Trump's policies are not very OK! Experts oppose 'US reserves BTC': fear weakening the US dollar

Recently, the concept of Strategic Bitcoin Reserve (SBR) has started to gain widespread attention. Trump advocates continuing to hold the BTC seized by the US government, but some proposals go further, such as Senator Lummis' recent legislative proposal to suggest that the US government purchase 1 million BTC within five years.

BTC enthusiasts believe that the proposition of strategic reserves has almost become a foregone conclusion. But I think this is unlikely, and BTC strategic reserves are not a good idea. Allow me to explain.

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

First of all, it is important to clarify the concept of BTC "reserve". In his speech at the Nashville BTC Conference, Trump promised: "I declare that if I am elected, my administration, the United States of America, will adopt a policy of retaining all BTC currently held or acquired in the future by the U.S. government... This will effectively become the core of the national BTC strategic reserve."

I strongly support the idea of the US government maintaining its BTC holdings, but I do not support buying more BTC. Some proposals suggest the government to buy a large amount of BTC: from around 800,000 BTC (BPI), to 1 million BTC (Lummis), and up to 4 million BTC (RFK Jr).

Senators Lummis, Michael Saylor, and BTC Policy Research Institute have been discussing the 'BTC Strategic Reserve (SBR)'.

According to Senator Lummis's framework, the US government will purchase 1 million BTC within five years and hold it for at least 20 years. His logic is to "strengthen the US's financial position, hedge against economic uncertainty and currency instability." Lummis's bill explicitly states that SBR will "strengthen the position of the US dollar" and compares it to the role of gold in previous currency eras.

It's important to distinguish these proposals from George Selgin's idea of buying BTC in a sovereign wealth fund. As far as I know, the main advocates of SBR do not see it as an asset in a national investment portfolio. They explicitly link BTC to the US dollar and suggest that BTC will actually strengthen the dollar. This means that they envision a monetary system in which BTC plays a positive role. Currently, it plays a role similar to foreign exchange reserves, but perhaps in the future, it will become the actual basis for a new commodity standard, just like the Bretton Woods system. (For those who think I'm exaggerating, you just need to read what the SBR advocates have written.)

It should be clear that I am not opposed to the idea of retaining the existing seized BTC (which I believe is the policy Trump will ultimately adopt), nor am I opposed to the idea of putting BTC into a sovereign wealth fund (although the US does not have a sovereign wealth fund). Instead, I am opposed to the idea of creating a BTC strategic reserve and giving it any form of monetary function.

BTC reserves will weaken rather than strengthen the US dollar

My main point is that BTC reserves will not strengthen the US dollar. Unlike other countries, the United States issues the global reserve currency - the US dollar. Other countries can try to buy BTC, and in fact, some countries are doing so.

If you are from Russia or Iran, it may be reasonable to consider adding an unencumbered asset to your foreign exchange reserves, especially after the United States confiscated Russian government debt in 2022. But the United States does not need to hedge its exposure to the dollar, as it issues the dollar itself.

Buying BTC and giving it a currency role (whether as forex reserves or a more significant role) signifies that the US has lost confidence in the current dollar-based system.

This means that the US government has abandoned the inconvertible legal currency standard, which will throw the system into chaos. Currently, the dollar is supported by various aspects such as the US role as a global trade manager, the stability of the US economy, the solvency of the US government, the ability of the US to demonstrate hard and soft power, the depth of the US securities market, and the ubiquity of the dollar in global trade and finance.

If the US government suddenly changes its position, saying "We are reconsidering the entire Washington Consensus," the market will begin to wonder what is going on with the government. Are they planning to default? Will they dissolve the Bretton Woods institutions? Are they hinting at huge deficits and high interest rates?

It should be noted that I believe the government has not considered these things, but bond traders will immediately be concerned.

You may protest, 'We're not talking about switching to some new gold standard where BTC would be pegged to the US dollar. We're just talking about buying some BTC and putting it on the US balance sheet.'

