Strategic Bitcoin Reserve, the most discussed topic for some time, has regained its glamor after the induction of Mr. Donald Trump as the 47th President of the United States of America. A Strategic Bitcoin Reserve is created on the premise that Bitcoin can stand tall in the market despite inflation and price volatility and back a strong currency as the US dollar.
Strategic reserve refers to a reserve of commodities or items kept from regular usage and stored to meet emergencies. In the case of Strategic Bitcoin Reserve, Bitcoin will be reserved to cover up the fiat currency. The initiative will be fulfilled using the Bitcoins owned by the American government. The idea behind Strategic Bitcoin Reserve is to elevate Bitcoin to the status of gold or oil to support USD at times of volatility. While many investors support this premise, some are apprehensive about Bitcoin’s capability to support a strong fiat currency such as USD.
Understanding Strategic Bitcoin Reserves
In the case of Strategic Bitcoin Reserves, Bitcoins are strategically hoarded under the supervision of the US government and the financial authorities. Like gold or oil, Bitcoin will be used further to address the government’s needs such as paying balance of payments or influencing the exchange rate of USD. Bitcoin will be added to the assets on the balance sheets of the US economy. Such diversification of the reserves helps the US government to foray into new economic ventures. Given the anticipated prominence that Bitcoin will secure in the market, Bitcoin reserve will help further strengthen the USD.
Donald Trump’s proposal for a Strategic Bitcoin Reserve is said to include 200,000 Bitcoins seized by the government from criminal actors. This reserve is still with the Justice Department of the United States and details about the legislation to move them to the finance department are still unclear. This is the major challenge in setting up a Strategic Bitcoin Reserve for the US economy.
Several investors have proposed ways to set up a Strategic Bitcoin Reserve, prominent among them being the proposal by the pro-crypto Republican Senator Cynthia Lummis. She introduced a bill in this regard in July last year, which is yet to gain approval. According to her proposal, the US Treasury would buy 200,000 Bitcoins annually for five years until the reserve hits 1 million tokens. The Treasury would hold these coins for a minimum of 20 years. With the current price rise of Bitcoin, this would be a strategic move to uphold the strength of the US economy.
Potential Risks and Benefits of the Strategic Bitcoin Reserve
The major reason behind America’s setting up of the Bitcoin strategic reserve is to counter the competition posed by China in the field of decentralized finance (Defi). Owning a significant amount of Bitcoin will strengthen the US economy against its competitors. Many other proponents of Bitcoin think that holding a reserve of Bitcoins will help the economy meet the problem of fiscal deficit without implementing more taxes on its citizens. As Cynthia Lummis expects, America’s national debt can be cut to half over the next few years with the Bitcoin strategic reserve if the price of Bitcoin appreciates in the current manner.
The Strategic Bitcoin Reserve would in short strengthen the US dollar to stand up against other competitors such as Russia and China. However, there are some potential risks to this model. The primary risk of the Strategic Bitcoin Reserve is that Bitcoin has no intrinsic use cases, and it may not end up being crucial for the existence of the US economy.
Another consideration is that Bitcoin is a relatively new currency, and the belief that it will grow to support the strongest economy in the world may be too optimistic. The currency is quite volatile, and being entirely digital, it can be vulnerable to cyber attacks, which points to the need for protective strategies for cyber attacks. This is why many people advocate for a diverse reserve of different profitable cryptocurrencies rather than relying exclusively on Bitcoin.
The Bottom Line
The path to fulfilling the revolutionary idea of the Strategic Bitcoin Reserve is strewn with many challenges and uncertainties. However, if it materializes, the Strategic Bitcoin Reserve would be a huge boost to decentralized finance. A strategic approach without any compromise on market research and thorough resolve on the part of authorities will shape the US government’s Strategic Bitcoin Reserve as a major determinant of the future of the world economy at large.
