Alice Morgan, Photo Illustration for Investopedia by Getty Images
What you need to know
- Donald Trump, the President-elect of the United States wants to have a bitcoin stockpile similar to that held by the Strategic Petroleum Reserve.
- Supporters say a large U.S. bitcoin stake could allow the U.S. to exert some influence over cryptocurrency and prevent other nations from adopting it as a substitute for the dollar.
- Economists claim that this idea is fraught with dangers. Taxpayers could end up having to bail out cryptocurrency investors should prices plummet.
President-elect Donald Trump has been promoting the idea of creating a ‘Strategic National Bitcoin Stockpile,’ but the purpose of such an institution remains unclear.
This week the price of bitcoins (BTCUSD), briefly passed the 108,000 dollar mark, after Donald Trump reiterated his proposal on the campaign trail that the government hold a certain amount of popular cryptocurrency.
Even though bitcoin swiftly reversed direction after the Federal Reserve's meeting this week, the idea of a reserve is gathering some steam. The idea has attracted some doubt from economists, who question whether it is a good idea to create a reserve for a volatile asset.
Trump proposed this idea in Nashville at a Bitcoin conference back in July. Then, Trump said that the cryptocurrency confiscated by the federal government in criminal prosecutions could be used as the basis of an upcoming cryptocurrency. “Strategic National Bitcoin Stockpile” And that his policy was to never sell it. BitcoinTreasuries tracks ownership of cryptocurrency and reports that the U.S. has 198,000 Bitcoins valued at $21 Billion.
Bitcoins are limited to 21 million and 19,79 million have already been in circulation.
What other Strategic Reserves does the US hold?
It is similar to the Strategic Petroleum Reserve. In 1975, the reserve was created in response to the U.S. oil embargos that caused severe shortages in fuel and economic damage. U.S. underground caverns store up to 727 millions barrels oil, which can be used in an emergency. Like any good investor, the government will sell the oil in the reserve at high prices to bring down the price, then refill the reserves when the prices drop.
Crypto investors are gaining influence in Washington, and the idea to establish a government equivalent bitcoin stockpile has gained momentum. Senate Cynthia Lummis of Wyoming introduced legislation in July to buy one million bitcoins by the government over a five-year period. “a hedge against economic uncertainty and monetary instability,” Similar to gold held by the Federal Reserve.
Arguments for a Strategic Bitcoin Reserve
Tyler Cowen (Professor of Economics at George Mason University & Columnist for Bloomberg) wrote in July, that the U.S. purchasing bitcoins would reinforce the dollar as the currency reserve of the globe, thereby cementing U.S. control of the global finance system.
Padhraic Garcia, head of regional research for the Americas region at ING told Investopedia that there were several reasons why a crypto-reserve could be created. Trump might want to control the bitcoin supply in order to stop it falling into bad hands. Trump could also try to stop other countries using bitcoin instead of the dollar.
Arguments against a Strategic Bitcoin Reserve
The idea of creating a reserve for cryptocurrencies was also met with skepticism by experts. Bitcoin isn’t essential to the running of an economy and can’t be used as fuel in tanks or fighter jets during a national crisis. The government purchasing bitcoin may help to drive up the prices of cryptos, but its economic benefits are less clear.
“It’s not clear what a crypto reserve would serve, apart from ensuring there is enough U.S. influence over it,” Garvey stated.
Reserves could carry risks for the economy. Ramaa Vasudevan told Investopedia in an email that establishing a bitcoin reserve commits the taxpayers as well as the state to backing this risky asset.
“The fund would provide bitcoin speculators the assurance that when the crash comes, the State will deploy this fund to rescue it,” She said
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