Handicapping The Chances of a Strategic Bitcoin Reserve
Author: Chris Wood
Donald Trump made a speech at the annual Bitcoin conference held in Nashville in late July becoming the first presidential candidate, or indeed former president, to embrace digital gold.
Aside from the usual colourful Trumpian rhetoric, the Republican presidential candidate made a core proposal to establish an official US Bitcoin strategic reserve.
Trump said he would establish a national "stockpile" of Bitcoin using the Bitcoin the US government currently holds that was largely seized in law enforcement actions.
The US government currently holds 203,239 Bitcoins, or 1% of the total maximum supply of Bitcoin of 21m.
The Financial Times’ LEX column referred to Trump’s comments as “verbiage” at the time (see Financial Times article: “Trump’s pitch to the crypto enthusiasts is lacking in logic”, 31 July 2024).
But this writer thinks it is interesting.
Indeed backing the dollar with Bitcoin is a good idea, just as is backing the dollar with gold from the perspective of owners of the US dollar who want to see it preserve its value.
In this respect, Trump has adopted an idea first proposed by Republican Senator Cynthia Lummis.
Indeed Lummis announced on the same day as Trump’s speech a proposal to establish a “strategic Bitcoin reserve” by implementing a Bitcoin purchase program over a set period of time to acquire a total stake of 1m Bitcoin or approximately 5% of the total Bitcoin supply.
Then on 31 July Lummis officially introduced the Strategic Bitcoin Reserve bill in the Senate.
The intent in the proposed legislation is to purchase a maximum of 200,000 Bitcoins per year over a five-year period for a total acquisition of 1m Bitcoins.
While the government should hold all Bitcoin acquired for not less than 20 years during when no Bitcoin held in the Strategic Bitcoin Reserve may be sold except for the purpose of paying down the national debt.
Clearly, it is doubtful in the extreme that Lummis’ bill has a chance of becoming law in this Congress.
But the prospects of such legislation in the next Congress will depend on the outcome of the coming November elections.
With an estimated 50m Americans owning Bitcoins this represents a significant number of voters from an electoral standpoint.
The appeal of backing the dollar with Bitcoin is that it provides one potential solution to the calamity which will face the current fiat paper system should markets suddenly conclude that G7 government bonds are no longer risk free.
This is not as far-fetched an outcome as it might sound.
An interesting way of looking at this dynamic was expanded on in the referenced article published on the Satoshi Nakamoto Institute on 4 July 2014 (“Speculative Attack” by Pierre Rochard, 4 July 2014).
In that article Rochard laid out, as he related in a subsequent article published in July on the tenth anniversary of the original article (“Speculative Attack, Season 2: The Case for the Greatest Pair Trade in History”, co-authored by Pierre Rochard and Allen Farrington, Axiom BTC Capital, 4 July 2024), the investment case for borrowing fiat to buy Bitcoin.
As he notes in the second article, since Bitcoin was priced at US$630 on the day of publication of the original article the subsequent return was over 100x in dollar terms or around 58% annualised as of 1 July.
But as he also notes in his latest article the case for borrowing dollars to own Bitcoin has now become even stronger with “roughly one third of all dollars in existence having been printed in the past four years, never mind ten”.
He also argues that “the more mainstream Bitcoin becomes, the more compelling the speculative attack will be”, in terms of borrowing dollars or other fiat currencies to buy Bitcoin.
If Bitcoin is still far from mainstream, it is certainly the case that it is a lot closer to the mainstream than it was back in 2014 with quoted Bitcoin ETFs trading in the US and the currency openly championed by a US presidential candidate.
The El Salvadorean Miracle
Meanwhile there is already an interesting precedent for backing a currency with Bitcoin.
In 2021 El Salvador made Bitcoin legal tender.
But, as Rochard notes, a less discussed part of President Nayib Bukele’s strategy has been to accumulate Bitcoin on the country’s balance sheet, just as would happen if Lummis’ proposed legislation became law in America.
Bukele announced in November 2022 that the country would buy one Bitcoin every day.
El Salvador now has 5,896 Bitcoins on its balance sheet.
So far this has been a major positive for El Salvador’s US dollar bonds as its credit rating has improved of late and its dollar borrowing cost has fallen.
Moody’s upgraded El Salvador’s sovereign credit rating by two notches from Caa3 to Caa1 in May.
While the yield on the El Salvador US dollar bond maturing 2052 has declined from a peak of 36.3% in July 2022 to 10%.
As for the authors of the LEX article, this writer recommends they buy some Bitcoin.