump's electoral victory. Bit proponents seized on this for politically expedient reasons, hoping he would not only introduce more favorable regulation, but actually become a national-level Bit buyer.

But Bit is not large enough or liquid enough to have a place in the US's reserve asset portfolio, and certainly not suitable to be a monetary base like gold. Its current market cap is only $2 trillion, while gold's is $17 trillion. Bit is still extremely volatile, clearly unsuitable as a unit of account (if we were to transition to some Bit-denominated dollar system).

Bit proponents just need more patience. Bit has performed remarkably in its short 15-year lifespan, gradually becoming a significant global monetary asset. It has undergone full institutionalization, with ETFs becoming its ultimate mainstream validation.

Over time, its volatility will diminish (as its market cap and liquidity increase), and it will become a more suitable asset for governments to consider in their asset portfolios. But as of now, it has no significant role in the US monetary system.

Be careful what you wish for

The fact is, there is no urgency to establish any form of reserve. The US has no reason not to wait. If Bit continues to monetize, and ultimately challenges gold, with other countries adopting Bit as part of their sovereign wealth or even "Bit-backing" their currencies, the US will have ample time to act.

US institutions, investors, and individuals own more Bit than anyone else. The US government has ample means to acquire Bit at any time, if they truly desire it.

They could buy Bit on the open market. Most likely, I think, they would choose the option of price caps, prohibiting private ownership, and forcibly converting any Bit held by the US, just as they did with gold in 1933.

They could simply confiscate the Bit held on domestic platforms - the US-based custodians are the largest. The US government could nationalize the miners. They could raise capital gains taxes and demand payment in kind. They could arrest known large Bit holders and seize their funds. They could invest resources in developing sufficiently good quantum computing to steal the ~4 million Bit that are quantum vulnerable.

"Wait, that's not how it would be." But therein lies the problem. You don't get to decide how the US government acquires Bit. If you succeed in convincing them of Bit's merits, and they do set their sights on it, they will do so through the most politically expedient means.

This may not necessarily align with what is best for US Bit holders. If the choice is to buy 1 million Bit at $1 million per Bit ($1 trillion), or simply confiscate 1 million Bit through other means, they will choose the more efficient method.

If not Bit, how should we shore up the dollar?

The US government's long-term solvency is indeed an issue. Debt/GDP is near a historic high of 120%. Interest costs as a percentage of GDP have reached a 60-year high and are still rising. Federal net spending as a percentage of GDP is also at a century-high, second only to World War II and the post-war period.

While the deficit has come down from its pandemic peak, it remains elevated, and would lack buffer space if the economy slips into recession. The reckless spending of the past four years (in fact, a bipartisan consensus on this) has led to the outbreak of inflation, which we are still grappling with.

The dollar's share of global foreign exchange reserves has declined from 70% to 60% over the past 25 years (though no other currency has gained a meaningful share individually). And some debt buyers are now uneasy about purchasing US Treasuries, especially after the US confiscated Russia's reserves in 2022.

All of this points to potential long-term issues for the dollar, even if there is no immediate crisis. If we experience an economic downturn, and the government finds itself unable to undertake large-scale stimulative spending, due to interest rates already being quite high and us running massive deficits, the situation could change.

If I were in charge, I would do the following:

• Improve GDP growth through any possible means. This means allowing energy to be cheaper, promoting high-growth industries such as artificial intelligence, and generally liberating the private sector
• Reduce the size of government spending, which is more wasteful than an equivalent amount of capital in the private market, in order to reduce the deficit
• Limit political interference in the US dollar market, such as recognizing the trade-off between the usefulness of the US dollar's sanction power and its value in the international arena
• Allow inflation to run at a high point for a period of time in order to reduce the actual burden

The good news is that the new Finance Minister Scott Benson's 3-3-3 plan basically does this. No Bit is needed.