Trump Sparks Talk of Bitcoin as Strategic Reserve Asset

LAS VEGAS, NEVADA — Trump's embrace of digital assets during his election campaign has shed new light on… [+] the role bitcoin could play as a strategic reserve asset (Photo by David Becker/Getty Images)

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We want all remaining Bitcoins to be made in the USA!

In an article published on Truth Social last month, Republican presidential candidate Donald Trump expressed his support for bitcoin. In the same article, he acknowledged the geopolitical importance of the world’s largest cryptocurrency, warning that any policies aimed at hindering bitcoin only help China and Russia. Trump’s statement not only positioned him as the first pro-bitcoin candidate of a major political party, but also brought into focus discussions about classifying bitcoin as a strategic reserve asset.

These discussions are gaining traction in political circles thanks to political leaders who are pro-bitcoin. Former presidential candidate Vivek Ramaswamy, for example, has been advising President Trump on bitcoin and digital assets since January. Ramaswamy took a unique stance in the final weeks of his campaign by proposing that the dollar be backed by a basket of commodities that could eventually include bitcoin.

Ramaswamy’s plan echoes a similar proposal by independent presidential candidate Robert F. Kennedy, Jr., in which a small percentage of U.S. Treasuries would be backed by a hard currency, gold, silver, platinum, or bitcoin. The goal behind Ramaswamy and Kennedy’s proposals is to curb inflation by pegging the dollar to deflationary assets that hold their value over time.

Senator Cynthia Lummis, the crypto queen of Congress, is another proponent of using bitcoin to improve the nation’s finances. In February 2022, she suggested that the Federal Reserve diversify the $40 billion in foreign currencies it holds on its balance sheet by adding bitcoin. And she continues to see benefits in holding the digital currency as part of the nation’s financial portfolio.

After Trump hinted at bitcoin’s growing political importance, I asked Senator Lummis for her take on the discussions around bitcoin as a strategic reserve asset. Senator Lummis seems enthusiastic about the idea. In her words: Bitcoin is an incredible store of value, and I certainly see the benefits our country would get from diversifying its investments.

Trump, Lummis, Kennedy and Ramaswamy represent a new generation of policymakers open to the potential of bitcoin as a tool for economic governance.

So how could the United States leverage a digital asset like bitcoin to bolster its own fiscal health and geopolitical position?

Leveraging Bitcoin as a Strategic Reserve Asset

To answer this question, I reached out to Alex Thorn, head of enterprise-wide research at Galaxy Digital. Thorn has written extensively about the impact bitcoin could have on the global financial system. And he sees value in the idea of ​​bitcoin as a strategic reserve asset.

As a decentralized, global commodity currency with robust properties, bitcoin will undoubtedly play an increasing role in geopolitics and international trade, Thorn said. What started as hobbyists using their personal computers has evolved into industrial manufacturing, institutional wallets and corporate balance sheets. There is every reason to believe that bitcoin’s network layer will expand further to include nation states.

Here’s the logic behind Thorns’ thinking: As with any scarce commodity, whether it’s oil, gold, or rare earths, countries often compete fiercely to secure the lion’s share of the resources. And as one of the scarcest commodities on the planet, there’s little reason to believe bitcoin would be any different, especially if its value continues to grow as many financial analysts predict.

For example, Jurrien Timmer, director of global macroeconomics at Fidelity, has described bitcoin as exponential gold. If it reached parity with gold’s current market capitalization, a single bitcoin would be worth about $700,000, or ten times its current value. The potential for stratospheric returns makes it all the more attractive for governments to accumulate bitcoin now rather than wait for other countries to do so first.

Despite the lack of a coherent bitcoin strategy, the United States is currently leading the digital gold rush. It is the largest bitcoin holding nation-state, having seized most of its bitcoin stack from illicit actors over the past decade. The country also has the most network nodes, the highest hash rate, and the most bitcoin of any country in the world. And if Trump wins in November, the country would have its first pro-bitcoin president.

These factors place the United States in a strong position to become the MicroStrategy of Nations, should that be a policy priority for a future administration.

