The delusions behind a bitcoin strategic reserve

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The writer is an FT contributing editor

In July, Cynthia Lummis, a US senator from Wyoming, introduced a bill to establish what she called a “strategic bitcoin reserve”, a programme instructing the Treasury and the Federal Reserve to buy a million bitcoins over the next five years to then hold them for at least 20 more years.

Donald Trump made vague noises in support of bitcoin and crypto during his campaign. With his election, the hope behind Lummis’s bill has started to gather weight, particularly among the people with private bitcoin holdings of their own. This stands to reason. If you held a portfolio of Andy Warhol paintings and someone in Washington proposed a strategic Warhol reserve, you’d be excited too.

The bill lays out a mechanism for paying for the reserve. Any surplus the Federal Reserve returns to the Treasury would be spent instead on bitcoin. The Fed doesn’t currently return any money to the Treasury. No matter. The bill also proposes that Fed banks mark all their gold certificates to the current market price of gold, then remit the difference to the Treasury to buy bitcoin. This is all plausible, but the bill doesn’t answer the most important question facing any piece of legislation: how will this change anything at all, for anyone?

A reserve would present both a consummation and an irony for bitcoin’s hardcore supporters — the hodlers. The state would recognise what hodlers call freedom money, but also prop that up with a state programme. The preamble to Lummis’s bill argues that in return, a million bitcoin would diversify America’s assets, improving financial and monetary resilience. Unlike a traditional banking reserve, however, they would be held by the Treasury and couldn’t start to be sold until 2045. An asset you cannot sell does not give you resilience. It gives you storage costs.

A bitcoin reserve would probably appreciate in value. This is the core of the hodlers’ argument: after two decades America would remain astride the global financial system, in control of roughly one in 20 of the world’s most valuable assets. In this sense, what the bill calls a strategic reserve is just a sovereign wealth fund, leaving the Treasury with the power to, say, pay down America’s sovereign debt. The challenge there is to lay out the case for why bitcoin’s rise must inevitably continue.

It is long past time to say that bitcoin can’t serve as money. It can and does. Analysis of the bitcoin public ledger published in September in the Journal of Empirical Finance shows that holdings serve as a way to move money offshore through the Seychelles, for example. Activity increased in Brazil during inflation and in Venezuela after sanctions, but dropped in China after a ban on bitcoin mining and trading. It does seem to serve a purpose beyond speculation, though not so far in countries with functional banking systems.

The additional spike in price after Trump’s election offers a circular argument. Bitcoin is even more valuable because Trump will embrace it. Trump must embrace it because it is becoming more valuable. But the dollar has been on a tear for 50 years already, and the way Americans and foreigners use bank dollars has nothing to do with the gold that the Treasury holds at Fort Knox in Kentucky. It would likewise have nothing to do with any bitcoin the Treasury secured with a Fed surplus.

The dollar is not suspended in the air by nothing. It has always been held up by Federal Deposit Insurance, imperfect but adequate bank regulation and handshake agreements among central banks to support offshore dollars in a panic. The global dollar system is untransparent and unfair. It’s terrible for American consumers. But bitcoin hodlers have made the classic engineer’s mistake of thinking that a social system riddled with inefficiency must, like a bridge, eventually collapse.

Perhaps in a collapse an asset like bitcoin could prove valuable. Historically, however, bank money has re-emerged from the rubble of every catastrophe. We rely on dollars not because we’re stupid, but because a bank is literally a licence to print money, and a state has not yet been founded that can prevent powerful people from getting that licence. A long-term bet on bitcoin is bullish on the permanent collapse of all institutions, everywhere. It’s a nuclear put.

A bitcoin reserve would serve exactly one strategy. A Treasury with a million bitcoin would be trapped by its own portfolio. Congress could never exercise monetary sovereignty by limiting bitcoin mining or trading, because the price of the Treasury’s own assets would immediately collapse. The strategic bitcoin reserve is not a resilience strategy for the US. It’s a resilience strategy for the hodlers.