An Economist's Perspective: Is Trump's Bitcoin Strategy Really Feasible or Just an Election Tactic?

Author: Chloe, PANews

Trump delivered a speech at the 2024 Bitcoin Conference stating that the U.S. should establish a "national Bitcoin reserve" to offset inflation, instantly causing the crowd to erupt in cheers. "For too long, the U.S. government has violated the crucial principle of every Bitcoin holder, which is to never sell Bitcoin." "And the Republican policy is to retain 100% of the Bitcoin currently held or acquired by the U.S. government."

In a recent interview with streamer Adin Ross, Trump also warned the current government against selling any of the U.S.'s Bitcoin holdings. He believes that if the U.S. does not innovate in digital assets, other countries will catch up, pointing out that America's most significant geopolitical rivals have made substantial progress in the fields of cryptocurrency and artificial intelligence.

However, economists interviewed by the American media outlet Wired believe that Trump's plan to reserve Bitcoin does not offer much benefit. "Basically, I see no economic advantage; the only tangible benefit is that it could get Bitcoin fanatics to vote for Trump," said James Angel, an economist from Georgetown University.

Trump's Bitcoin Reserve Plan to Repay U.S. Debt Based on Two Major Assumptions

In his interview with Adin Ross, Trump praised the advantages of the Bitcoin industry. Fellow Republican Senator Cynthia Lummis also introduced a legislative draft called the "2024 Bitcoin Act" on July 31, which outlines a Bitcoin purchasing plan allowing for the purchase of up to 200,000 Bitcoins annually over five years, totaling one million Bitcoins.

Additionally, these Bitcoins will be held by the U.S. for at least 20 years and can only be used to repay U.S. debt. After that, no more than 10% of the assets can be sold within any two-year period.

According to financial market economist James Angel, Trump's advocacy for investing in Bitcoin to offset the decline in purchasing power due to inflation is based on two uncertain assumptions: one is the uncertainty of Bitcoin's price increase, and the other is the uncertainty of whether the U.S. government can liquidate Bitcoin for dollars without crashing the market.

"The government buying Bitcoin will drive up the price, so it looks like it made a lot of money, but once it actually starts selling Bitcoin to profit, it will push the price back down," Angel said. Although Trump initially proposed that the current government must pause selling the Bitcoin it already owns, he also vaguely promised that the U.S. would increase its holdings over time.

If Trump wants to expand the Bitcoin reserve fund, he must find other funds to purchase these additional Bitcoins. However, available options such as increasing taxes, borrowing, or printing more dollars do not align with the goals of reducing inflation and national debt, nor do they align with Trump's tax cut promises.

Cynthia Lummis's "2024 Bitcoin Act" legislative draft mentions that the U.S. Treasury currently holds a significant amount of gold reserves, which are valued at historical cost rather than current market prices. This valuation may be based on a statutory price of $42.22 per ounce, far below the current market price. Therefore, if the value of gold certificates were updated to reflect current market prices, it would lead to a substantial increase in the asset value on the Federal Reserve's balance sheet. In other words, if the value of gold reserves could be raised from $42.22 per ounce to close to current market prices (for example, around $2000 per ounce), it would increase the assets on the Federal Reserve's balance sheet by trillions of dollars. Lummis proposed that this newly added "book" value could serve as a source of funds for purchasing Bitcoin.

"Money has to come from somewhere," Angel stated.

Even if Trump intends to only reserve Bitcoin obtained through law enforcement activities, his government must weigh the opportunity cost of reserving Bitcoin, as assets like bonds can continuously provide income streams to holders, while Bitcoin does not, making the holding costs high.

George Selgin from the Cato Institute believes the issue is what the U.S. government can gain from reserving Bitcoin. If the U.S. government chooses not to sell the Bitcoin seized from law enforcement activities, it will remain illiquid and provide no benefits, as the money that could have been liquidated could be used for many purposes, including eliminating federal debt and funding other government programs.

Majority of Citizens Paying for the Minority? Government Cannot Represent Citizens in Investment Trust Actions

George Selgin is a supporter of Bitcoin but opposes the U.S. government speculating on Bitcoin on behalf of its citizens. He said, "No government is a savvy investor, let alone a government making certain investment trusts or mutual fund plans on behalf of its citizens is simply unreasonable."

Michael Green from the asset management company Simplify stated that while the ambition to establish a Bitcoin reserve is welcomed and supported by many Bitcoin holders and industry executives, it could come at the expense of the majority, especially if the government seeks to expand its existing holdings. "The only way the U.S. government could purchase Bitcoin is by buying from existing holders," Green said. "But if the government uses taxes or issues bonds to buy Bitcoin, it would result in taxpayers subsidizing a very small number of people, ultimately making the majority pay for the interests of a small minority."

"It's like the U.S. government promising to buy real estate at high prices in California, unfairly benefiting California homeowners; there's fundamentally no difference," Green said.

Moreover, the larger the government's Bitcoin position, the more it relies on mining companies that maintain the underlying operations. In the near future, the mining industry will become another special interest group, and excessive centralization means that if this industry encounters issues, the U.S. government will have to intervene for bailouts.

As for the criticisms regarding the Bitcoin reserve plan, neither Trump nor Lummis have responded. Angel believes that even if Trump is elected, he may not establish a Bitcoin strategic reserve. "Trump is a masterful demagogue, appealing to the emotions of the crowd; this is purely an electoral maneuver, and I think this plan could end up like Trump Airlines, Trump Casinos, and Trump University—turning into a mirage."

Bitcoin Supporters Also Know Trump is Courting Their Voter Base

Finally, Bitcoin participants are also well aware that Trump is seeking their support. Early Bitcoin supporter and founder of cryptocurrency custody service Casa, Jameson Lopp, believes that Trump's view of Bitcoin as important enough to become a campaign issue is itself a "historic" shift.

However, he also pointed out, "Trump is clearly courting us; his way of speaking gives a condescending impression." Lopp also mentioned the apparent shift in Trump's stance. He said, "Although Trump previously dismissed Bitcoin as a 'scam,' he now clearly recognizes its political value. In this way, he can win over a fairly large voter base focused on Bitcoin."

As for how to genuinely create strategies that would benefit American citizens economically, we will have to wait until Trump is elected president again to find out.