The Argument for National Cryptocurrency Reserves

Take outs:

• On January 23, 2024, U.S. President Donald Trump signed an executive order to create a cryptocurrency advisory council. This group will help shape U.S. digital asset policies, collaborate with Congress on crypto legislation, and work with agencies like the SEC and CFTC to advance a Bitcoin reserve proposal.
  
  
• Countries and institutions are increasingly holding Bitcoin as part of their reserves, similar to gold. Bitcoin is seen as a hedge against inflation, currency devaluation, and economic instability. Nations like El Salvador and the Central African Republic have even made Bitcoin legal tender to assert financial sovereignty. 
   
• Corporations like MicroStrategy and Tesla, along with publicly traded companies and investment funds, are increasingly adding Bitcoin to their balance sheets. This highlights growing institutional confidence in Bitcoin as a store of value.
  
  
• The main risk of Bitcoin reserves lies in its volatility and the potential for geopolitical tension if large-scale accumulation by countries like the U.S. occurs. This uncertain future of Bitcoin as a stable asset could create systemic risks for global finance, with the possibility of destabilizing the broader economy if its value declines significantly. 

The Argument for National Cryptocurrency Reserves

On 23 January 2024, U.S. President Donald Trump signed an executive order to create a cryptocurrency working group, fulfilling a campaign vow made after he won the backing of digital asset firms by positioning himself as a “crypto president.” The newly created crypto advisory council will be tasked with crafting digital asset policy, working with Congress on crypto legislation, helping to develop Trump’s proposed bitcoin reserve, and coordinating among the major agencies like the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Treasury.

In recent months, legislators in states such as Massachusetts, Ohio, Texas, Illinois, North Carolina, and Florida have proposed bills establishing government reserves to invest in Bitcoin and possibly other cryptocurrencies.

Typically referred to as “digital gold,” Bitcoin is increasingly finding its way into the reserves of governments, businesses, and institutional investors. As foreign exchange reserves are traditionally made up of gold, the U.S. dollar, and other fiat currencies, there is an emerging trend of nations resorting to bitcoin as a strategic inflation hedge, economic uncertainty hedge, and geopolitical risk hedge.

Image Credit: Marketwatch (Matthew Sigel, VanEck)

What Are Bitcoin Reserves?

A strategic reserve refers to a stock of an essential resource that can be deployed during emergencies or supply shortages. The most prominent example is the U.S. Strategic Petroleum Reserve, the largest global stockpile of emergency crude oil. Canada has the world’s only strategic reserve of maple syrup, while China has strategic reserves of metals, grains and even pork products. Similar to how countries hold gold or foreign currency reserves, Bitcoin reserves are seen as a hedge against inflation, currency devaluation, and economic instability. The decentralized nature of Bitcoin, combined with its limited supply of twenty-one million coins, makes it an attractive alternative to traditional reserve assets.

Why Are Countries and Institutions Holding Bitcoin Reserves?

Countries Leading the Bitcoin Reserve Trend

Institutional Adoption of Bitcoin Reserves

Beyond nations, corporations and financial institutions are also building Bitcoin reserves:

The biggest risk posed by a Bitcoin reserve

“The irony is striking,” notes Hilary Allen, professor at American University Washington College of Law. “Bitcoin was born out of a rejection of central banks and traditional finance, yet the fear now is that it could ultimately rely on support from the very institutions it sought to escape.”

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