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"A small leak will sink a great ship."

— Benjamin Franklin

The bitcoin strategic reserve: Crypto’s best or worst idea?

Perhaps the most dramatic development of the election is how quickly the idea of the US government adopting bitcoin as a strategic asset has progressed from crypto meme to long-shot legislation to reasonable possibility — Polymarket now puts the odds of the US starting a Strategic Bitcoin Reserve at 34% and sensible people are seriously considering it.

Why would the US government legitimize an upstart rival to the US dollar?

Senator Cynthia Lummis, who wrote the bill that might make it happen, promises that just one million bitcoin could cover half the US government’s mountain of debt in 20 years.

A recent paper from the Bitcoin Policy Institute (BPI) argues that a Bitcoin Strategic Reserve would, among other benefits, "provide option value against monetary devaluation and debt instability."

The economist Josh Henrickson, a co-author of the BPI paper, says bitcoin would act "like a hedge against your own behavior" for the free-spending US government.

And Matt Huang of Paradigm, likening bitcoin to gunpowder as a technology that every sovereign will inevitably adopt, thinks the US should avoid the rush and buy it now.

I see merits in all these views and I get the appeal of a silver bullet to solve the US’s seemingly intractable debt problem — especially if you think the US dollar is inevitably fated to lose its status as a global reserve currency. 

But I still think it’s a bad idea for the US government to buy bitcoin.

Let’s count the ways:

There's no reason to: The benefit of issuing the global reserve currency is that you don’t need to hold reserves of anything. Other countries hold reserves to protect against a strong US dollar or recycle a trade surplus. The US issues dollars to itself and runs a giant trade deficit.

Gold is not strategic: The government’s stockpile of gold is a functionless anachronism that has no bearing on the value of the US dollar. The government hasn’t added to its gold holdings in decades so why would it add digital gold now?

The dollar will probably be the global reserve currency forever: Because what’s the alternative? China has a closed financial system, Europe is a mess and everything else is too small.

The math does not check out: Bitcoin’s market cap would probably have to exceed a quintillion dollars to hit Senator Lummis’s target of offsetting half of the US government’s debt in 2045. I’m not sure we should be rooting for a world where bitcoin is worth 20x the global stock market.

It’s impractical: Imagine the front running! There is no way for the slow-moving US government to acquire bitcoin at a reasonable price — unless they just seize it from people, which might be what it comes to if bitcoin really is that strategic (most of the government’s gold was acquired by seizure). 

Storing crypto is tricky: What if the government buys a million bitcoin and then gets hacked by North Korea? Or we just lose the seed phrase? It could happen.

So, buying bitcoin for a strategic reserve seems like a bad idea to me. 

Here’s why I think it might be the worst idea:

It would make a tiny number of people insanely rich: Some of these people are already very annoying — imagine how insufferable they’d be as trillionaires! 

It might make millions or billions of people hate bitcoin: Senator Lummis suggested on Bankless that a strategic reserve could be a first step toward putting the US on a bitcoin standard. This would not go over well because one constant from modern history is that people hate hard money. If bitcoin becomes the hard money that global governments anchor their budgets to, people will resent it.

It would stop bitcoin from winning organically: Winning hearts and minds one at a time is more powerful than winning by government decree. By buying up all the coins now, the US government would deprive bitcoin the chance of winning broad support by slowly making many millions of people rich. 

This is a slippery slope: Like Mikhail Gorbachev attempting to shore up communism by introducing just a little bit of capitalism, attempting to shore up the dollar by backing it with a just little bit of bitcoin could trigger the crisis it's ostensibly trying to avoid.

(If that reference is too dated for you, think instead of Do Kwon attempting to inspire confidence in Luna by starting a bitcoin reserve to partially back it.)

This last point is perhaps the only one that really matters. 

In a recent podcast, Mathew Pines, a co-author of the BPI paper written in support of a Strategic Reserve, warns that "there probably is a risk that you could stimulate the negative feedback loop that you're trying to prevent."

Pines also paraphrases his BPI colleague Josh Hendrickson’s idea that "fiat monies exist essentially by stable equilibrium, where everyone believes that they're worth something, a positive value, or they're worth nothing."

Bitcoiners, of all people, should be cognizant of the risk of upsetting that equilibrium.

The dollar is backed by the full faith and credit of the US and nothing else.

Buying bitcoin for a strategic reserve would therefore suggest that the US government is losing faith in itself, with unpredictable consequences. 

As I was recently reminded by reading "Resistance Money," bitcoin is a great idea.

But the Bitcoin Strategic Reserve seems like a bad one — and possibly even crypto’s worst.

(Unless Bitcoinization is inevitable, in which case it may be the best one.)

— Byron Gilliam

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