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President-elect Donald Trump wants the U.S. to hold a stockpile of bitcoin, similar to the Strategic Petroleum Reserve.
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A significant U.S. stake in bitcoin could give the government some control over the cryptocurrency, and discourage other countries from using it as an alternative to the dollar, advocates say.
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Economists say the idea has significant downsides, including exposing taxpayers to the risk of having to bail out crypto investors if prices crash.
President-elect Donald Trump has been promoting the idea of creating a ‘Strategic National Bitcoin Stockpile,’ but the purpose of such an institution remains unclear.
The price of a bitcoin (BTCUSD) surged to a record high this week, briefly passing the $108,000 mark after President-elect Donald Trump repeated his campaign trail proposal for the government to hold some amount of the popular cryptocurrency officially.
Even though bitcoin swiftly reversed direction after the Federal Reserve's meeting this week, the idea of a reserve is gathering some steam. It has also attracted some skepticism from economists who question the purpose of establishing a strategic reserve of a volatile speculative asset.
Trump first proposed the idea at a bitcoin conference in Nashville in July. At that time, he said cryptocurrency the government has seized during criminal prosecutions would serve as the core of a “Strategic National Bitcoin Stockpile” and that his policy would be never to sell it. According to BitcoinTreasuries, a website that tracks cryptocurrency ownership, the U.S. owns 198,000 bitcoins worth $21 billion.
Bitcoin's supply is capped at 21 million, and 19.79 million of those are already in circulation.
The idea has echoes of the Strategic Petroleum Reserve. The reserve was established in 1975 in the wake of the oil embargoes against the U.S. which caused shortages and wreaked havoc on the economy. The U.S. stores up to 727 million barrels of oil in underground caverns for use in emergencies. And, like any good trader, the government seeks to sell oil from the reserve when prices are high, bringing prices down, and refill it when prices are low.
The idea of establishing an equivalent government stockpile of bitcoins has gathered momentum as crypto investors have gained influence in Washington. In July, Senator Cynthia Lummis, a Republican from Wyoming, introduced a bill to have the government buy 1 million bitcoins over five years as “a hedge against economic uncertainty and monetary instability,” similar to the gold bullion kept by the Federal Reserve.
Tyler Cowen, a professor of economics at George Mason University and a columnist at Bloomberg, wrote in July that the U.S. buying bitcoin would strengthen the dollar as the world’s reserve currency, cementing U.S. leadership of the global financial system.
Padhraic Garvey, regional head of research, Americas at ING, told Investopedia there are several possible reasons to establish a crypto reserve. By exerting some control over the bitcoin supply, Trump may seek to prevent it from falling into the hands of bad actors. He also said Trump may aim to prevent other countries from using bitcoin as an alternative to the dollar.
But the idea of a cryptocurrency reserve also drew skepticism from experts. Unlike oil, bitcoin is not crucial to running the economy, and cannot be turned into fuel for tanks and fighter jets in case of a national emergency. And while the government buying bitcoin could help crypto investors by driving up prices, its benefits to the economy are harder to discern.
“It’s not clear what a crypto reserve would serve, apart from ensuring there is enough U.S. influence over it,” Garvey said.
The reserve could also carry economic risks. Establishing a reserve would commit the state and taxpayers to backing bitcoin, a risky financial asset, Ramaa Vasudevan, a professor of economics at Colorado State University, told Investopedia by email.
“The fund would provide bitcoin speculators the assurance that when the crash comes, the State will deploy this fund to rescue it,” she said.
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