The market won't see it this way. If the BTC on the balance sheet is just a symbol, then it will be a very expensive one. At the current price, one million BTC will cost 100 billion US dollars. Of course, it is well known that the US government is a buyer insensitive to price, so the US may eventually buy these BTC at a price of 1 million US dollars per coin, which means spending 1 trillion US dollars. This is a significant expense that should be spent on other more meaningful things.

I suspect the market will not see the purchase of BTC as symbolic, but as the first step towards the return of the US dollar as the new commodity standard supported by BTC.

Austin Campbell said, this will "accelerate the demise of the US dollar, as it will signal to the world that the United States does not intend to manage its finances properly and may reprice in BTC at some point."

Assuming the probability of the LummisSBR proposal begins to converge to 1. You will see the financial markets collapse. Interest rates will soar because US debt investors will start to doubt whether the US is considering completely abandoning the Bretton Woods system II.

The cost of capital for everyone on earth will rise sharply, and inflation may intensify. With the financial market crashing and BTC skyrocketing, there will be a large-scale redistribution of wealth.

In other words, the United States is considering abandoning its current relatively stable monetary system in the short term and replacing it with a currency standard based not on gold but on highly volatile emerging assets, which will cause thorough panic among its creditors.

In my opinion, once the Lummis-style reserve approaches its target, the market will go crazy and Trump will be forced to withdraw the policy.

Although BSR supporters may claim not to advocate the establishment of a new gold standard based on BTC, their stated intentions are very radical, and if reserves become a reality, the bond market will panic.

From a political perspective, SBR is unwise.

I believe that any proposed legislation to establish a strategic reserve of BTC is completely unworkable in Congress. Just a few weeks ago, I visited some members of Congress who support cryptocurrencies in Washington, and I witnessed it firsthand. The situation in Congress is severe, with the Republican Party only having a slight advantage. They cannot forcefully pass a bill based on partisan disputes, and I am not sure if the Republican Party will vote on it.

Supporters of the reserve strategy argue that the executive branch can raise funds for the reserve strategy without passing laws. Of course, the executive branch can also spend money without prior authorization from Congress. BTC supporters have proposed various methods. However, these methods completely miss the point. BTC reserves imposed by executive order are undemocratic and are likely to be abolished in subsequent administrations if not voted on by Congress.

The executive branch can unilaterally decide to launch a costly foreign war and divert funds through various secret plans. However, such actions would be highly unpopular as they would be seen as undemocratic. The power balance in our republic dictates that the president takes action, but Congress grants the power (and appropriations). We do not have a tyrant in power.

As the Congress controls the purse, American citizens are consulted when making major spending decisions.

In other words, in a family, a husband may not mind if his wife occasionally uses his credit card for shopping. But if she decides to buy a new car or a house, he would definitely prefer to be consulted. Of course, in terms of mechanism, if the credit limit is high enough, she may be able to buy a car with her husband's credit card. But that's not the point. She should consult her husband when making such major decisions. The president should seek the opinion of Congress (and then the American people) on any major expenditure, and BTC reserves certainly fall into this category.

You may say, 'But Trump has the power.' That's not true. He doesn't have the power to spend billions of dollars to establish a BTC strategic reserve. The BTC strategic reserve did not appear in the election debates, nor did it appear significantly in the media.

In his speech in Nashville, he talked about the BTC reserve (holding the existing seized BTC), not the government's additional purchase of BTC. Trump tried to bypass Congress to spend government funds on BTC, which is extremely unpopular politically. This will exhaust his limited political capital. Trump's agenda is far more than BTC. I expect that even if he is temporarily excited about the concept of reserves, political logic will eventually make him clear.

Another issue with forcing the purchase of BTC through executive orders is that what is easy to do is also easy to revoke. If such a policy is unpopular, a future Democratic government will undoubtedly immediately sell off reserves, causing chaos in the BTC market.

BTC users should hope for a democratic consensus, i.e., it is a good idea for BTC reserves or inventory, and this policy should be implemented through bipartisan legislation or even constitutional amendments. Generally, meaningful monetary reforms are achieved through legislation, such as the Gold Reserve Act of 1934 or the Gold Clause Resolution of 1977 after Nixon suspended the Bretton Woods system.

