This week, the Trump administration unveiled a project that elicits enthusiasm from the crypto community, skepticism from critics, and indifference from the general public: a “bitcoin strategic reserve.”
New York (CNN) — This week, the Trump administration unveiled a project that elicits enthusiasm from the crypto community, skepticism from critics, and indifference from the general public: a “bitcoin strategic reserve.”
Though the terminology may sound dull and insipid, understanding the ensuing debate in straightforward terms is worth your while. Keep reading.
What is the Strategic Bitcoin Reserve?
According to Trump’s executive order, the United States would essentially pool all bitcoin obtained through criminal and civil forfeitures and maintain it as a reserve asset — akin to how gold and oil are stored.
Supporters of this initiative argue that the reserve could serve as a safeguard against financial uncertainty in a future scenario where cryptocurrencies might take the place of conventional money from central banks. They contend that investing in bitcoin could offer a means to reduce the national debt. (However, it’s worth noting that selling off such holdings would likely result in a price drop, and unlike oil, bitcoin isn’t usable to energize the US economy.)
The rationale behind establishing a reserve hinges on a (albeit slight) possibility that the Federal Reserve could mismanage the dollar. “It’s a ‘small, small chance,'” Jason Yanowitz, co-founder of the crypto news platform Blockworks, explained to me. “But in that scenario, assets like gold and Bitcoin could serve as hedges against dollar depreciation and inflation.”
Critics challenge the logic of linking America’s financial trajectory to a speculative and highly unstable asset. They warn that the reserve might merely function to inflate bitcoin’s value, benefitting early investors, including about 30 prominent crypto CEOs who met with the president for discussions on Friday.
How would it work?
The White House order indicates that the reserve will use only the bitcoin that has been confiscated by law enforcement. (Currently, there is an estimated $17 billion worth of bitcoin from various legal cases gathered over the years. Generally, the Treasury sells these assets to compensate victims and strengthen law enforcement.)
Officials have stressed that taxpayer money will not be used to purchase additional bitcoin.
However, the order permits the Treasury and Commerce departments to devise “budget neutral” strategies for acquiring more bitcoin.
“We’re only allowed to buy more if it doesn’t contribute to the deficit or the debt, or impose costs on taxpayers,” crypto czar David Sacks stated ahead of the White House’s crypto summit on Friday.
Why did bitcoin fall on the news?
Many crypto investors were hoping for a bolder strategy regarding bitcoin purchases, rather than just reallocating existing government assets.
Following President Trump’s signing of the executive order establishing the reserve, bitcoin’s price fell from approximately $90,000 to $85,000 on Thursday evening.
There may also have been a sentiment of “buy the hype, sell the news” surrounding Friday’s crypto summit.
The US dollar is the reserve currency globally. Why would we need a bitcoin reserve, too?
That’s a great question! The dollar is the cornerstone of worldwide finance. Interestingly, bitcoin was designed to replace the dollar, not support it. This is one reason economists are skeptical about the bitcoin reserve — undermining confidence in the US dollar is the last thing anyone wants to do.
OK, but, like, what even is bitcoin?
In simple terms, it’s a form of computer code. It isn’t a physical asset you can hold — if you own bitcoin, it’s stored in a digital wallet secured by a complex password, which needs to be kept safe, lest you become one of the early adopters who can’t access their crypto fortune. (This is one of the many criticisms directed at it; there’s no customer service to turn to if you find yourself in a jam.)
Despite being labeled cryptocurrency, it can be used to purchase very little. (Unless you’re on the dark web — but I’m not here to guide you there.)
The most compelling rationale for using bitcoin, if you can handle its volatility, is viewing it as a store of value — a sort of “digital gold.” This is particularly appealing to those in countries with weak currencies. Advocates of the digital gold theory argue that, despite its unpredictable price fluctuations, bitcoin’s value has skyrocketed over 1,000% in the last five years.
Bitcoin remains the most popular cryptocurrency, but there are thousands of others available.
Bottom line
Investing in crypto (including bitcoin) is notoriously risky. The sector’s past is littered with high-profile scams. So, like any investment, it’s crucial to exercise caution. Conduct thorough research — and by that, I mean read extensively beyond this simplistic article.
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