Nic Carter: Why I Oppose Bitcoin as a Strategic Reserve

Author: Nic Carter, Partner at Castle Island Ventures

Compiled by: Luffy, Foresight News

Recently, the concept of a Strategic Bitcoin Reserve (SBR) has begun to attract widespread attention. Trump advocates for the continued holding of Bitcoin seized by the U.S. government, but some proposals go further, such as Senator Lummis's recent legislative draft suggesting that the U.S. government purchase 1 million Bitcoins within five years.

Bitcoin enthusiasts believe that the case for a strategic reserve is almost a foregone conclusion. However, I think this is unlikely; a Bitcoin strategic reserve is not a good idea. Allow me to explain.

Are We Talking About Inventory, Sovereign Wealth Funds, or Reserves?

First, let's clarify the concept of a "reserve" of Bitcoin. In his speech at the Nashville Bitcoin Conference, Trump promised: "I announce that if I am elected, my government, the United States of America, will adopt the policy that all Bitcoin currently held or acquired by the U.S. government will be retained… this will effectively become the core of the national Bitcoin strategic reserve."

I strongly support the idea of the U.S. government maintaining a Bitcoin inventory, but I do not support purchasing more Bitcoin. Some proposals suggest that the government should buy large amounts of Bitcoin: from about 800,000 BTC (BPI), to 1 million BTC (Lummis), to 4 million BTC (RFK Jr).

Senator Lummis, Michael Saylor, and the Bitcoin Policy Institute have been discussing the "Strategic Bitcoin Reserve (SBR)."

According to Senator Lummis's framework, the U.S. government would purchase 1 million BTC within five years and hold it for at least 20 years. His logic is to "strengthen America's financial position, hedge against economic uncertainty and currency instability." Lummis's bill explicitly states that the SBR will "strengthen the position of the dollar" and compares it to the role of gold in previous monetary eras.

It is important to distinguish these proposals from the idea of purchasing Bitcoin within a sovereign wealth fund, as mentioned by George Selgin. To my knowledge, the main advocates of the SBR do not view it as an asset in a national portfolio; they explicitly link Bitcoin to the dollar and imply that Bitcoin would actually strengthen the dollar. This means they envision a monetary system where Bitcoin plays a positive role. Currently, it serves the same function as foreign exchange reserves, but perhaps in the future, it will become the actual basis for a new commodity standard, similar to the Bretton Woods system. (For those who think I am exaggerating, just read the writings of SBR advocates.)

It should be clear that I do not oppose the idea of retaining existing seized Bitcoin (I believe this is a policy Trump will eventually adopt), nor do I oppose the idea of putting Bitcoin into a sovereign wealth fund (even though the U.S. does not have a sovereign wealth fund). Rather, I oppose the idea of creating a Bitcoin strategic reserve and giving it any form of monetary function.

Bitcoin Reserves Will Weaken, Not Strengthen, the Dollar

My main point is that a Bitcoin reserve will not strengthen the dollar. Unlike other countries, the U.S. issues the global reserve currency—the dollar. Other countries may try to purchase Bitcoin, and in fact, some are already doing so.

If you are Russia or Iran, it may make sense to consider adding an unseizable asset to your foreign exchange reserves, especially after the U.S. seized Russian bonds in 2022. But the U.S. does not need to hedge its exposure to the dollar risk because it issues dollars itself.

Buying Bitcoin and giving it a monetary role (whether as foreign exchange reserves or a more significant role) implies that the U.S. has lost confidence in the current dollar-based system.

This means the U.S. government is abandoning the inconvertible fiat currency standard, which would throw the system into chaos. Currently, the dollar is supported by various factors, including the U.S.'s role as a global trade manager, the robustness of the U.S. economy, the creditworthiness of the U.S. government, the ability of the U.S. to project hard and soft power, the depth of U.S. capital markets, and the dollar's ubiquity in global trade and finance.

If the U.S. government suddenly shifts its stance and states, "We are reconsidering the entire Washington Consensus," the market will begin to question what is happening with the government. Are they planning to default? Will they dismantle the institutions of the Bretton Woods system? Are they hinting at massive deficits and high interest rates?

It should be noted that I do not believe the government is considering these matters, but bond traders would immediately become concerned.

You might protest, "We are not talking about a shift to some new gold standard, with the dollar as the weight of Bitcoin. We are just talking about purchasing some Bitcoin and putting it on the U.S. balance sheet."

