Bitcoin
Donald Trump’s speech to the crypto crowd lacks logic
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Donald Trump’s Plans to Create a Strategic Bitcoin Reserve excited the crowd in Nashville this weekend — and lifted the cryptocurrency as well. There was still some logic to the presidential candidate’s verbiage.
Reserves of cash and gold typically provide stability for countries with currencies other than the US dollar. When financial or other crises occur, it helps to have an emergency supply of dollars to cover import bills (denominated in US dollars) or to shore up the local currency. This need is unlikely to arise when you are the reserve currency and can simply print more.
In any case, being a force for stability is a tall order for a volatile asset. Emerging markets would have struggled to resist bank runs if they had piled their foreign exchange reserves into the equally weak currencies of their neighbors—Mexican pesos to Argentina, for example.
Reserves also need to be liquid. Even assuming a future Trump the administration has done away with the bureaucracy that kept seized bitcoins in Washington, cryptocurrency markets are neither deep nor liquid.
All the other plumbing that makes buying and selling government debt a breeze—regulation, infrastructure, settlement, and trading itself—are absent or in very early stages when it comes to bitcoin. The same goes for transparency and efficiency. There are no rating agencies or instruments like credit default swaps to help assess counterparty risk.
To be sure, the predicted amounts are small. The US holds 213,000 bitcoins, or 1 percent of those in circulation, according to for Bitcoin Treasuries that compiles data on corporate and government holdings. These existing holdings — worth about $15 billion at current prices — are the result of seizures from illegal operations, notably the online dark web Silk Road. Even raising the bar to the 5% proposed by Senator Cynthia Lummis would still be a fraction of what the country’s gold reserves are worth.
What would be the advantage? The stated objective, per Lummis, who is behind the proposal, is to moderate inflation and “secure our economic future.” Governments and central banks have many other levers they can pull, fiscal and monetary, to ease inflationary pressure.
Raising the specter of an arms race with China, as Trump has done, is not the point. It’s true that China’s Bitcoin holdings are second only to the US. But Beijing’s real crypto hubris will likely come from its own cryptocurrency (even if its use of this central bank digital currency has been decidedly underwhelming so far).
It remains to be seen whether Trump’s courting of the crypto crowd will translate into votes. It’s a pretty safe bet that it won’t translate into viable policy.
Video: The ongoing battle to defeat cryptocurrency thieves | FT Tech
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