Trump’s Bet: A Strategic Reserve for the Future?
As an official currency reserve, Bitcoin is becoming increasingly relevant in light of global economic changes. In recent years, cryptocurrencies, in particular, have attracted the attention of investors, technology companies, and government agencies, which view them as a potential alternative reserve asset.
This is due to the growing economic instability and volatility of traditional fiat currencies. Countries and companies seek new ways to protect their financial systems and savings.
Considering the opportunities, risks, and benefits of using Bitcoin as an official currency reserve and comparing it with traditional assets such as the US dollar, gold, and others is necessary. With global changes brought about by financial crises and changing central bank policies, understanding the role of Bitcoin in the future world economic order is becoming increasingly important.
What is a foreign exchange reserve, and why is it needed?
A foreign exchange reserve is a stock of assets a country’s central bank holds to maintain financial stability, support the national currency, and inter-facilitate national settlements. The main purpose of foreign exchange reserves is to provide a ‘safety cushion’ that allows a country to weather economic crises, stabilize the exchange rate, and meet international financial obligations, such as paying debts and financing imports.
Reserves provide liquidity to the national economy and protect the country from external economic shocks. For example, if a country faces a sharp depreciation of its currency, it can use foreign exchange reserves to stabilize the situation by selling them on international markets. This helps to avoid inflation, maintain confidence in the national currency, and ensure the country’s solvency.
Traditional currency reserves: gold, US dollar, euro – their functions and importance
Traditional currency reserves often include several types of assets, such as:
- Gold: Historically, gold reserves have played a vital role in the global financial system. Gold is not subject to inflation and always retains its value, making it a reliable capital protection tool. It serves as an insurance policy in case of economic disasters, as its value is independent of the policies of central banks and fiat currencies.
- US Dollar: The world’s reserve currency for international trade and settlement. It is central to the world’s financial systems because of the resilience of the US economy and its widespread use in global markets. Central banks hold dollars in their reserves because they are needed for international transactions and their currency’s exchange rate stability.
- Euro: The Euro, as a reserve currency, plays a vital role in the financial system of the European Union and beyond. It is used as a medium of exchange and savings, especially in countries outside the euro area that trade extensively with Europe.
How can Bitcoin become an official reserve?
Bitcoin has several characteristics that could contribute to its becoming an official reserve currency:
- Decentralized nature. Bitcoin is independent of any central authority, making it attractive to countries looking to reduce the influence of external factors on their monetary system. The absence of central governing bodies eliminates the risk of political manipulation of the currency.
- Limited issuance. Unlike fiat currencies, Bitcoins are limited to 21 million coins, which creates scarcity and protects the currency from inflationary risks. This feature makes Bitcoin resistant to devaluation, which can be attractive to countries with unstable economies.
- Opportunities for international settlements. Bitcoin allows transactions to be conducted directly between countries, bypassing intermediaries, which reduces transfer costs and increases the efficiency of international trade transactions. This makes cryptocurrency convenient for global settlements, providing greater flexibility than traditional reserve currencies.
- Protection against currency manipulation. In countries with hyperinflation or currency crises where fiat currencies are losing value, Bitcoin can be a safe asset for capital preservation, providing a reliable alternative.
The benefits of Bitcoin for reserves
- Inflation protection. Bitcoin’s limited issuance and the inability to artificially increase the size of the money supply make it an effective hedge against inflation, unlike fiat currencies that can devalue due to money printing.
- Independence from central banks. Bitcoin is not subject to the financial policies of central banks, which can be important for countries seeking to minimize the risks associated with the manipulation of national currencies.
- High liquidity. Bitcoin is one of the most liquid cryptocurrencies, allowing it to be quickly exchanged for other currencies and assets. This makes Bitcoin a convenient tool for international financial transactions.
- Ease of transfer. Thanks to blockchain technology, Bitcoin provides fast and inexpensive transactions, making it attractive for international settlements and financial transactions that require speed and minimal costs.
The Bitcoin exchange rate in dynamics since 2015
Challenges and risks of using Bitcoin as an official currency reserve
While Bitcoin has several attractive features, such as limited issuance and decentralization, its use as an official currency reserve faces several significant challenges and risks that require careful consideration.
- Volatility. One of Bitcoin’s main problems is its high volatility. Unlike traditional currencies, which tend to be more stable, Bitcoin’s exchange rate can fluctuate by tens of percent in short periods. For example, in 2021, Bitcoin’s value dropped from over $60,000 to $30,000 in months before rising again. These fluctuations make it an unreliable asset to use as a stable currency reserve. Countries that use Bitcoin as part of their reserves may face risks of losses amid such price fluctuations. It also threatens financial stability, as significant changes in the value of Bitcoin could affect a country’s foreign exchange reserves, causing economic disruption.