The market will not see it that way. If Bitcoin on the balance sheet is merely symbolic, it will be an extremely expensive symbol. At current prices, one million Bitcoins would cost $100 billion. Of course, it is well known that the U.S. government is a price-insensitive buyer, so the U.S. might ultimately purchase these Bitcoins at $1 million each, meaning a total expenditure of $1 trillion. This is a significant expense that should be spent on other, more meaningful things.

I doubt the market will view the purchase of Bitcoin as symbolic; rather, it will see it as the first step toward a return to a new commodity standard backed by Bitcoin.

Austin Campbell states that this would "accelerate the demise of the dollar, as it would signal to the world that the U.S. does not intend to manage its finances properly and may at some point reprice in Bitcoin."

Assuming the probability of the Lummis SBR proposal begins to converge to 1, you would see financial markets collapse. Interest rates would soar as U.S. debt investors would begin to doubt whether the U.S. is considering a complete break from the Bretton Woods II system.

The cost of capital for everyone on Earth would rise sharply, and inflation could worsen. With financial markets crashing and Bitcoin soaring, there would be a massive redistribution of wealth.

In other words, the U.S. is considering abandoning the current relatively stable monetary system in the short term and replacing it with a monetary standard based on a highly volatile emerging asset, which would cause complete panic among its creditors.

In my view, if a Lummis-style reserve comes close to its goal, the market will begin to panic, and Trump will be forced to retract the policy.

While BSR supporters may claim not to advocate for a new gold standard based on Bitcoin, their stated intentions are very radical, and if the reserve comes close to becoming a reality, the bond market will panic.

From a Political Perspective, SBR Is Unwise

I believe that any legislative proposal to establish a Bitcoin strategic reserve would be completely unworkable in Congress. A few weeks ago, I visited some pro-crypto members of Congress in Washington, and this was my firsthand experience. The situation in Congress is dire, with the Republicans holding only a slim majority. They cannot force a bill through on the grounds of partisan conflict, and I am unclear whether the Republicans would even vote on it.

Supporters of the reserve strategy insist that the executive branch can fund the reserve strategy without passing a law. Of course, the executive branch can also spend money without prior authorization from Congress. Bitcoin supporters have proposed various methods. But these methods completely miss the point. A Bitcoin reserve imposed by executive order is undemocratic, and if Congress does not vote to approve it, it is likely to be overturned in subsequent administrations.

The executive branch can unilaterally decide to launch an expensive foreign war and divert funds through various secret plans. But such actions would be very unpopular, as people would view them as undemocratic. The balance of power in our republic dictates that the president takes action, but Congress grants power (and appropriations). We do not have a tyrant in power.

Since Congress controls the purse strings, American citizens would be consulted when making significant spending decisions.

In other words, in a household, a husband might not mind if his wife occasionally shops with his credit card. But if she decides to buy a new car or a house, he would certainly prefer to be consulted. Of course, mechanically, if the limit is high enough, she might be able to buy a car with her husband's credit card. But that misses the point. She should consult her husband before making such significant decisions. The president should consult Congress (and thus the American people) on any significant expenditure, and a Bitcoin reserve certainly falls into that category.

You might say, "But Trump has the power." That is not the case. He does not have the power to spend hundreds of billions of dollars to establish a Bitcoin strategic reserve. The Bitcoin strategic reserve did not come up in the campaign debates, nor has it meaningfully appeared in the media.

He talked about the Bitcoin reserve (i.e., holding existing seized Bitcoins) in his speech in Nashville, not about the government purchasing additional Bitcoins. Trump's attempt to bypass Congress to spend government funds on Bitcoin is politically extremely unpopular. This would deplete his limited political capital. Trump's agenda is far broader than Bitcoin. I expect that even if he feels a momentary excitement about the concept of a reserve, political logic will ultimately clarify things for him.

Another issue with forcing Bitcoin purchases through executive order is that what is easy to do can also be easily reversed. If such a policy is unpopular, a future Democratic administration would undoubtedly immediately sell off the reserves, leading to chaos in the Bitcoin market.

Bitcoin users should hope for a democratic consensus that a Bitcoin reserve or inventory is a good idea and implement this policy through bipartisan legislation or even a constitutional amendment. Generally speaking, meaningful monetary reform is achieved through legislation, such as the Gold Reserve Act of 1934 or the Gold Clause Resolution of 1977 after Nixon suspended the Bretton Woods I system.

Bitcoin users should hope for a Bitcoin reserve that can endure, rather than one that is fleeting. Policies based on executive orders implemented by a new Trump administration will not last.

