The Perils of Trump's Proposed Bitcoin Strategic Reserve

In 2021 Trump called bitcoin a "scam" but he seems to have
realized his political coalition includes cryptocurrency enthusiasts.

Fourteen years ago, bitcoin was an experimental obscurity mainly popular among cypherpunks and libertarians, trading for less than a U.S. dollar. Since then, it has proven its success as a mostly swift and affordable way to move value globally, while experiencing unprecedented leaps in exchange value for dollars—as well as massive volatility. (Bitcoin first broke $100 in April 2013 and as of this writing is above $54,000.) Former President Donald Trump recently suggested that it's time for the United States to form a bitcoin strategic reserve.

"The government has violated the cardinal rule that every bitcoiner knows by heart: Never sell your bitcoin," said Trump, speaking to the Bitcoin Conference in Nashville in July. He vowed if he's president again that the U.S. will "keep 100 percent of the bitcoin [it] currently holds or acquires into the future" instead of, as it now does, occasionally auctioning it off through the U.S. Marshals service that confiscated much of it from accused criminals who, in some cases, stole the bitcoin. The government already possesses around 200,000 bitcoin.

This boosterism was a change of heart: In 2021 Trump called bitcoin a "scam" and a danger to the dollar's international dominance, but he seems to have
realized his political coalition includes cryptocurrency enthusiasts.

Sen. Cynthia Lummis (R–Wyo.) has introduced a bill to make that strategic reserve real, working toward government ownership and stewardship of a million bitcoin—nearly 5 percent of the total amount that will ever exist, via purchases of 200,000 bitcoins a year for five years. The cost of that yearly purchase as this is being written would be $11.2 billion.

To finance these purchases, Lummis suggests revaluing Federal Reserve gold certificates to current market value (rather than the $42 an ounce established decades ago) and requiring the Fed to kick back to the Treasury in newly created cash money the amount of the increase in value of the certificates.

A previous huge and important U.S. strategic reserve was for petroleum, founded in 1975 as a response to price and supply disruptions after the 1973 Arab oil embargo. (The federal government also stockpiles medical supplies, foreign currencies, materials of military manufacturing importance, grains, and gold.) The way the U.S. has handled the petroleum reserve doesn't indicate it'd be a smart steward of any future bitcoin one.

As economist Alan Reynolds explained on the Cato Institute's blog in 2022, the government has mostly continued to buy more petroleum even at higher prices (which made the reserve, Reynolds concludes, "in the early 1980s….in effect, a price support program for OPEC oil") and to sell, when it does, at lower prices than the petroleum was bought for.

Bitcoin devotees have a strong incentive to go gaga over this idea, and many have. It would directly push prices upward by increasing demand, put billions of government dollars (taxpayer dollars) a year into the hands of private sellers, and signal to the world's big money powers, sovereign and private, that bitcoin is officially ratified by the world's richest and most powerful government.

Some concerns in the bitcoin community over the idea are about vibes: Wasn't this bitcoin experiment supposed to be about a financial system outside government control, not something for the state to co-opt for its own economic goals? Lummis sells the idea as a way to reduce future debt, which depends on bitcoin continuing to rise in value—something that is not guaranteed. Her bill would require the government to hold the bitcoin it buys for 20 years except for sales to reduce national debt.

But the government being a buyer and holder of the coin doesn't inherently give it any more control over your use of the coin than it already has. (The feds have proven in criminal investigations that bitcoin's pseudonymity can be highly porous.)

A more concrete worry is the government making market-disrupting moves at any time. The scheme could also turn bitcoin holders and miners into one more politically powerful rent-seeking force pushing the government to pursue policies to benefit them.