Bitcoin has shot up more than 40% since Donald Trump’s victory in the US presidential election, in part on hopes that he’ll champion a government reserve devoted entirely to the cryptocurrency.
He supported the idea during his campaign, and crypto-friendly legislators have offered ways to make it happen.
It’s hard to fathom how this would benefit most Americans.
Bitcoin has some positive attributes. It’s portable — you can keep millions of dollars’ worth on a thumb drive.
It’s semi-anonymous, in the sense that holders are identified only by a public alphanumeric key. It can be transferred to anyone, anywhere without relying on government-regulated banks or other traditional financial intermediaries. And adding it to a portfolio of stocks and bonds might provide some diversification benefit.
But Bitcoin hardly qualifies as money. Its volatility makes it a poor medium of exchange.
In most countries, people don’t have to accept it as payment.
Transactions are slow and expensive, requiring significant computing power and energy to validate each one. Moreover, if you lose that thumb drive, you’ve lost your Bitcoin.
Unlike traditional financial assets, it’s not connected to any cash flows such as interest or dividends. Higher prices don’t bring forth greater supply: The number of tokens is capped at 21 million and nearly 20 million have already been created. As a result, greater demand can drive prices to extreme highs — limited only by the amount of real money people are willing to put in.
As of yesterday, that was almost $2 trillion, or $99,000 per Bitcoin.
It’s thus easy to see why current Bitcoin holders love the idea of a government reserve.
One bill already in Congress, for example, would require the government to purchase 1 million Bitcoin over five years, then hold it for at least 20 years, along with Bitcoin already confiscated from criminal enterprises.
If enacted, this would undoubtedly send the price soaring, as investors piled in to get ahead of the government’s purchases.
Suppose, for example, the US government’s imprimatur encouraged everyone to make Bitcoin a small part of their investment portfolio – say, just 2%.
The total value of global stocks and bonds is about $250 trillion, so 2% would require all Bitcoin to be worth $5 trillion, or $250,000 each. Double the portfolio allocation to 4%, and the price would need to double again.
What’s in it, though, for the government or for people who don’t hold Bitcoin? Nothing good.
There’s no exit strategy, so the purpose must be to push prices higher, not create value for the government — which would be stuck holding volatile tokens that produce no income.
To fund the purchases, either the Treasury would have to borrow (driving up debt service costs) or the Federal Reserve would have to create money (fueling inflation).
The latter would be little different than the Fed monetizing U.S. government debt (as would directing the Fed to tap the government’s gold reserves, as the congressional legislation proposes).
If the Trump administration really wants to support the nascent crypto industry, it should work on a set of laws and regulations under which it might safely develop and operate.
Ensure, for example, that stablecoins — tokens that purport to be worth a dollar — are fully backed by deposits at the Fed or short-dated Treasury securities.
Define legislatively whether tokens are currencies or securities, and who regulates them.
Set rules to protect consumers and to prohibit use for criminal activities such as terrorist financing or illicit drug sales.
Crypto technology has the potential to improve the financial system — for example by making it easier and less costly for people to trade financial assets, or for migrants to send money home to their families.
In the absence of strong guardrails, however, fraud and abuse will persist, undermining the trust required to bring such benefits to fruition.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Bill Dudley, a Bloomberg Opinion columnist, served as president of the Federal Reserve Bank of New York from 2009 to 2018. He is the chair of the Bretton Woods Committee, and has been a nonexecutive director at Swiss bank UBS since 2019.
