Trump Initiates Talks on Bitcoin as Strategic Reserve Asset

“We want all remaining Bitcoin to be made in the US!”

In a true social after Last month, Republican presidential candidate Donald Trump voiced strong support for bitcoin. In the same post, he acknowledged the geopolitical significance of the world’s largest cryptocurrency and warned that any policies that attempt to hamper bitcoin “only help China and Russia.” Trump’s statement not only positioned him as the first pro-bitcoin nominee from a major political party, but also put a spotlight on discussions about whether to classify bitcoin as a strategic reserve asset.

These discussions are gaining traction in policy 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 took a unique position in the final weeks of his campaign by proposing that the dollar would be supported by a basket of commodities that could eventually include bitcoin.

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

Senator Cynthia Lummis, the “Crypto Queen” of Congress, is another proponent of using bitcoin to improve the country’s finances. In February 2022, she proposed that the Federal Reserve diversify the $40 billion in foreign currency it had on its balance sheet by adding bitcoin. And she continues to see benefits in holding the digital currency as part of the country’s financial portfolio.

Following Trump’s post alluding to bitcoin’s growing political importance, I asked Senator Lummis for her perspective on discussions around bitcoin as a strategic reserve asset. Senator Lummis seems enthusiastic about the idea. In her own words, “bitcoin is an incredible store of value, and I certainly see the benefit to our country as it diversifies its investments.”

Trump, Lummis, Kennedy and Ramaswamy represent a new generation of policymakers open to the possibilities of bitcoin as a tool of economic statecraft.

How can the United States use a digital commodity like bitcoin to strengthen its own financial health and geopolitical position?

Using Bitcoin as a Strategic Reserve Asset

To answer this question, I reached out to Alex Thorn, head of firmwide 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 globally decentralized commodity money with solid properties, bitcoin will undoubtedly play a growing role in geopolitics and international trade,” Thorn said. “What began as hobbyists using their home computers has expanded into industrial production, institutional portfolios, and corporate balance sheets. There is every reason to believe that the bitcoin network layer will extend further into nation states.”

Here’s the logic behind Thorn’s thinking: As with any scarce commodity, whether it’s oil, gold, or rare earth metals, countries often compete fiercely with one another to secure the lion’s share of the resources. And as one of the scarcest commodities on planet Earth, there’s little reason to believe bitcoin would be any different, especially if its value continues to grow as many financial analysts expect.

An example of this is Jurrien Timmer, Fidelity’s director of global macro, who has described bitcoin as “exponential gold.” If it were to equal the current market cap of gold, a single bitcoin would be worth about $700,000, more than ten times what it is today. The potential for such stratospheric returns makes it all the more attractive for governments to hoard bitcoin now rather than wait for other countries to do so first.

Despite its lack of a coherent bitcoin strategy, the United States is currently leading the digital gold rush. It is the largest nation-state holder of bitcoin, having seized the majority of its bitcoin stack from illicit actors over the past decade. The country also boasts the most network nodes, hashrate, and bitcoin mindshare of any country in the world. And if Trump were to win in November, the country would have its first pro-bitcoin president.

These factors put the United States in a strong position to become the MicroStrategy of countries, should that be a policy priority for a future administration.

Case Studies: MicroStrategy and El Salvador

MicroStrategy is a legacy technology company that was in decline in the 2010s. But it catapulted itself back to relevance in August 2020 after announcing it had begun accumulating bitcoin as a treasury reserve asset.

Since this announcement, MicroStrategy’s stock price has increased by over 900%, making it the largest corporate holder of bitcoin in the world. The company currently holds 226,000 bitcoins in total, more than the United States or any other country.

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

In 2021, El Salvador’s President Nayib Bukele declared bitcoin legal tender and announced that the country would begin buying bitcoin as a treasury reserve asset. El Salvador is up about 50% on the bitcoin it bought in the run-up to the bull market. And President Bukele has made it clear that he intends to hold bitcoin for the long term. In his own words: “We will not sell, of course. At the end of the day, 1 BTC = 1 BTC.”

Scaling the MicroStrategy Playbook

One way the United States can use bitcoin as a strategic reserve asset is to follow the lead of MicroStrategy and El Salvador.

As the largest nation-state holder of bitcoin, the United States already has a head start on other countries in accumulating digital gold. But classifying and subsequently treating bitcoin as a strategic reserve asset would accelerate the nation-state race for bitcoin.

As Alex Thorn explained, “Simple game theory dictates that acceptance by one country requires other countries to consider the same, whether friend or foe.”

That game theory would only accelerate if the United States, the world’s richest country and home to global capital, were the first developed country to hoard bitcoin as a strategic reserve. This move would accelerate the global adoption of bitcoin as a long-term savings vehicle and a form of digital gold. In this scenario, the United States would enjoy the largest windfall of profits of any OECD country as a result of having first-mover advantage.

Weighing the pros and cons

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

Among the pros and cons, Pines said the move “could put the United States in a good position against authoritarian challengers (who may be considering their own hard asset diversification and hedging strategies), while signaling its intention to take the lead in emerging open digital financial networks.”

But there are downsides: “This strategy would face significant challenges, including regulatory hurdles, the introduction of additional uncertainty into the U.S. Treasury market (even if it can serve as a gold-like substitute for hard assets on the national balance sheet), and political opposition that could undermine its sustainability.”

Linking Bitcoin and Stablecoins

However, policymakers could reduce uncertainty in the US Treasury market by combining a bitcoin adoption strategy with a robust promotion of dollar-based stablecoins.

Stablecoin providers are today the 18^e largest holder of U.S. debt, with about $120 billion in U.S. Treasuries. To put that figure in perspective, stablecoin providers now hold more U.S. Treasuries than some of the United States’ largest trading partners, including Germany and South Korea. What’s more, securities firm Bernstein predicts that the stablecoin market will grow exponentially over the next decade, reaching a total market cap of $3 trillion by 2028.

As former House Speaker Paul Ryan wrote in The Wall Street Journal Last month, USD stablecoins created unprecedented demand for US Treasuries and even averted 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 bolster the market for Treasuries.

A holistic digital asset strategy is essential to achieving this goal. Such a strategy would seek to increase demand for U.S. debt via stablecoins while simultaneously bolstering the country’s overall balance sheet via bitcoin.

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