Donald Trump will do something “crazy” or “big” with Bitcoin strategic reserve policy

It's no secret that Donald Trump was dead against bitcoin and cryptocurrencies a few years ago.

During his first term as US president, Trump declared that cryptocurrencies are “not money” and that their value is “highly volatile and based on nothing.”

Fast forward to 2024, the Republican politician has changed his tune.

During his re-election campaign, Mr. Trump was the keynote speaker at a Bitcoin convention. He started his own crypto company (World Liberty Financial) and received millions of dollars in donations (in the form of bitcoin, ether and XRP) from his supporters, including a handful of pro-crypto billionaires .

Since pledging to make America the “cryptocurrency capital of the world,” Trump's promises to enact cryptocurrency-friendly policies have helped propel bitcoin's value to new heights. records (up to $108,000 ($173,000) in mid-December).

Trump has also appointed cryptocurrency advocates to key positions in his administration.

However, one of Trump's most controversial policies is the creation of a “strategic bitcoin reserve” which would essentially require the United States to store bitcoins and hold them for a substantial period of time.

At this point, there are not many details on what a strategic reserve would look like.

Some analysts expect the value of the highly volatile cryptocurrency to continue to rise, particularly if the U.S. government uses taxpayer money to purchase large quantities.

Loading…What is a strategic reserve?

When people talk about “strategic reserves,” they most likely mean oil.

One of the best-known examples is the United States Strategic Petroleum Reserve (SPR), an emergency stockpile of crude oil created by the Gerald Ford administration in 1975.

This was a response to the Arab oil embargo, which caused serious damage to the American economy (with rising gasoline prices, inflation, and unemployment).

More recently, in 2022, these crude stocks came in handy when the Biden administration released a record 180 million barrels from the SPR to soften the impact of the oil price surge caused by the US invasion. Ukraine by Russia.

China also has strategic reserves, containing millions of tonnes of copper, aluminum, zinc and other metals essential to its real estate and technology sectors.

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Canada also gets a special mention for being the only country to have a strategic reserve of maple syrup, the supply of which fell to 3.1 million kilos last year, its lowest level in 16 years.

The idea is that these raw material stocks can be released in an emergency, to minimize the impact of supply shortages and inflationary shocks.

It is clear that bitcoin, which has only existed for 15 years, has nothing in common with oil, industrial metals and maple syrup.

Although a reserve supply of oil, for example, can be used as fuel for tanks and fighter jets in a national emergency, the usefulness of bitcoin as an emergency resource is questionable.

And while the government's purchase of Bitcoin could help crypto investors by boosting prices, its benefits to the economy are harder to discern.

The practical aspect of a Bitcoin reserve

Mr Trump told a crowd of supporters at the Bitcoin Convention in Nashville in May that the US government would never sell its Bitcoin holdings if he won the election.

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“For too long, our government has violated the cardinal rule that every bitcoiner knows by heart: never sell your bitcoin,” he said at the time.

But the United States already owns around 200,000 Bitcoin tokens worth more than $21 billion ($33.6 billion).

This is the result of the US government's seizure of bitcoins belonging to criminal syndicates, including the high-profile shutdown of illegal drug marketplace Silk Road.

At this point, the most concrete proposal for a bitcoin reserve comes from a young, pro-crypto Republican senator called Cynthia Lummis. (She had previously interviewed for the role of Trump's interior secretary, but was unsuccessful).

In July, she circulated a bill in Washington (which has not yet passed the House of Representatives) that would create a U.S. bitcoin reserve.

The Wyoming senator's Bitcoin bill, if signed into law, would require the Treasury to purchase 1 million Bitcoin tokens over a five-year period, with funding coming from Federal Reserve deposits and gold reserves.

The United States would end up owning about 5% of the world's bitcoin supply, capped at around 21 million under his proposal, and the government would have to maintain the bitcoin stock for at least 20 years.

Critics say Lummis's bill, if seriously considered by Congress, would face significant hurdles, at the very least, because it would likely involve the U.S. government adding to its already exorbitant national debt of 36 trillion dollars.

And recent events in the House of Representatives have shown that any proposals to increase spending and raise the debt ceiling (even to avoid a government shutdown) would face strong opposition.

Even within Trump's own party, 38 Republicans voted with Democrats to reject a spending bill backed by the new president.

Given that Republicans have a slim majority in the House (220 seats to Democrats' 215) and are not a unified cohort, it is highly unlikely that a strategic Bitcoin reserve will sit at the top of their legislative priorities.

Additionally, if the Trump administration were to fund bitcoin purchases by issuing new Treasury debt, it would likely face strong resistance from the U.S. Federal Reserve.

Last week, Federal Reserve Chairman Jerome Powell said the US central bank was not looking to hold bitcoin in its reserves.

“We are not allowed to own Bitcoin,” Mr. Powell said.

“The Federal Reserve Act says what we can own, and we're not looking to change the law. That's the kind of thing Congress needs to consider, but we're not looking to change the law at the Fed. “

Federal Reserve Chairman Jerome Powell said the US central bank is not looking to hold Bitcoin in its reserves. (AP: Jacquelyn Martin)

Protection against inflation or a “crazy” idea

Earlier this month, Trump told CNBC: “We're going to do something great with crypto because we don't want China, or anyone else, to adopt it, and we want to be ahead.”

Essentially, the argument is that if the United States does not accumulate bitcoins, China and other geopolitical rivals will.

Thus, the fear of missing out (FOMO) and potential geopolitical risks (if US adversaries manage to accumulate a huge amount of cryptocurrency) are factors to take into account.

Lummis says her bill could lead the United States to cut its debt in half in 20 years.

“It helps us protect against inflation and protect the U.S. dollar on the world stage,” she told Fox Business in November.

She also wrote, in a letter published in the Wall Street Journal: “While there may be short-term volatility, in the long term, a Bitcoin reserve like this will serve as an important and stable store of value. “

But this assumes that the value of Bitcoin continues to increase over the long term (which is not guaranteed, despite what its true believers claim).

Although the government's purchase of Bitcoin could help crypto investors by boosting prices, its benefits to the economy are harder to discern. (Provided: Pixabay)

On the other hand, former Treasury Secretary Larry Summers dismissed Trump's idea of ​​a bitcoin stash, calling it a “politically motivated” move aimed at propping up its value and rewarding the president-elect's major donors .

“Part of what's being said, this idea that we should have some sort of national bitcoin reserve, is crazy,” he said in an interview with Bloomberg in early December.

“Of all the prices to support, why would the government choose to support, by accumulating a barren stockpile, a bunch of bitcoins.”

“There is no reason to do this other than to pander to generous special interest campaign contributors.”

As bitcoin nears record highs, it has seen dramatic sell-offs, or “crypto winters,” in the past.

More recently, its value fell by more than 70% between November 2021 and November 2022.

Although it has since rebounded above $100,000, this outcome (along with the outcome of the US election and the crypto policies that would be introduced) were by no means certain.

Given the huge price swings and continued volatility, there is always a risk that a taxpayer-funded purchase of Bitcoin could end up threatening the financial security of the United States instead of protecting it.

What happens to the price is anyone's guess.

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