BTC users should hope that BTC reserves can be sustainable, rather than a flash in the pan. The policy implemented by the new Trump administration based on executive orders will not be lasting.

The US government's purchase of BTC will seriously alienate the public.

Without a doubt, the SBR policy will be seen as a massive transfer of wealth from US taxpayers to wealthy BTC holders. This will be a step backwards and will not be welcomed by the public. BTC holders are a relatively small group. The Federal Reserve will find in 2022 that only 8% of US adults hold cryptocurrencies, with a higher proportion being wealthy individuals.

Even if the source of SBR funds is in some 'neutral' way, such as selling some gold, it will still be considered as something that BTC holders should not get. These funds can be used for anything else, instead of being allocated to BTC holders.

A major currency policy change that benefits a small fraction of Americans will turn everyone who does not hold BTC against BTC holders. And I doubt many Americans will understand the logic of SBR, because the dollar does not currently have a clear crisis.

If the dollarization accelerates, the United States falls into some kind of default dilemma, interest rates soar, and many other countries start to adopt BTC as a reserve asset, then people's attitudes may be different in ten or twenty years. But that's not the case today.

If you remember, student loan forgiveness is quite unpopular, as it is seen as a bailout for upper-middle-class Americans who are able to go to college and obtain worthless liberal arts degrees. (Interestingly, Elizabeth Warren proposed a unilateral plan in 2019/2020 to spend $640 billion to cancel student loans, but it was ultimately rejected by Congress.)

Biden's student loan forgiveness plan will benefit approximately 43 million Americans, a group larger than BTC holders. As a result, the turmoil caused by BTC reserves will be even more severe.

Currently, due to the gradual organic adoption of Bitcoin (BTC), the financial industry is becoming interested in BTC. The reserve strategy will create a confrontation between ordinary Americans and BTC holders, which will seriously affect the adoption of BTC.

BTC reserves have no 'strategic' purpose

The terminology of SBR is puzzling, especially the word "strategic". The US government holds many commodities that are truly used for strategic purposes. Most importantly, strategic petroleum reserves are a means to stabilize the oil market.

It is worth noting that Biden actually sold a large amount of oil at a high price and then bought it back, thus making a profit. We also hold or have previously stockpiled a large amount of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium, and other rare minerals and medical equipment.

The common point is that these commodities have some industrial use, and the government is interested in retaining them for emergencies or maintaining market stability.

In contrast, BTC has no industrial use. The U.S. government does not 'need' BTC to trade at any specific price level. Whether the trading price of BTC is 1 dollar or 1 million dollars, it makes no difference to the government. BTC also does not generate cash flow, so reserves will not help pay interest on future debts.

The only 'strategic' role that BTC can play is equivalent to the existing reserve assets of the US government, such as gold and foreign exchange. In other words, it has no effect. As George Selgin painstakingly explains, compared to other developed countries, the US's foreign exchange reserves are actually relatively small. This is because the US dollar is a truly free-floating currency, and the US does not manage this peg at all. Since 1971, the approximately 8130 tons of gold held by the US have no relevant use. They are purely a historical legacy held only out of tradition. The last significant intervention in managing the US dollar exchange rate occurred in the 1980s.

Supporters of BTC reserve strategy often greatly overestimate the role of gold in the US dollar system. Ultimately, when it comes to the universality of the US dollar system, the US government's balance sheet is almost irrelevant.

What really supports the US dollar is:

The growth of the US GDP can only be paid in US dollars.

The credibility and stability of the US government and monetary policy

The US capital market is the most attractive and liquid market in the world, making it a global hub for investment

The network effect generated by the dominant position of the US dollar in trade settlement, commodity markets, foreign exchange markets, and debt markets.

The United States continues to play the role of global hegemon and global trade and security guarantor.

