Should The US Have Bitcoin Reserves?

Should The US Have Bitcoin Reserves?

During the presidential election, President Trump stated he would initiate a cryptocurrency strategic reserve. Many clients have asked for thoughts on this.

Presidential candidates say many things and do some things. Let’s see what proposals are actually introduced. Remember, Wall Street has very powerful lobbyists. Most likely, Trump spoke favorably about crypto to get financial support during an election.

However, if any president is being logical then maybe bringing crypto mainstream is beneficial. Not only could crypto currencies be rationally audited, but regulatory fees from trading might be sizable.

Widespread adoption of cryptocurrencies would increase the IRS’s ability to crack down on tax fraud. Crypto transactions are pseudo-anonymous. People incorrectly believe they cannot be tracked. Blockchain transactions like Bitcoin are publicly visible meaning the IRS can track crypto transactions simply by matching “anonymous” transactions to known individuals.

When we talk to proponents, they frequently cite devaluation of the dollar and a desire to get away from our currency. Or, they want to buy it simply because it is going up. Never underestimate the power of greed.

Devaluation is most certainly happening. Despite this, half of world GDP is denominated in US dollars. The world sees value in what our currency stands for. Furthermore, we are not the only ones playing this game. Every central bank with a currency also devalues it.

If you’re mad at funds being devalued, put it in something diversified that hedges against devaluation, like a productive multi-national business. Tangentially, it is ironic that we complain about inflation or currency devaluation, but never complain about our stocks or houses increasing in value.

Regarding our government possessing a cryptocurrency strategic reserve, especially Bitcoin, consider these points:

1. You don’t know who stands behind it. No one has ever come forward and said, “I’m the person who stands behind this.” In comparison, the dollar is backed by the GDP of the most powerful nation on earth.
2. There is no audit process. What assurances do you have that it won’t be hacked?
3. You don’t know what gives it value, other than everyone saying it has value. Much of this may be driven by the fear of missing out, which works, until it doesn’t.

Increases in Bitcoin prices are inflationary. If you hold this for inflationary purposes, you are ultimately trying to trade a currency, that is not really a currency. Good luck with that.

It’s illogical for our government to hold bitcoin, unless the goal is to build reserves so we can control it or, at a minimum, have a seat at the table globally. A crypto reserve could signal increased acceptance of cryptocurrencies by the U.S. government, potentially leading to greater adoption and legitimacy. However, such a move would serve to undermine legitimacy of the US Dollar.

In the US, crypto is mainly used by the financial industry for trading purposes. If you follow the money, you identify peoples’ true motivations. Wall Street loves shiny trinkets to sell to the world, regardless of merit. They will make a fortune pushing cryptocurrencies. Ironically, the fortune Wall Street makes will be paid in green dollar bills!

Crypto does not have a legitimate or conventional role as a currency. We can’t stroll into HEB to buy groceries with Bitcoin. Given its tremendous volatility, it functions much more like a stock than a currency.

Outside the US, people are attracted to cryptocurrencies if their currency or government is unstable or illiquid. So, why would the US hold a strategic reserve for external nations? Possibly to track, stabilize and control international relations.

There are also hacking and security risks which could be risky for a strategic reserve. A hacking group stealing huge amounts of cryptocurrency could be devastating to the US.

For individuals, owning crypto in an exchange like Coinbase or Binance, offers no FDIC/SIPC insurance. If you lose your private key or recovery seed, there is no central authority to restore access.

In comparison, the strategic petroleum reserve has legitimate use as a necessary daily commodity. We can see it, measure it and know exactly how much energy it holds. And, in the case of war it can be quickly mobilized to power our nation.

If we go down the road of a Bitcoin reserve, then why not a strategic reserve of diamonds, gold or other stores of value?

At this point, the Bitcoin strategic reserve question is above our pay grade. However, we would caution investors chasing any asset merely because it has gone up.

Dave Sather is a Certified Financial Planner and the CEO/Founder of the Sather Financial Group, a fee-only strategic planning and investment management firm.