BTC volatility example
USD volatility example
Gold volatility example- Legal and regulatory risks. Bitcoin, like other cryptocurrencies, faces challenges in legal recognition. Bitcoin’s status remains in many countries to be determined: in some countries, cryptocurrencies are completely banned, while in others, they are regulated as assets but not accepted as official means of payment. For example, China actively suppresses cryptocurrency transactions, while countries like El Salvador have accepted Bitcoin as an official currency. Such international policy and law differences create significant legal risks for nations using Bitcoin as a currency reserve. Moreover, governments may change their policies to restrict or completely ban the use of Bitcoin, which could materially affect its value and the stability of the reserves.
- Liquidity and security. Although Bitcoin has high liquidity on cryptocurrency exchanges, its rapid conversion into traditional currencies can be problematic in a crisis. Unlike fiat currencies, which can always be exchanged for other assets at major financial institutions, converting Bitcoin into real money in large volumes can lead to significant exchange rate fluctuations and even restricted exchange transactions on some platforms. Moreover, the security issues of Bitcoin storage are becoming critical. Hacking attacks on exchanges and cryptocurrency wallets, such as the attack on Mt. Gox in 2014, show that Bitcoin storage can be at risk. Loss of critical data or infrastructure attacks can result in significant loss of significant amounts.
- Adoption at the state level. For Bitcoin to become an official currency reserve, it must be integrated into the traditional financial system. Central banks and financial institutions are generally skeptical of cryptocurrencies due to their instability and lack of control. Adopting Bitcoin as an official reserve currency would require significant changes to economic and banking systems, which involve many complexities. For example, states must implement new regulatory, taxation, and investor protection mechanisms.
However, including Bitcoin in the list of state reserves alongside precious metals or foreign currencies is increasingly becoming a topic of discussion among politicians and officials worldwide.
Speaking at the Bitcoin 2024 conference in Nashville, Donald Trump announced his intention to create a “strategic reserve out of Bitcoin.” He emphasized that cryptocurrencies can be critical to the country’s economic competitiveness and promised never to sell Bitcoins confiscated by the US government.
“If I am elected president, the policy of my administration will be to hold onto whatever amount of Bitcoins the government has or confiscates. These coins will be included in the government reserve,” Trump said.
Thus, using Bitcoin as an official currency reserve faces several complex challenges: volatility, legal risks, liquidity and security issues, and difficulties in adoption at the state level. These factors require further research and the development of regulatory mechanisms to ensure the sustainability and security of such a transition.
Bitcoin may become a new asset in the US reserves
Republican Senator Cynthia Lummis shared details of a bill with the working title “Bitcoin Act of 2024,” which would create a national reserve in Bitcoins, with reporters. The bill was first introduced at the Bitcoin 2024 conference in Nashville on July 27. The Block writes about it.
According to the senator, creating a strategic Bitcoin reserve to strengthen the US dollar with a digital asset will ensure the country’s status as a global financial leader for decades to come.
According to the document, the US Treasury Department will also purchase 1 million Bitcoins over five years at 200 thousand Bitcoins each year, which is ~5% of the total supply of the asset. The Treasury Department must hold the Bitcoins for at least 20 years, using them to reduce the national debt. Lummis also called for the department to publish quarterly reports on digital asset purchases.
Lummis and Trump were far from the first to suggest adding Bitcoin to government reserves. Michael Saylor, head of MicroStrategy, also expressed such thoughts. He suggested buying 4 million BTC for the balance of the US Treasury.
ARK Invest CEO Kathy Wood also favors using BitcoinBitcoin as a reserve. She noted that this will only matter when the first cryptocurrency is not a monetary policy instrument but simply on the US balance sheet.
According to data from analyst firm Arkham, the US now holds more than 200,000 BTC.
Predictions for Bitcoin as an official currency reserve
If the proposal to create a strategic Bitcoin reserve in the US is adopted, it will have a significant impact on both the price of BTC and its perception in the global financial system:
Increased interest from institutional investors
The recognition of Bitcoin as part of the official US reserve fund, especially if the US Treasury Department starts buying millions of Bitcoins, will lead to a considerable increase in institutional investment. Large government entities investing in Bitcoin will significantly increase its liquidity and confidence as a long-term asset.