Gold and BTC are fundamentally unimportant in today's US monetary system. Perhaps one day they will play a role, but the current non-convertible standard is not built in any way on the basis of commodity reserves.

Bitcoin is a must?

Why reserve BTC? Why not something else? BTC holders have not yet provided a convincing answer. You might say that BTC is valuable (with a market value of about 2 trillion US dollars), has global liquidity, and is held by many people. However, BTC is not unique in this respect. Can you make an argument to support BTC reserves, and wouldn't this argument also apply to Apple or NVIDIA stocks?

"Okay," you might say, "these are claims on the company's cash flow, not bearer assets. BTC is unique in that it cannot be seized." However, it is speculated that Apple or NVIDIA would not face the risk of their assets and intellectual property being confiscated. This would be another reason for a country to oppose acquiring US equity as reserves, but we are talking about the US government.

Choosing BTC reserves instead of gold also doesn't make sense. If you want to monetize hard assets and use them as the basis of a monetary system, gold is the obvious choice. If we want to 'lead' other countries in terms of reserve assets (a common argument in support of SBR), gold is the perfect choice because we have more gold than anyone else. Just monetizing the gold puts us ahead.

Gold is also a 'bearer' asset, as ownership is not a claim on anything, just a simple possession of gold bars and ingots. If BTC holders successfully convince the US government to abandon the Bretton Woods system II standard and return to the commodity standard before 1971, then gold would indeed be a better choice. It has a longer history, more people own it, its value is approximately 9 times that of BTC, its volatility is much lower, and we already own it, so monetizing it would be much cheaper.

If you don't like gold because it's not a "high-growth" asset like BTC, you can consider fast-growing assets such as NVIDIA, Apple, or Microsoft stocks. If we consider what commodities the US may invest in for strategic purposes, my preference is AI data centers or chip manufacturing. They serve obvious strategic purposes and are also economically productive. We will then discuss using resources from the Treasury or the Federal Reserve for "industrial policy".

Most conservatives and liberals are skeptical of the government's top-down allocation of resources and prefer to let the private sector solve this problem. I don't like Biden's massive infrastructure spending, which I think is a waste, so I don't support further government intrusion into the private sector, especially through blatant dollar issuance.

In general, the US government does not actively intervene in the market by using monetary tools, apart from setting interest rates; its role is to establish rules and maintain system stability, rather than actively investing government funds in intraday trading of commodities. (This is why many people are skeptical of Biden's sale of strategic oil reserves.) We are a market-based capitalist economy, not a centrally planned economy. Managing commodities is not the government's job for hedge funds.

This is for the private sector, and the government will only intervene when there is an urgent strategic need to increase reserves of certain important commodities. Ultimately, if the American private sector invests in appreciating commodities and assets, the US government will still benefit from capital gains taxes.

There is no point in establishing SBR now

Why create BTC reserves now? What is so special about BTC reserves that makes it urgent? No. The US dollar is not collapsing. In fact, it is thriving. The US dollar index has been rising for the past 15 years, which may harm the interests of US manufacturing and other countries with US dollar debt.

Compared to other regions of the world, the GDP of the United States is growing. Especially in Europe, it is experiencing a slow decline, while China is facing its first major economic crisis since the reform and opening up. The US stock market is outperforming other regions of the world, accounting for about 50% of the global stock market. These trends will continue.

You might say, 'But the US dollar is falling relative to hard assets like gold. Its purchasing power is decreasing, and we are in an era of unpredictable inflation.' But the US dollar doesn't seem to be in crisis.

Interest rates are slightly higher than they have been over the past decade, but there is no panic about the US government's ability to pay. The US dollar's share of global foreign exchange reserves has declined somewhat over the past few decades, but there is no real crisis. The dollar still dominates globally, with no potential challengers anywhere. Neither the struggling euro nor the managed renminbi has the capability or ambition to challenge the dollar's status as the preferred global reserve asset.

The only reason for the serious discussion of SBR today is Trump's election victory. BTC enthusiasts have seized upon this for political expediency, hoping that it will not only introduce more favorable regulation but also truly become a national-level BTC buyer.

