Nic Carter: Why I oppose Bitcoin strategic reserves

Original author: Nic Carter, Partner at Castle Island Ventures

Traduction originale : Luffy, Foresight News

Recently, the concept of a Strategic Bitcoin Reserve (SBR) has begun to attract widespread attention. Trump advocates continuing to hold Bitcoin seized by the US government, but some proposals go further, such as Senator Lummis’ recent draft legislation proposing that the US government purchase 1 million Bitcoins within five years.

Bitcoin enthusiasts believe that the advocacy of a strategic reserve is almost a foregone conclusion. But I think this is unlikely and a strategic reserve of Bitcoin is not a good idea. Allow me to explain.

Are we talking about stocks, sovereign wealth funds or reserves?

First, we need to clarify the concept of Bitcoin reserves. In his speech at the Nashville Bitcoin Conference, Trump promised: I declare that if I am elected, my government, the United States of America, will adopt the policy that all Bitcoin currently held or acquired in the future by the U.S. government will be retained… This will actually become the core of the national Bitcoin strategic reserve.

I strongly support the idea of the US government keeping a stockpile of Bitcoin, but I do not support buying more Bitcoin. Some proposals suggest that the government buy large amounts of Bitcoin: from about 800,000 BTC (BPI), to 1 million BTC (Lummis), to 4 million BTC (RFK Jr).

Senator Lummis, Michael Saylor, and the Bitcoin Policy Institute, among others, have been talking about the “Strategic Bitcoin Reserve (SBR)”.

According to Senator Lummis framework, the US government will purchase 1 million BTC over five years and hold it for at least 20 years. His logic is to strengthen the financial position of the United States and hedge against economic uncertainty and monetary instability. Lummis bill explicitly states that the SBR will strengthen the status of the dollar and compares it to the role of gold in previous monetary eras.

It is important to distinguish these proposals from George Selgin’s idea of buying Bitcoin in sovereign wealth funds. As far as I know, none of the main advocates of the SBR see it as an asset in national portfolios, and they explicitly link Bitcoin to the dollar and suggest that Bitcoin will actually make the dollar stronger. This means that they envision a monetary system in which Bitcoin plays an active role. At present, it plays the same role as foreign exchange reserves, but perhaps in the future it will become the actual basis of a new commodity standard, just like the Bretton Woods system. (For those who think I am exaggerating, you only need to read the text written by SBR advocates.)

To be clear, I am not against the idea of preserving existing seized Bitcoin (which I think is a policy Trump will eventually adopt), and I am not even against the idea of putting Bitcoin into a sovereign wealth fund (even though the United States does not have a sovereign wealth fund). Instead, I am against the idea of creating a strategic reserve of Bitcoin and giving it any kind of monetary role.

Bitcoin reserves will weaken, not strengthen, the dollar

My main point is that Bitcoin reserves do not strengthen the dollar. Unlike other countries, the United States issues the global reserve currency, the dollar. Other countries can try to buy Bitcoin, and in fact some countries do so.

If you are Russia or Iran, it might make sense to consider adding an unseizureable asset to your reserves, especially after the US seized Russian Treasury bonds in 2022. But the US does not need to hedge its exposure to the dollar because it issues its own dollars.

Buying Bitcoin and giving it a monetary role (whether as a foreign exchange reserve or something more significant) would mean that the United States has lost confidence in the current dollar-based system.

This would mean the U.S. government abandoning the inconvertible fiat currency standard, which would throw the system into chaos. Currently, the dollar is supported by the U.S. role as a global trade manager, the soundness of the U.S. economy, the solvency of the U.S. government, the ability of the U.S. to demonstrate both hard and soft power, the depth of the U.S. securities market, and the dollars ubiquity in global trade and finance.

If the US government suddenly changes its position and says we are rethinking the entire Washington Consensus, the market will start to wonder what is wrong with the government. Are they planning a default? Are they going to dismantle the Bretton Woods institutions? Are they hinting at huge déficits and high interest rates?

To be clear, I dont think the government is thinking about these things, but bond traders will be immediately concerned.

