Trump has fueled talk of Bitcoin as a strategic reserve asset

“We want all remaining bitcoins to be made in the USA!”

In true social post last month, Republican presidential candidate Donald Trump expressed strong support for Bitcoin. In the same post, he acknowledged the geopolitical importance of the world’s largest cryptocurrency, warning that any policy that seeks to curb Bitcoin “only helps China and Russia.” Trump’s announcement not only positioned him as the first pro-bitcoin nominee of a major political party, but also drew attention to discussions about bitcoin’s classification as a strategic reserve asset.

These discussions are gaining momentum in political circles thanks to Bitcoin-friendly political leaders. Former presidential candidate Vivek Ramaswamy, for example, has been advising President Trump on bitcoin and digital assets since January. Ramaswamy staked out a unique position in the final weeks of his campaign by proposing that the dollar be backed by a basket of commodities that could eventually include bitcoin.

Ramaswamy’s plan echoed a similar proposal by independent presidential candidate Robert F. Kennedy, Jr., in which a small percentage of U.S. Treasury bills “would be backed by hard currency, gold, silver, platinum, or bitcoin.” The intent of Ramaswamy and Kennedy’s proposals is to curb inflation by pegging the dollar to deflationary assets that will retain their value over time.

Senator Cynthia Lummis, the “Cryptocurrency Queen” of Congress, is another proponent of using Bitcoin to improve the nation’s finances. In February 2022, it proposed that the Federal Reserve diversify the $40 billion in foreign currencies it held on its balance sheet by adding bitcoin. And they continue to see benefits in holding digital currency as part of a nation’s financial portfolio.

After Trump’s post alluding to bitcoin’s growing political importance, I asked Senator Lummis for her take on the debate surrounding bitcoin as a strategic reserve asset. Senator Lummis seems keen on the idea. In her own words, “Bitcoin is an incredible store of value and I can definitely see the benefits of diversifying our country’s investments.”

Trump, Lummis, Kennedy and Ramaswamy represent a new group of policymakers who are open to bitcoin’s potential as a tool of economic statesmanship.

So how could the United States use a digital commodity like Bitcoin to bolster its own fiscal health and geopolitical position?

Using Bitcoin as a Strategic Reserve Asset

To answer this question, I reached out to Alex Thorne, Head of Enterprise Research at Galaxy Digital. Thorn has written extensively about the impact Bitcoin could have on the global financial system. And he sees merit in the idea of ​​bitcoin as a strategic reserve asset.

“As a global decentralized commodity money with sound characteristics, bitcoin will undoubtedly play a growing role in geopolitics and international trade,” Thorn said. “What started as hobbyists using their home computers has moved into industrial manufacturing, institutional portfolios and corporate balance sheets. There is every reason to believe that the Bitcoin network layer will continue to expand to include nation states.

Here’s the logic behind Thorne’s thinking: As with any scarce commodity—be it oil, gold, or rare earth minerals—countries often compete fiercely with one another to secure the lion’s share of resources. And as one of the rarest commodities on planet earth, there’s no reason to think bitcoin will be any different, especially if its value continues to rise, as many financial analysts expect.

As an example, Jurrien Timmer, director of global macro at Fidelity, described bitcoin as “exponential gold.” If parity were achieved with the current market capitalization of gold, one bitcoin would be worth approximately $700,000—more than ten times its value today. The potential for such stratospheric returns makes it all the more tempting for sovereigns to hoard bitcoins now, rather than waiting for other countries to do so first.

Despite the lack of any coherent Bitcoin strategy, the United States is currently at the forefront of the digital gold rush. It is the nation’s largest state-owned bitcoin holder, having seized most of its bitcoins from illegal players over the past decade. The country also boasts the highest number of network nodes, hashrate and bitcoin of any country in the world. And if Trump were to win in November, the nation would have its first pro-bitcoin president.

These factors put the United States in a strong position to become a micro-strategy of nations, should that be a policy priority for a future administration.

