What Could a "Strategic Bitcoin Reserve" Mean in Practice?

The United States is no stranger to stockpiling strategic assets to serve important national interests. The U.S. strategic gold reserve provides financial stability and supports the value of the U.S. dollar. The U.S. strategic petroleum reserve, in contrast, protects the U.S. from emergencies and economic shocks in the oil industry, on which much of the modern economy depends. Now, the U.S. is strongly considering a new strategic reserve: the Strategic Bitcoin Reserve ("SBR"), in which billions of dollars' worth of the digital currency Bitcoin would be securely stored as a new financial hedge and support for the U.S. dollar.

The SBR was conceptualized in Bitcoin's earliest days, fleshed out in the seminal work "The Bitcoin Standard" in 2018, and then gained concrete form as MicroStrategy (on a corporate level) and El Salvador (on a sovereign level) adopted Bitcoin strategic reserves in 2020 and 2021, respectively. In July 2024, President-elect Donald Trump, in the midst of the presidential campaign, attended the Bitcoin 2024 conference, and endorsed Wyoming Senator Cynthia Lummis' bill "Boosting Innovation, Technology, and Competitiveness through Optimized Investment Nationwide Act" (BITCOIN Act) (S. 4912) that would establish an SBR.

Support for an SBR has surged since Election Day as the country looks forward to an aggressively pro-crypto Administration that has already endorsed the concept of "stockpiling" Bitcoin. Indeed, Bitcoin's price increased approximately 35% in the two weeks following the U.S. presidential election, even though Bitcoin was already trading around all-time highs on Election Day.

The Issues

The U.S. does not create strategic asset reserves often, and this would be the first reserve of a purely digital asset. We therefore want to examine some of the implications of this effort:

• What impact would the Bitcoin reserve have on the dollar?
• Should the Bitcoin reserve replace the gold reserve?
• How will the government prepare for and account for the likely wild fluctuations in the value of Bitcoin, and how would it handle the 50, 60, or 70+% drawdowns that have regularly occurred with Bitcoin in the past?
• Would a Bitcoin reserve improve or hurt the U.S.'s ability to exert influence in the world with financial sanctions?

Basic Concepts

The establishment of an SBR would pioneer a new paradigm. Because of the newness of the technology, accumulating such a virtual reserve asset may seem unusual. However, it is similar to the accumulation of historical asset reserves, should be manageable in a reasonable fashion, and has the potential for a positive impact on the management of America's financial future. Set forth below, we discuss the SBR concept in the framework of questions and answers which we hope will explain the idea in a manner that's logical and understandable.

Q: What is the purpose of an SBR?

A: The BITCOIN Act states its purpose is to contribute to the economic stability of the United States, provide an innovative hedge against monetary instability, and encourage the integration of digital assets into the U.S. financial system. Additionally, though, many leaders expect this fund of value to be used in the future to pay down the national debt and to provide the government with additional geopolitical flexibility. Because Bitcoin is a deflationary asset, it can help protect against excessive inflation, as it has in other countries. It can also help stabilize the dollar's value in times of stress. Also, it would further diversify the government's reserves, a prudent move in any event.

Q: Would a Bitcoin reserve be new and unique to the U.S.?

A: No, the country has accumulated strategic reserves of commodities in the past, such as gold, silver, grain, fuel, oil, etc. Moreover, other countries have started strategically accumulating Bitcoin in various ways. El Salvador adopted Bitcoin as legal tender and began purchasing Bitcoin to hold in reserve. Bhutan set up state-owned Bitcoin mining operations and are keeping the mined Bitcoin in reserve. Other countries, including China, are holding large amounts of Bitcoin that they seized from participants in illicit activities.

Q: What are the key elements of this debate?

A: It is a debate about whether we should have a reserve of a commodity, namely Bitcoin, for which there is a demonstrated demand, which is recognized by many as a store of value ("digital gold"), and which has the possibility of future increases in value. Many are hopeful that a run up in Bitcoin's value could allow the SBR to help pay down the national debt. The plan's opponents point to Bitcoin's price volatility, lack of intrinsic value (in contrast to the everyday practical uses of oil, for example), security risks, and potential political conflicts of interest (including using the reserve to pump up the price of Bitcoin to help allies and donors).

Q: Isn't Bitcoin too volatile to hold as a reserve asset?