You might protest, “We’re not talking about moving to some new gold standard where the dollar is weighted to Bitcoin. We’re just talking about buying some Bitcoin and putting it on the U.S. balance sheet.”

The market doesnt see it that way. If the Bitcoin on the balance sheet is just a token, it will be an extremely expensive token. At current prices, one million Bitcoins would cost $100 billion. Of course, the U.S. government is known to be a price-insensitive buyer, so the U.S. may end up buying these Bitcoins at $1 million each, which means spending $1 trillion. This is a significant expense that should be spent on other more meaningful things.

I suspect the market will not view the Bitcoin purchase as symbolic, but rather as the first step in the return of the U.S. dollar to a new commodity standard backed by Bitcoin.

Austin Campbell dit this would “accelerate the demise of the dollar because it would signal to the world that the U.S. does not intend to manage its finances properly and may revert to Bitcoin at some point.”

Suppose the probability of the Lummis SBR proposal starts converging to 1. Youll see financial markets going into meltdown. Interest rates will spike dramatically as investors in US debt start to wonder if the US is considering a complete break from Bretton Woods II.

The cost of capital for everyone on the planet will rise dramatically, and inflation will likely increase. A massive redistribution of wealth will occur as financial markets plummet and Bitcoin soars.

In other words, the United States contemplating abandoning its current relatively stable monetary system in the short term and replacing it with a monetary standard based not on gold but on a highly volatile emerging asset would cause complete panic among its creditors.

In my opinion, if Lummis-style reserves ever get close to their target, the market will start to go crazy and Trump will be forced to roll back the policy.

While BSR supporters may claim not to advocate for a new gold standard based on Bitcoin, their stated intentions are sufficiently radical that Treasury markets would panic if the reserve came close to becoming a reality.

From a political perspective, SBR is unwise

I think any legislation that proposes a strategic reserve of Bitcoin is a complete nonstarter in Congress. I just visited some pro-crypto congressmen in Washington a few weeks ago and I experienced this firsthand. Congress is in a tight spot, with Republicans holding a slim majority. They can’t force a bill through on partisan grounds, and it’s unclear to me whether Republicans would vote for it.

Reserve strategy supporters insist that the executive branch can raise funds for a reserve strategy without passing a law. Of course, the executive branch can also spend money without prior authorization from Congress. Bitcoin supporters have proposed a variety of ways to do this. But these methods completely miss the point. A Bitcoin reserve imposed by executive order is undemocratic and will likely be repealed in a subsequent administration if Congress does not vote to approve it.

The executive branch could unilaterally decide to launch a costly foreign war and embezzle funds through various secret programs. But such action would be extremely unpopular because people would view it as undemocratic. The balance of power in our republic dictates that the president takes action, but Congress grants authority (and appropriations). We do not have tyrants in power.

Because Congress controls the purse strings, American citizens are consulted when major spending decisions are made.

In other words, in a family, a husband might not mind his wife using his credit card for the occasional purchase. But if she decides to buy a new car or a house, he would certainly prefer to be consulted. Sure, mechanically, she might be able to buy a car on her husband’s credit card if the limit is high enough. But that misses the point. She should consult her husband on major decisions like these. The president should consult Congress (and by extension the American people) on any major spending, and Bitcoin reserves certainly fall into that category.

You might say “but Trump has the power”. That is not true. He does not have the power to spend hundreds of billions of dollars to build a Bitcoin Strategic Reserve. The Bitcoin Strategic Reserve did not come up in the campaign debates, nor did it appear meaningfully in the media.

His speech in Nashville talked about a Bitcoin reserve (i.e. holding existing seized Bitcoins) rather than additional government purchases of Bitcoin. It would be extremely politically unpopular for Trump to try to bypass Congress and spend government funds on Bitcoin. It would use up his limited political capital. Trumps agenda goes far beyond Bitcoin. I expect that even if he gets excited about the concept of a reserve for a while, the political logic will eventually make sense to him.

Another problem with forcing Bitcoin purchases through executive orders is that what is easy to do is also easy to undo. If such a policy is unpopular, a future Democratic administration would undoubtedly sell off reserves immediately, causing chaos in the Bitcoin market.