U.S. Government Purchasing Bitcoin Will Severely Alienate the Public

There is no doubt that SBR policy will be seen as a massive wealth transfer from American taxpayers to wealthy Bitcoin holders. This would be a regression that would not be welcomed by the public. Bitcoin holders are a relatively small group. The Federal Reserve found in 2022 that only 8% of American adults hold cryptocurrency, with a higher proportion among the wealthy.

Even if the funding for the SBR comes from some fiscally "neutral" means (such as selling some gold), it will still be seen as something that Bitcoin holders do not deserve. These funds could be used for anything else rather than being allocated to Bitcoin holders.

A significant monetary policy change that benefits a small portion of Americans will turn all non-Bitcoin holders against Bitcoin holders. And I suspect many Americans will not understand the logic of the SBR, as there is currently no apparent crisis with the dollar.

If de-dollarization accelerates, the U.S. finds itself in some default predicament, interest rates soar, and many other countries begin adopting Bitcoin as a reserve asset, then people's attitudes may change in ten or twenty years. But that is not the case today.

If you recall, student loan forgiveness was quite unpopular because it was seen as a bailout for middle-class Americans who could afford to go to college and obtain worthless liberal arts degrees. (Interestingly, Elizabeth Warren proposed a unilateral $640 billion plan to cancel student loans in 2019/2020, which was ultimately rejected by Congress.)

Biden's student loan forgiveness plan will benefit about 43 million Americans, a group larger than Bitcoin holders. Viewed in this light, the uproar caused by a Bitcoin reserve would be even more severe.

Currently, due to the organic adoption of Bitcoin, the financial world is becoming interested in Bitcoin. The reserve strategy will pit ordinary Americans against Bitcoin holders, which will severely impact Bitcoin adoption.

Bitcoin Reserves Have No "Strategic" Purpose

The term SBR is perplexing, especially the word "strategic." The U.S. government holds many commodities that are genuinely used for strategic purposes. Among the most important is the Strategic Petroleum Reserve, which is a means to stabilize the oil market.

It is commendable that Biden actually sold a large amount of oil at high prices and later bought it back, thus making a profit. We also hold or have held large amounts of heating oil, natural gas, grains, dairy products, cobalt, titanium, tungsten, helium, and rare minerals and medical equipment.

The commonality is that these commodities have some industrial use, and the government is interested in retaining them for emergencies or to maintain market stability.

In contrast, Bitcoin has no industrial use. The U.S. government does not "need" Bitcoin to trade at any specific price level. It makes no difference to the government whether Bitcoin trades at $1 or $1 million. Bitcoin also does not generate cash flow, so reserves will not help pay interest on future debt.

The only "strategic" role Bitcoin could play is equivalent to the U.S. government's existing reserve assets, such as gold and foreign exchange. In other words, it has no role. As George Selgin painstakingly explains, compared to other developed countries, the U.S.'s foreign exchange reserves are actually relatively small. This is because the dollar is a truly freely floating currency, and the U.S. does not manage this peg at all. Since 1971, the approximately 8,130 tons of gold held by the U.S. have no relevant use. They are purely a historical relic, held simply out of tradition. The last significant intervention in managing the dollar's exchange rate occurred in the 1980s.

Supporters of the Bitcoin reserve strategy tend to greatly overestimate the role of gold in the dollar system. Ultimately, when it comes to the dollar system's ubiquity, the U.S. government's balance sheet is almost irrelevant.

What truly supports the dollar is:

• U.S. GDP growth, with tax liabilities that can only be paid in dollars
• The credibility and stability of the U.S. government and monetary policy
• The U.S. capital markets being the most attractive and liquid markets in the world, making them a hub for global investment
• The network effects generated by the dollar's dominance in trade settlement, commodity markets, foreign exchange markets, and debt markets
• The U.S. continuing to play the role of global hegemon and global trade and security guarantor

Gold and Bitcoin are fundamentally unimportant in today's U.S. monetary system. Perhaps one day they will play a role, but the current inconvertible standard is not based on commodity reserves in any way.

Why Bitcoin and Not Something Else?

Why reserve Bitcoin? Why not something else? Bitcoin holders have yet to provide a compelling answer. You might say that Bitcoin is valuable (with a market cap of about $2 trillion), has global liquidity, and is held by many people. However, Bitcoin is not unique in this regard. Can you make an argument for Bitcoin reserves that does not also apply to Apple or NVIDIA stock?