A: First, all commodities are subject to volatility and, as the chart linked here shows, Bitcoin is no different. Second, short-term volatility can be severe, including a 65% drawdown from January through March 2018, but the average rate of return on Bitcoin over multi-year periods is impressive: 400% over four years; 2,500% over six years; 9,900% over eight years; and 33,000% over ten years.

These are impressive returns for a new asset whose use cases are still being developed. All assets with high returns have volatility but if the U.S. can accept the short-term volatility tradeoff, there is potential for a substantial ARR. Moreover, the volatility risks can be hedged and managed, especially since they will be expected (it is always harder to hedge unexpected risks).

Given the long-term investment horizon for a Bitcoin Strategic Reserve, short-term volatility would not appear to be a compelling reason to forego this opportunity.

Q: What are the chances of Bitcoin continuing to hold its value?

A: Reasonably strong. Bitcoin is used as a payment system in all corners of the world. It has a limited supply, which will be fully distributed in 2140 when the last Bitcoin is mined out of a total supply of 21MM. However, with 19.9MM Bitcoin mined to date, the supply/demand curve is highly likely to bend in Bitcoin's favor going forward. Unlike every fiat currency, it is impossible to debase Bitcoin by creating more. Moreover, Bitcoin is the beneficiary of a network effect. That is, the more people use it, the more valuable it will become. Corporate adoption of Bitcoin has accelerated considerably and is likely to continue to accelerate:

1. MicroStrategy began stockpiling Bitcoin as an asset on its balance sheet in 2020.
2. Tesla announced it would accept Bitcoin as payment for cars in 2021 (this was later paused).
3. PayPal added Bitcoin, allowing users to pay for goods and services with Bitcoin.
4. BlackRock, Grayscale, and others created Bitcoin ETFs, allowing average investors to buy Bitcoin through their brokerage accounts.
5. Consumers can purchase Apple and Walmart products through various crypto apps, which is gradually driving broad retail acceptance globally.

Bitcoin is now about one-sixth of the value of all gold reserves in the world and has overtaken silver in value.

Q: Will the change in Administration impact the value of Bitcoin?

A: Because it is likely to be used more extensively by the U.S. government and by other governments throughout the world, it is likely that the crypto-friendly attitude of the Trump Administration will continue to boost Bitcoin's value. Moreover, unlike gold, Bitcoin can be programmed to do a number of different things to increase efficiency and lower the costs around payment systems and financial services in general.

Q: What would a Bitcoin reserve look like?

A: Senator Cynthia Lummis (R-WY) introduced legislation requiring that the U.S. purchase 1 million Bitcoins, in four tranches of 250,000 Bitcoin each, over four years. The net result would be that the U.S would own 1 million Bitcoin or about 5% of the total, fixed supply. This would be funded from three sources: First, the Bitcoin that the government has already seized which amounts to over 200,000 Bitcoin; second, the surplus that the Federal Reserve returns to the Treasury (i.e., the profits of the U.S. central banking system); and third, the unrealized value of the U.S.'s gold certificates representing the value of the gold held by the Treasury. These certificates have been pegged at a price of $42 an ounce since 1973 for a total assessed value of $10.5 billion. But if they were marked to market, their value would be approximately $643 billion.

Q: How would the Bitcoin reserve be managed?

A: The SBR would have to be managed in coordination with all the financial services agencies to maintain the security and utility of the asset. But, in essence, it would simply be kept in a digital vault as an appreciating asset (or wallet) like any other commodity. At some point, if the appreciation gets to a significant point, it could be used as collateral, or it could be sold to pay down some of the national debt. If the government decided that deploying some of the Bitcoin could help manage geopolitical issues that arise over time, it could also deploy the Bitcoin strategically.

One benefit of holding government reserves in Bitcoin is that the entire country could audit the asset at any time on the blockchain. And any movement of the price of Bitcoin could be tracked by the public, ensuring security and accountability on a scale never before seen. How many people have actually gone and seen the government's gold and oil reserves?

Q: Can we protect against a sudden decline in the value of Bitcoin?

A: Yes. Like any other commodity, Bitcoin can be hedged. We should simply think of it as another financial instrument which the Treasury Department manages. There's no reason to think that the government could not successfully manage an asset of this size, particularly with the ability to contract with global asset managers, liquidity providers, and other governments, all of whom have experience in managing market risks.

