People like MicroStrategy’s Michael Saylor and ARK Invest’s Kathy Wood have suggested the US government create a strategic Bitcoin Reserve. Senator Cynthia Lummis has even proposed a bill called the Bitcoin Act of 2024, which would start the process. In her view, the development could both diminish the national debt and bolster the US dollar. When Donald Trump mentioned the idea of the Reserve at the Nashville Bitcoin Conference in 2024, it wasn’t the first time the idea had been put forward.
Indeed, President Joe Biden’s fiscal stimulus measures during the pandemic gave people a good reason to support such a plan. In March 2020, Biden doled out 2.2 trillion dollars to support Americans in that challenging situation. The next year, although the US economy had started recovering, Biden sent Americans another unfunded $1.9 trillion. According to one measure, these handouts were responsible for a hefty 3% of the 7% inflation consumers saw in 2021.
And the inflationary forces unleashed didn’t vanish with Covid. By November 2024, consumer prices were as much as 21% higher than their levels four years before. The economic constraints people suffered due to the Fed’s rate-hiking schedule, done to combat inflation, can be partially accounted for Biden’s stimulus.
When American citizens saw the value of their savings plummet in this way, the idea of keeping them safe from the hands of governments became much more appealing. They likely felt the same way when the USA froze Russian assets in 2022 as a punishment for their invasion of Ukraine. Nations and individuals worldwide realized the same could feasibly happen to them.
Enter Bitcoin – a peer-to-peer digital exchange mechanism that’s not subject to government policy and that could be impervious to the global political climate. Perhaps understandably, Bitcoin prices leaped 8% within a single day after the US sanctions on Russia.
If so, holding national reserves in digital currency might protect them from the vagaries of our economic world, which is so vulnerable to the geopolitical instability that continues to flare up. Are there any reasons to doubt this? Join us for a few minutes, especially if you trade online with iFOREX Europe.
Volatility
In April 2021, one Bitcoin was worth $65,000. Two months later, it was worth less than half that amount. This is just one instance of the token’s infamous price volatility, which economists are still trying to understand fully. If government funds were held in Bitcoin, the result could be a substantial injection of volatility, not stability, into national economies. This is because of the enormous exchange rate risk central bank revenues would face.
Gold has worked well as a store of value for central banks because it is relatively resistant to the effects of inflation, geopolitical risk, and currency debasement. Bitcoin might not fit the same profile, though, because, unlike gold which has real uses in jewelry and other industries, digital tokens don’t accomplish anything practical in society. In the words of Nouriel Roubini, Professor of Economics at New York University, “Bitcoin doesn’t have an income, doesn’t have any use… It’s not a means of payment that is in any formal way scalable”.
You may argue that Bitcoin can, technically, be used to make payments and that this use case is gradually increasing. Facilitating payments was indeed, in fact, the initial reason for Bitcoin’s creation, and some people indeed use it to pay for things. But this happens on a tiny scale. Looking back from October 2024, the portion of Americans who use it had not grown in the previous three years. This means that its usability in this regard has not really materialized.
Store of Value
For something to qualify as an effective store of value, it “means that the basket of goods and services that can be bought is stable over time”, according to BNP Paribas. While the purchasing power of the US dollar does fluctuate, it is held in check by central bank monetary policy. By contrast, Bitcoin is not subject to the policy decisions of any ruling body. This is one reason it displays wild variances in purchasing power over relatively short periods.
Another reason for cryptocurrencies’ volatility is their lack of intrinsic worth. The European Central Bank says, “This makes them particularly sensitive to changes in risk appetite and market narratives.” National revenues, obviously, cannot be subject to the whims of the media’s ever-changing crypto narratives.
The data suggests that Bitcoin behaves more like a risk asset than like gold. When stocks plummeted due to the unraveling carry trade in August 2024, traders didn’t seek refuge in Bitcoin. On the contrary, the token was sold off along with equities, causing it to plunge 17%. “It is unrealistic to think that institutional investors are allocating capital to Bitcoin for the same reason as gold”, concluded Josh Gilbert of eToro.
Final Thoughts
Bitcoin’s susceptibility to waves of sentiment is not just theoretical. We saw it in the flesh during the FTX crypto exchange bankruptcy in November 2022. At the end of the following month, a Bitcoin was worth one-quarter of its value a year before as traders sought refuge in real safe havens like gold.
This asset is simply not stable enough to be entrusted with national revenues. However, this wouldn’t preclude central banks from keeping a small portion of their reserves in digital currency.
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