What Bitcoin users should hope for is democratic consensus that a Bitcoin reserve or inventory is a good idea, and for bipartisan legislation or even a constitutional amendment to implement that policy. Generally, meaningful monetary reform is accomplished through legislation, such as the Gold Reserve Act of 1934 or the Gold Clause Resolution of 1977 after Nixon terminated Bretton Woods I.

Bitcoin users should hope that their Bitcoin reserves are durable, not a flash in the pan. The executive order-based policies implemented by the new Trump administration will not last.

The US Government Buying Bitcoin Would Seriously Alienate the Public

There is no doubt that the SBR policy will be seen as a massive wealth transfer from US taxpayers to wealthy Bitcoin holders. This will be a step backwards and it will not be popular with the public. Bitcoin holders are a relatively small group. The Federal Reserve found in 2022 that only 8% of American adults hold cryptocurrencies, with a higher proportion of wealthy people.

Even if the SBR is funded in some fiscally “neutral” way (such as selling some gold), it will still be considered undeserved by Bitcoin holders. These funds can be used for anything else instead of being allocated to Bitcoin holders.

A major monetary policy change that benefits a small percentage of Americans will turn everyone who does not hold Bitcoin against Bitcoin holders. And I doubt many Americans will understand the logic of the SBR, since there is no clear crisis in the US dollar at the moment.

If de-dollarization accelerates, the U.S. gets into some kind of default, interest rates spike, and many other countries start adopting Bitcoin as a reserve asset, then attitudes may be different in ten or twenty years. But that’s not the case today.

If you recall, student loan forgiveness was pretty unpopular because it was seen as a bailout for middle- and upper-class Americans who could afford to go to college and get a worthless liberal arts degree. (Interestingly, Elizabeth Warren proposed a unilateral $640 billion plan to cancel student loans in 2019/2020, which was ultimately rejected by Congress.)

The commotion over Bitcoin reserves is even more severe given that Biden’s student loan forgiveness plan would benefit an estimated 43 million Americans, a larger group than Bitcoin holders.

Currently, the financial community is gaining interest in Bitcoin due to its gradual, organic adoption. A reserve strategy would pit average Americans against Bitcoin holders, which would severely hamper Bitcoin adoption.

Bitcoin reserves have no “strategic” purpose

The SBR’s terminology is confusing, especially the word “strategic.” The U.S. government holds many commodities that are truly strategic in nature. Chief among them is the Strategic Petroleum Reserve, a means of stabilizing the oil market.

Biden, to his credit, actually sold a lot of oil when it was high and later bought it back for a profit. We also hold or have held large amounts of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, rare minerals such as helium, and medical equipment.

The commonality is that these commodities have some industrial use and the government has an interest in retaining them for emergencies or to maintain market stability.

In contrast, Bitcoin has no industrial use. The U.S. government does not need Bitcoin to trade at any particular price level. It makes no difference to the government whether Bitcoin is trading at $1 or $1 million. Bitcoin also does not generate cash flow, so reserves will not help pay interest on future debt.

The only “strategic” role Bitcoin can play is equivalent to the existing reserve assets of the US government, such as gold and foreign exchange. That is, no role. As George Selgin is at pains to explain, the US foreign exchange reserves are actually relatively small compared to other developed countries. This is because the US dollar is a truly free-floating currency, and the US does not manage such a peg at all. The approximately 8,130 tons of gold held by the United States since 1971 have no relevant use. They are purely historical relics, held only because of tradition. The last major intervention to manage the US dollar exchange rate occurred in the 1980s.

Proponents of the Bitcoin reserve strategy tend to greatly overestimate the role of gold in the dollar system. Ultimately, when it comes to the pervasiveness of the dollar system, the U.S. government’s balance sheet is almost irrelevant.

What really supports the dollar is:

• As US GDP grows, the tax debt generated can only be paid in US dollars

• The credibility and stability of the U.S. government and monetary policy

• The U.S. capital market is the most attractive and liquid market in the world, making it a gathering place for global investment.

