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Answering the Critics of a Strategic Bitcoin Reserve

Written by Dr. Robert P. Murphy | Dec 24, 2024 3:33:00 PM

In my previous post, I explained that Michael Saylor has been making the rounds with a suggestion that the US government sell off its gold reserves and replace them with a Strategic Bitcoin Reserve (SBR). After noting that my preferred policy outcome would be a complete dissolution of the Federal Reserve and a return of money/banking to the private sector, I said that in a more politically realistic framework, where the US government still maintains control of the global dollar supply, I would endorse the accumulation of a Bitcoin reserve in the same way I’d recommend this to a conventional corporation looking to diversify its treasury.

When I posted my article on Twitter/X, I received some vehement pushback, most of which was nonsense. In the present post—which corresponds to the forthcoming [January 3, 2025] InFi podcast episode—I will respond to some of the popular criticisms of the SBR proposal. (Podcast episode is now available here!)

 

Good Objections to the Creation of an SBR

 

I’m a fair guy, so let me concede that some of the objections were valid. First and most obvious, in general I don’t want the government acting as a hedge fund manager with taxpayer dollars. If we set a precedent with an SBR, that might grease the wheels for corporate lobbyists to get Uncle Sam to establish a Sovereign Wealth Fund in which it buys all sorts of equities and debt instruments, looking to earn a spread above the Treasury’s borrowing rate. That might make economic sense in a narrow vision, but it’s an awful slippery slope and would give the US government even more leverage over private asset markets.

Another valid objection is that even if things go as planned and Bitcoin enjoys another decade of tremendous price gains, the only way it can pay down (or off!) the federal debt—as many boosters of the SBR tout—is if a chunk of the SBR is eventually sold. But in light of the “HODL” slogan, and the fact that a large sale might crash the Bitcoin price at that time, is it realistic to suppose that today’s supporters of an SBR would be in favor of selling off (say) half of it in ten years? 

The above two objections are valid. If they are the reasons one opposes the creation of an SBR, fair enough. But now let me move on to a string of objections that are nonsense, and would just as well apply to any company considering adding Bitcoin to its treasury.

 

Bad Objections to the Creation of an SBR

 

One objection (which is carried forward from my prior article) is that the US dollar doesn’t need any type of reserves, whether forex, gold, or Bitcoin. “Sure,” this type of critic might say, “it makes sense for Switzerland to hold reserves denominated in USD, euros, and yen, because they are a small country and want to keep the Swiss franc trading within a certain band against the currencies of other major trading partners. But the US dollar is the global reserve currency,” this critic could continue, “and so it doesn’t need to maintain parity with other currencies—the USD is the benchmark for every other currency.

The problem with this objection is that it argues in a circle. Many analysts—including myself, as I explained during my ZeroHedge debate in early 2024—think that the US dollar is going to steadily shed its status as the global reserve currency. If we’re right, then the USD is going to need as much “defense” as other non-global-reserve currencies. And starting to accumulate BTC now is a very wise move, in that context.

A second objection argues that it makes no sense to hold currency reserves at all, in an age of fiat money. Back when the dollar was redeemable in gold, it made sense to hold gold reserves, but not even the proponents of an SBR are suggesting to literally pledge to redeem dollars for bitcoins at some pegged exchange rate. So if the dollar is still going to be fiat money, this objection asks, what does it even mean to say we have “reserves”? There’s nothing “backing up” the US fiat dollar.

This second objection overlooks the need for the monetary authority to be able to withdraw dollars from circulation if needed to keep its purchasing power at a desired level. Right now, governments around the world—including the US—hold assets denominated in various foreign currencies, and these are classified as “foreign exchange reserves.” If the Swiss authorities want the Swiss franc to rise against the yen, then they can use their holdings of yen reserves to enter the forex market and spend their yen buying back Swiss francs. This will make the Swiss franc strengthen against the yen. The same process works for any asset that appreciates faster than the bonds denominated in those currencies. In our example, if the Swiss authorities originally had invested not in Japanese government bonds but instead in more bitcoins, then over a long enough stretch (given the past performance of Bitcoin) they clearly would have been able to use their Bitcoin to buy more yen than they originally would have had, in order to then go buy Swiss francs.

Finally, we come to a third objection to an SBR. Some critics were wondering, why not have the authorities by Dogecoin? It has outperformed Bitcoin (they claim). To be clear, such critics are being facetious; they think it’s obviously a silly idea for the world’s superpower to begin a reserve for the global reserve currency consisting of a meme coin.

Here it’s a difference of degree. Yes, in some respects Bitcoin and Dogecoin are similar assets, but Bitcoin is clearly in a league of its own. As of this writing, BTC has a market cap of $1.9 trillion. DOGE in contrast has a cap of about $48 billion. As I explain in this post, from 2014 – 2024 BTC has on average more than doubled every single year.

In contrast, DOGE was founded in late 2013 and was relatively flat in price until 2021:

If private individuals want to invest in DOGE, more power to them, but the case for BTC being a more mature, institution-grade asset is obviously far more compelling.

 

Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.

Twitter: @infineogroup, @BobMurphyEcon

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