Case Studies: MicroStrategy and El Salvador

MicroStrategy is a legacy technology company that was on the decline in 2010. But in August 2020, it catapulted itself back into relevance after announcing that it had begun accumulating bitcoins as a government reserve asset.

Since the announcement, MicroStrategy’s stock price has risen more than 900% and is now the largest corporate holder of Bitcoin in the world. The company currently holds a total of 226,000 bitcoins – more than the United States or any other country.

Some financial policymakers now question whether MicroStrategy’s success can be replicated at the nation-state level. El Salvador serves as a compelling beta test of this strategy.

In 2021, Salvadoran President Nayib Bukele declared Bitcoin legal tender and announced that the country would begin purchasing Bitcoin as a treasury asset. El Salvador rallied roughly 50% of bitcoins it bought ahead of the bull market. And President Bukele has made clear his intention to hold Bitcoin for the long term. In his own words: “We won’t sell, of course. At the end 1 BTC = 1 BTC.”

Scaling The MicroStrategy Playbook

One way the United States could use bitcoin as a strategic reserve asset is to take a page from the MicroStrategy and El Salvador playbooks.

As the largest nation-state holder of Bitcoin, the United States is already ahead of other countries in hoarding digital gold. But classifying — and then treating — bitcoin as a strategic reserve asset would kick the nation-state race for bitcoin into high gear.

As Alex Thorn explained, “Simple game theory dictates that adoption by one nation requires other nations to regard the same, whether friend or foe.

This game theory would only accelerate if the United States—the richest nation in the world and home to global capital—was the first developed country to start hoarding bitcoins as a strategic reserve asset. This decision would accelerate the global adoption of Bitcoin as a long-term savings tool and a form of digital gold. In this scenario, the United States would enjoy the largest windfall of the OECD countries as a result of holding first-mover advantage.

Dear Pros and cons

Of course, as with any bold strategy, there are always trade-offs. To get a broader perspective on the pros and cons of adopting bitcoin as a strategic reserve asset, I reached out to Matthew Pines, national security fellow at the Bitcoin Policy Institute.

Among the pros, Pines said the move “could position the United States well against authoritarian challengers (who may be considering their own diversification into hard assets and hedging strategies) while signaling that it intends to lead emerging open digital financial networks.”

However, the downsides include: “This strategy would face significant challenges, including regulatory hurdles, introducing additional uncertainty to the US Treasury bond market (although it can serve as a golden proxy for hard assets on the nation’s balance sheet), and political opposition that could undermine its sustainability .”

Bitcoin and stablecoin pairing

However, policymakers could ease uncertainty in the US Treasury market by combining a bitcoin adoption strategy with massive support for dollar stablecoins.

There are 18 stablecoin providers today^Thursday the largest holder of US debt, holding approximately US$120 billion in US Treasuries. To put this number into perspective, stablecoin providers today hold more US Treasuries than some of the United States’ largest trading partners, including Germany and South Korea. What’s more, brokerage firm Bernstein predicts that the stablecoin market will grow exponentially in the coming decade, reaching a total market capitalization of $3 trillion by 2028.

As former Speaker of the House Paul Ryan wrote The Wall Street Journal last month USD stablecoins could create unprecedented demand for US Treasuries and even avert a debt crisis. According to Ryan, it is incumbent on US policymakers to see stablecoins for what they are: a generational opportunity to expand dollarization and strengthen the market for Treasuries.

A holistic digital asset strategy is key to achieving this. Such a strategy would seek to increase demand for US debt through stablecoins while simultaneously strengthening the nation’s overall balance sheet through Bitcoin.

A robust balance sheet supported by Bitcoin in the early stages of nation-state adoption would only increase the resilience of the US economy. And a stronger economy would only increase confidence in Treasuries backed by the “full faith and credit” of the US government. With this strategy, therefore, policymakers could lay the groundwork for an unexpected future—one where bitcoin and the dollar grow together.