• Network effects from the dollar’s dominance in trade settlement, commodities, foreign exchange, and debt markets

• The United States continues to play the role of global hegemon and guarantor of global trade and security

Gold and Bitcoin are simply not important in today’s U.S. monetary system. Perhaps they will play a role someday, but the current inconvertible standard is not based in any way on a commodity reserve.

Must Bitcoin?

Why reserve Bitcoin? Why not something else? Bitcoin holders have yet to come up with a convincing answer. You could say that Bitcoin is valuable (market cap is about $2 trillion), has global liquidity, and is held by many people. Well, Bitcoin is not unique in this regard. Can you make an argument for reserve Bitcoin that doesn’t also apply to Apple or NVIDIA stock?

“Well,” you might say, “these are claims on the cash flows of a company, not bearer assets. Bitcoin is special because it can’t be seized.” Presumably, though, Apple or NVIDIA are not at risk of having their assets and intellectual property seized. This would be another country’s argument against acquiring equity in U.S. companies as reserves, but this is the U.S. government we’re talking about.

It also makes no sense to choose Bitcoin reserves over gold. If you want to remonetize hard assets and use them as the basis of a monetary system, gold is the obvious choice. If we want to be “ahead” of other countries in reserve assets (a common argument in favor of SBR), gold is the perfect choice because we have more of it than anyone. Just remonetize gold and we’re already ahead.

Gold is also a bearer asset, in that ownership is not a claim on anything, just the simple possession of bars and ingots. If Bitcoin holders succeed in convincing the US government to withdraw from the Bretton Woods II standard and return to the pre-1971 commodity standard, then gold is indeed a better choice. It has a longer history, more people own it, it is worth about 9 times as much as Bitcoin, it is much less volatile, and we already own it, so it will be much cheaper to monetize it.

If you don’t like gold because it’s not a “high growth” asset like Bitcoin, then you could consider fast-growing assets like NVIDIA, Apple, or Microsoft stock. If we think about what commodities the U.S. might invest in for strategic purposes, my top choices would be AI data centers or chip manufacturing. They serve obvious strategic purposes and would also be economically productive. We then start talking about using Treasury or Fed resources for “industrial policy.”

Most conservatives and libertarians are skeptical of the government allocating resources in this top-down way, and would rather let the private sector solve the problem. I dont like Bidens massive infrastructure spending, which I think is very wasteful, so I dont support further government intrusion into the private sector, especially through naked dollar issuance.

Normally, the U.S. government doesn’t really intervene in the market with monetary tools, other than setting interest rates; its role is to set rules and keep the system stable, not to actively put government money into commodities for day trading. (This is why many are skeptical of Biden selling the Strategic Petroleum Reserve.) We are a market-based capitalist economy, not a centrally planned economy. It’s not the government’s job to manage commodity hedge funds.

This is left to the private sector, and only if there is an urgent strategic need to increase reserves of a certain important commodity will the government step in. At the end of the day, if the U.S. private sector invests in commodities and assets that appreciate in value, the U.S. government still benefits from capital gains taxes.

There is no point in establishing SBR now.

Why create a Bitcoin reserve now? What is special about the current situation that makes Bitcoin reserves a priority? Nothing. The dollar is not collapsing, in fact it is booming. The dollar index has been rising for the past 15 years, which may hurt the interests of US manufacturing and other countries with dollar debt.

The US GDP is growing relative to the rest of the world. Europe, in particular, is slowly declining, while China is facing its first serious economic crisis since the reform and opening up. The US stock market is beating the rest of the world, and the US stock market accounts for about 50% of the global stock market, and these trends will continue.

You might say, But the dollar is falling relative to hard assets like gold. Its purchasing power is declining and we are in an era of volatile and high inflation. But the dollar does not seem to be in crisis.

Interest rates are slightly higher than they were in the past decade, but no one is panicking about the solvency of the US government. The dollar’s share of global foreign exchange reserves has declined over the past few decades, but there is no real crisis either. The dollar remains absolutely dominant globally, with no potential challengers anywhere. Neither the dying euro nor the (managed) renminbi have the capacity or ambition to challenge the dollar’s position as the world’s preferred reserve asset.