Case Studies: MicroStrategy and El Salvador

MicroStrategy is a traditional tech company that was in decline in the 2010s. But it catapulted back into the spotlight in August 2020 after announcing that it had begun accumulating bitcoin as a Treasury reserve asset.

Since that announcement, MicroStrategy's stock price has increased by more than 900%, and it is now the largest bitcoin holding company in the world. The company currently owns 226,000 bitcoins in total, more than the United States or any other country.

Some financial policymakers are now wondering whether MicroStrategy's success can be replicated on a nation-state scale. El Salvador is a compelling beta test for that strategy.

In 2021, El Salvador’s President Nayib Bukele declared bitcoin legal tender and announced that the country would begin purchasing bitcoin as a treasury reserve asset. El Salvador made about 50% on the bitcoin it purchased before the bull market. And President Bukele has made it clear that he intends to hold bitcoin for the long term. In his words: “We will not sell, of course.” Ultimately, 1 BTC = 1 BTC.

Scaling the MicroStrategy Manual

The United States could notably use bitcoin as a strategic reserve asset, drawing inspiration from the models of MicroStrategy and El Salvador.

As the largest nation-state holding bitcoin, the United States already has a head start on other countries in accumulating digital gold. But classifying and then treating bitcoin as a strategic reserve asset would accelerate the nation-state race for bitcoin.

As Alex Thorn explains, simple game theory states that adoption by one nation requires that other nations consider the same thing, whether they are friends or enemies.

This game theory could only accelerate if the United States, the world’s richest nation and home to global capital, were the first developed country to begin accumulating bitcoin as a strategic reserve asset. This move would accelerate the global acceptance of bitcoin as a long-term savings instrument and a form of digital gold. In this scenario, the United States would enjoy the largest windfall of profits among OECD countries thanks to its first-mover advantage.

To weigh the pros and cons

Of course, as with any bold strategy, there are always tradeoffs. To get a broader sense of the pros and cons of adopting bitcoin as a strategic reserve asset, I reached out to Matthew Pines, a national security researcher at the Bitcoin Policy Institute.

Among the benefits, Pines said the move could position the U.S. well against authoritarian challengers (who may be considering their own diversification and hard asset hedging strategies) while signaling its intention to lead the emergence of open digital financial networks.

But among the downsides: This strategy would face considerable challenges, including regulatory hurdles, the introduction of additional uncertainty into the U.S. Treasury market (even though it can serve as a substitute for gold for tangible assets on the national balance sheet), and political opposition that could compromise its sustainability.

Combining Bitcoin and Stablecoins

Policymakers could, however, ease uncertainty in the U.S. Treasury market by combining a bitcoin adoption strategy with vigorous promotion of dollar-based stablecoins.

Stablecoin providers are now the 18th largest holders of U.S. debt, holding approximately $120 billion in U.S. Treasuries. To put that figure in perspective, stablecoin providers now hold more U.S. Treasuries than some of the U.S.’s largest trading partners, including Germany and South Korea. Additionally, brokerage firm Bernstein predicts that the stablecoin market will grow exponentially over the next decade, reaching a total market cap of $3 trillion by 2028.

As former House Speaker Paul Ryan wrote in the Wall Street Journal last month, USD-denominated stablecoins could create unprecedented demand for U.S. Treasuries and even avert a debt crisis. Ryan says it’s incumbent on U.S. policymakers to see stablecoins for what they are: a generational opportunity to expand dollarization and shore up the Treasury market.

A comprehensive digital asset strategy is essential to achieving this goal. Such a strategy would seek to increase demand for U.S. debt through stablecoins while simultaneously strengthening the country’s overall balance sheet through bitcoin.

A strong balance sheet, bolstered by bitcoin in the early stages of nation-state adoption, could only improve the resilience of the U.S. economy. And a stronger economy would only increase confidence in Treasuries, backed by the full faith and credit of the U.S. government. With this strategy, policymakers could thus lay the groundwork for an unexpected future in which bitcoin and the dollar grow together.

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