But the scale and liquidity of BTC are far from sufficient to have any impact on the US reserve portfolio, and under the gold standard, it is definitely not ready to become a monetary commodity like gold. Its current value is only about 2 trillion US dollars, while the value of gold is about 17 trillion US dollars. BTC is still extremely unstable and obviously not suitable as a unit of account.

BTC holders should be more patient. BTC has performed very well in its short 15-year lifespan and is becoming an important global monetary asset.

Over time, its volatility will ease (its market value and liquidity will grow), making it a more suitable asset for governments to consider in their investment portfolios. However, at present, it does not play a meaningful role in the US currency system.

BTC reserves may not be what you want

The fact is that there is no need to establish any form of BTC reserves. The United States just needs to be patient and there will be no losses. If BTC continues to monetize and eventually challenge gold, other countries will include BTC as part of their sovereign wealth funds and may even begin to use BTC to 'support' their national currencies. In that case, the United States still has enough time to take action.

More BTC is held by American institutions, investors, and individuals than anyone else. If the US government really wants BTC, they have ample means to obtain it at any time.

They can buy BTC through the open market. In my opinion, it is more likely that they will choose a cheaper option by setting a price ceiling, prohibiting private ownership, and forcing the exchange of BTC held by Americans, just like they did with gold in 1933.

They can also simply confiscate the BTC held on domestic platforms. The US custodian is the largest custodian to date. They can nationalize BTC mining companies. They can increase capital gains tax and insist on physical payment. They can arrest individuals known to hold large amounts of BTC and confiscate their funds. They can invest resources in developing quantum computing capable of stealing approximately 4 million BTC vulnerable to quantum attacks.

"Wait... it's not like that." But that's the problem. You can't dictate how the US government acquires BTC. If you successfully persuade them of the benefits of BTC and they are truly determined to reserve BTC, they will do so in the most politically advantageous way.

This may not necessarily be in the best interest of American BTC holders. If they have to choose between buying 1 million BTC at a price of $1 million each and confiscating 1 million BTC through other means, they would choose the more efficient method.

If there is no Bitcoin, how should we support the US dollar?

The long-term solvency of the US government is undoubtedly worrisome. The debt-to-GDP ratio is close to its highest historical level of 120%. The proportion of interest costs to GDP has reached its highest level in 60 years and continues to rise. Federal net expenditures as a proportion of GDP are at their highest level in the past century, second only to the levels during and after World War II.

Although the deficit has declined from its peak during the COVID-19 pandemic, it remains stubbornly high, leaving us little breathing room if an economic recession hits. The reckless spending of the past four years has led to an explosion of inflation that we are still grappling with.

In the past quarter-century, the US dollar's share of global foreign exchange reserves has declined from 70% to 60%. After the US confiscated Russia's reserves in 2022, some buyers are now cautious about buying US treasuries.

All of this suggests that the dollar may have long-term problems, although there doesn't seem to be an immediate crisis. If we experience an economic recession and the government finds itself unable to engage in large-scale stimulus spending, this situation may change, as interest rates are already quite high and we are facing massive deficits.

If it were up to me, I would do the following:

Do everything possible to increase GDP growth. This means cheaper energy, cultivating high-growth industries such as 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 equivalent capital in the private market

Restricting political intervention in the US dollar market, for example, recognizing that the power of sanctions on the US dollar is in conflict with its international utility

Allowing inflation to persist for a period of time to reduce the actual debt burden

The good news is that Scott Bessent, the incoming Secretary of the Treasury, has basically achieved this with his 3-3-3 plan. We don't need Bitcoin.

【Disclaimer】There are risks in the market, and investment should be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views, or conclusions in this article are suitable for their specific situation. Investing based on this is at your own risk.

This article is authorized to be reproduced from: 'Foresight News'

Original author: Nic Carter, Partner at Castle Island Ventures

The article 'Trump's policies are not very OK! Experts oppose 'US reserves BTC': may weaken the US dollar' was first published in 'Crypto City'.