Q: What would be the impact on the dollar?

A: At first, none. The Bitcoin would simply be an asset held in reserve and available as a flexible tool to be used as needed. However, over time, the adoption of cryptocurrencies like Bitcoin creates a risk of eventual "de-dollarization" around the world. Having a strong position in Bitcoin helps protect the U.S. against that risk and also prepares us for a more decentralized and more efficient financial future. In essence, because it cannot be debased, it can help protect the balance sheet of the United States against the kind of inflation experienced from 2022-2024.

Q: Would Bitcoin replace gold as a reserve asset?

A: At the beginning, no. Replacing the gold reserve with a Bitcoin reserve would not diversify the U.S.'s balance sheet. Gold is still a valuable reserve asset given its remarkable ability to store value over time and its countercyclical market value, which offsets the risk of economic depressions. However, in the future, as digital assets begin to replace hard assets, a reduction in the amount of gold held in reserve by the U.S. may be appropriate to consider.

Q: Would holding Bitcoin as a reserve asset negatively impact the U.S.'s ability to participate in a robust global sanctions regime?

A: Not likely. Bitcoin is traceable on its blockchain, by definition, and holding Bitcoin as a reserve asset would not change that. However, it would likely incentivize the government to increase security and traceability of all digital assets to improve the stability of the global financial system, which, over time, is likely to become predominantly digital. Thus, wallets that contained cryptocurrency that had passed through mixers or other anonymizing technology could be barred from purchase for the reserve. Further, those wallets could be barred from any usage with the U.S. government or with U.S. entities for a certain number of years.

On the other hand, the U.S. will not control Bitcoin the way it controls the dollar. Global adoption of Bitcoin could lessen other countries' reliance on the dollar, which may negatively impact the U.S.'s ability to impose sanctions through controls on the flow of dollars.

Q: Is there similar activity at the state level?

A: Yes. Texas, Ohio, and Pennsylvania all have introduced bills to create state-level Bitcoin reserves and some Bitcoin advocates think that as many as ten states may take such action. However, no state has yet passed a Bitcoin reserve act.

Potential Downsides

Q: Are there policy risks attendant to establishing an SBR?

A: Potentially, yes. Some commenters, such as George Selgin of the CATO Institute, have argued that an SBR would not serve any useful purpose. He notes that the United States holds gold almost as a matter of tradition since gold reserves are no longer used to settle international accounts. And, because the dollar's status is currently secure as the global reserve currency, it does not need additional shoring up. Selgin also points out that the United States' reserves, particularly its foreign exchange holdings, are relatively modest, which reflects the dollar's unique status as the freest of free-floating currencies. This is part of the "exorbitant privilege" the United States enjoys as a result of the dollar's status as both a national and global exchange medium.

Others, such as Nic Carter, argue that assigning Bitcoin a monetary role, whether as an equivalent of FX reserves or something similar, might imply that the U.S. is losing confidence in the current dollar-based system. Moreover, Carter points out that Bitcoin could be an extraordinarily expensive asset to acquire given that the price of the coins would likely rise once it became known that the U.S. Treasury was a buyer. Finally, an SBR policy could be seen as, in effect, a massive wealth transfer from U.S. taxpayers to "Bitcoiners." This would run the risk of being both regressive and unpopular. Even if the SBR was funded in a fiscally neutral manner, for example, by revaluing gold as noted above, it could still be seen as an undeserved handout for Bitcoiners.

Conclusion

The proposed Strategic Bitcoin Reserve offers a compelling vision for modernizing U.S. financial strategy, with potential benefits including enhanced financial flexibility, a hedge against economic uncertainty and world markets, support for the inflationary pressure on the dollar, and the chance to leverage Bitcoin's potential upside to address the national debt. It also positions the U.S. to participate in the emerging digital economy. However, the proposal has certain challenges as well. Bitcoin is a highly volatile asset with less than two decades of market experience. Potential conflicts of interest could arise in the implementation. And there is a significant opportunity cost of diverting resources to the SBR when the nation faces other investment needs in areas like infrastructure, education, and healthcare. But we applaud the introduction of innovative ideas to capitalize on emerging innovations like Bitcoin.

*Daniel M. Payne is a partner at Cole-Frieman & Mallon LLP.