The only reason SBR is being seriously discussed today is Trump’s election victory. Bitcoin enthusiasts have seized on this for political expediency, hoping that he will not only introduce more favorable regulation, but actually become a buyer of Bitcoin on a national level.

But Bitcoin is nowhere near the size and liquidity to make any dent in the U.S. reserve portfolio, and it’s certainly not ready to become a monetary commodity like gold under the gold standard. It’s worth only about $2 trillion today, while gold is worth about $17 trillion. Bitcoin remains extremely volatile and clearly unsuitable as a unit of account.

Bitcoin holders should be more patient. Bitcoin has performed very well in its short 15-year life cycle and is becoming an important global monetary asset.

Over time, its volatility will moderate (and its market capitalization and liquidity will grow), and it will become a more appropriate asset for the government to consider in its portfolio. But for now, it plays no meaningful role in the U.S. monetary system.

Bitcoin reserves may not be what you want

The truth is, there is no need to build any kind of Bitcoin reserve. The U.S. has nothing to lose by simply waiting patiently. If Bitcoin continues to be monetized and eventually challenges gold, and other countries use Bitcoin as part of their sovereign wealth funds or even begin to back their currencies with Bitcoin, then the U.S. still has plenty of time to act.

American institutions, investors, and individuals hold more Bitcoin than anyone else. If the U.S. government really wanted Bitcoin, they have ample means to get it at any time.

They can buy Bitcoin through the open market. It seems more likely to me that they will choose the cheaper way of setting a price cap, prohibiting private ownership, and forcing Americans to redeem Bitcoin, just as they did with gold in 1933.

They could also simply seize bitcoin held on domestic platforms, with U.S. custodians being by far the largest. They could nationalize bitcoin mining operations. They could raise capital gains taxes and insist on payment in kind. They could arrest individuals known to hold large amounts of bitcoin and seize their funds. They could devote resources to developing quantum computing, enough to steal the estimated 4 million bitcoins that are vulnerable to quantum attacks.

“Wait… that’s not it.” But here’s the thing. You can’t dictate how the US government acquires Bitcoin. If you succeed in convincing them of the merits of Bitcoin, and they really are determined to stockpile Bitcoin, they will do so in the most politically expedient way possible.

This is not necessarily in the best interest of U.S. Bitcoin holders. If the choice is between buying 1 million BTC at $1 million each and confiscating 1 million Bitcoins through other means, they will choose the more efficient method.

How are we supposed to support the dollar without Bitcoin?

The long-term solvency of the U.S. government is undoubtedly a concern. The debt-to-GDP ratio is close to an all-time high of 120%. Interest costs as a percentage of GDP are at a 60-year high and continue to rise. Federal net spending as a percentage of GDP is at its highest level in the past century, second only to levels during and after World War II.

While deficits have fallen from their pandemic highs, they remain high, leaving us with little breathing room if a recession sets in. Four years of reckless spending led to an outbreak of inflation that we are still dealing with.

Over the past quarter century, the dollar’s share of global foreign exchange reserves has fallen from 70% to 60%. After the United States seized Russian reserves in 2022, certain buyers are now cautious about buying U.S. Treasuries.

All of this suggests that the dollar may have long-term problems, even though there doesnt seem to be an imminent crisis. This could change if we had a recession and the government found itself unable to do large stimulus spending because interest rates are already quite high and we are running large deficits.

If it were up to me, I would do the following:

• Do whatever it takes to increase GDP growth. That means cheaper energy, fostering high-growth industries like artificial intelligence, and opening up the private sector.

• Cut government spending to reduce the deficit, since government spending is far more wasteful than the equivalent capital in the private market.

• Limiting political interference in the dollar market, for example by recognizing that the dollar’s sanctions power conflicts with its international utility

• Allow inflation to continue for a while to reduce the actual debt burden

The good news is that incoming Treasury Secretary Scott Bessent’s 3-3-3 plan essentially accomplishes this. We don’t need Bitcoin.

This article is sourced from the internet: Nic Carter: Why I oppose Bitcoin strategic reserves

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