A similar process has already happened with the launch of Bitcoin ETFs and institutional fundraising in January 2024, which caused a sharp rise in the cryptocurrency’s value. If the US government starts actively buying and storing Bitcoin, the price of BTC could rise as there will be additional demand for the asset, especially considering that the supply of Bitcoins is limited (maximum 21 million).
After adopting the Bitcoin ETF, the price impulsively rose 40% in the first month. Since then, the price has increased by 133%.
BTC growth after ETF adoption
Some of the largest institutional holders of BTC are BlackRock (NYSE:) and MicroStrategy. BlackRock’s total Bitcoin holdings total 380,972 BTC, while MicroStrategy owns 331,200 Bitcoins. However, MicroStrategy was the first public company to start repurchasing Bitcoin in 2020. And BlackRock only after the adoption of the Bitcoin ETF in January 2024.
BlackRock’s share price after ETF launch
MicroStrategy’s share price after BTC purchases began
Impact on Bitcoin exchange rate
The expected purchase of 1 million BTC over five years (200,000 per year) will result in additional demand for Bitcoin in volumes that could significantly affect its exchange rate. For example, suppose the US begins purchasing a significant portion of Bitcoin’s annual supply. In that case, it will limit the availability of the asset in the markets, which will contribute to its appreciation. It is predicted that such purchases could result in Bitcoin’s exchange rate appreciating several times and dozens of times in the long term, given its ever-shrinking supply and growing demand.
Long-term stability and regulation
If Bitcoin is recognized as an official US reserve, it could become a more stable and globally recognized asset. Such a move from the world’s leading economy would positively impact the perception of cryptocurrencies and accelerate their national adoption in other countries. Moreover, different countries may also follow the example of the US to reduce the economic gap. In this way, Bitcoin could become a strategic asset. This could also mitigate Bitcoin’s volatility, as increased institutional demand and understanding of its role as a long-term asset would reduce the short-term fluctuations in cryptocurrencies.
Supporting the dollar and reducing government debt
Lummis emphasizes that creating a strategic Bitcoin reserve should strengthen the US dollar. If Bitcoin is used to reduce national debt, it could be integrated further into international financial structures. With such a reserve, the US can better manage its debt and promote its interests on the global stage. It will also reduce dependence on traditional fiat currencies and monetary policy instruments.
Could Bitcoin become part of the global financial system?
If the US decides to integrate Bitcoin into its reserves, this could be the first step towards its recognition as a reserve asset on a global level. This will encourage other countries to consider Bitcoin as an alternative to traditional currencies such as the dollar or gold. In the long term, this could change the architecture of the global financial system and lead to new models of international settlement.
Thus, if the US passes this bill, it is likely to positively impact the price of Bitcoin by increasing its stability and liquidity. Bitcoin could become one of the most valuable assets in international reserves and strengthen the US’s role in global financial structures.
Price forecast
Since November 2022, when Bitcoin bottomed at $15,460, each upward momentum has corrected within 40-50% Fibonacci retracement of the momentum. So too, can be traced to the global uptrend level, which continues to influence the price movement.
Bitcoin corrections after each pulse
At the moment, Bitcoin has approached the $100,000 mark, a significant resistance level. It is not so important whether this mark will be broken; it is important to watch when the momentum is over because the price can expect a correction of 40-50% of the impulse after the momentum is over.
Technical goals
In the last bullish cycle, Bitcoin price reached 3.618-4.236 Fibonacci levels. If history repeats itself, the current targets will be 178,000-200,000.
On the monthly timeframe, the RSI is nearing the descending trendline and entering the overbought zone, consistent with previous bull cycles. Traders might consider closing long positions as the RSI approaches this critical level.
Technical goals BTC
Nevertheless, it is worth considering that such an increase will inevitably lead to a shortage of Bitcoins, which could lead to market manipulation to provoke sales and lure investors into fear.
คำแนะนำการอ่านบทความนี้ : บางบทความในเว็บไซต์ ใช้ระบบแปลภาษาอัตโนมัติ คำศัพท์เฉพาะบางคำอาจจะทำให้ไม่เข้าใจ สามารถเปลี่ยนภาษาเว็บไซต์เป็นภาษาอังกฤษ หรือปรับเปลี่ยนภาษาในการใช้งานเว็บไซต์ได้ตามที่ถนัด บทความของเรารองรับการใช้งานได้หลากหลายภาษา หากใช้ระบบแปลภาษาที่เว็บไซต์ยังไม่เข้าใจ สามารถศึกษาเพิ่มเติมโดยคลิกลิ้งค์ที่มาของบทความนี้ตามลิ้งค์ที่อยู่ด้านล่างนี้
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