"Well," you might say, "these are claims on company cash flows, not unencumbered assets. Bitcoin is special because it cannot be seized." However, it is presumed that Apple or NVIDIA would not face the risk of their assets and intellectual property being confiscated. This would be another reason for a foreign country to oppose acquiring U.S. company equity as reserves, but we are talking about the U.S. government.

Choosing Bitcoin reserves over gold also makes no sense. If you want to remonetize hard assets and use them as the foundation of a monetary system, gold is the obvious choice. If we want to "lead" other countries in reserve assets (a common argument supporting the SBR), gold is the perfect choice because we have more gold than anyone else. Simply remonetizing gold would put us ahead.

Gold is also an "unencumbered" asset, as ownership is not a claim on anything but simple possession of gold bars and coins. If Bitcoin holders successfully persuade the U.S. government to abandon the Bretton Woods II standard and return to a commodity standard like before 1971, then gold is indeed a better choice. It has a longer history, more people own it, its value is about nine times that of Bitcoin, it is much less volatile, and we already have it, so remonetizing it would be much cheaper.

If you dislike gold because it is not a "high-growth" asset like Bitcoin, then you might consider fast-growing assets like NVIDIA, Apple, or Microsoft stock. If we consider what commodities the U.S. might invest in for strategic purposes, my preference would be AI data centers or chip manufacturing. They serve clear strategic purposes and would also be economically productive. We would then begin discussing using Treasury or Federal Reserve resources for "industrial policy."

Most conservatives and libertarians are skeptical of the government allocating resources in this top-down manner and prefer to let the private sector handle it. I do not like Biden's massive infrastructure spending; I find it very wasteful, so I do not support further government intrusion into the private sector, especially through blatant dollar issuance.

Typically, the U.S. government does not really use monetary tools to intervene in the market aside from setting interest rates; its role is to set rules and maintain system stability, not to actively inject government funds into commodities for day trading. (This is why many are skeptical of Biden's sale of the Strategic Petroleum Reserve.) We are a market-based capitalist economy, not a centrally planned economy. Managing commodity hedge funds is not the government's job.

This is left to the private sector, and the government will only intervene in emergencies where there is a strategic need to increase reserves of some important commodity. Ultimately, if the U.S. private sector invests in appreciating commodities and assets, the U.S. government will still benefit from capital gains taxes.

Creating an SBR Now Makes No Sense

Why create a Bitcoin reserve now? What is special about the current moment that makes a Bitcoin reserve urgent? Nothing. The dollar is not collapsing; in fact, it is thriving. The dollar index has been rising for the past 15 years, which could harm U.S. manufacturing and other countries with dollar debt.

Relative to the rest of the world, U.S. GDP is growing. Europe, in particular, is slowly declining, and China is facing its first serious economic crisis since the reform and opening up. The U.S. stock market is outperforming the rest of the world, accounting for about 50% of the global stock market, and these trends are likely to continue.

You might say, "But the dollar is declining relative to hard assets like gold. Its purchasing power is decreasing, and we are in an era of volatile high inflation." But the dollar does not seem to be facing a crisis.

Interest rates are slightly higher than in the past decade, but no one is panicking about the U.S. government's creditworthiness. The dollar's share of global foreign exchange reserves has declined over the past few decades, but there is no real crisis. The dollar still holds absolute dominance globally, with no potential challengers anywhere. Whether it is the dying euro or the (managed) yuan, neither has the capacity or ambition to challenge the dollar's status as the global preferred reserve asset.

The only reason to seriously discuss the SBR today is Trump's electoral victory. Bitcoin enthusiasts are seizing this political opportunity, hoping he will not only introduce more favorable regulations but also become a national-level Bitcoin buyer.

However, Bitcoin's scale and liquidity are still far from sufficient to impact the U.S. reserve portfolio, and under a gold standard, it is certainly not ready to become a monetary commodity like gold. Its current value is only about $2 trillion, while gold's value is about $17 trillion. Bitcoin remains extremely volatile and is clearly unsuitable as a unit of account.

Bitcoin holders should be more patient. Bitcoin has performed exceptionally well in its short 15-year lifespan and is becoming an important global monetary asset.

Over time, its volatility will ease (its market cap and liquidity will grow), and it will become a more suitable asset for the government to consider in its portfolio. But for now, it does not play a meaningful role in the U.S. monetary system.

A Bitcoin Reserve May Not Be What You Want

The fact is, there is no need to establish any form of Bitcoin reserve. The U.S. can simply wait patiently without any loss. If Bitcoin continues to monetize and eventually challenges gold, and other countries begin to include Bitcoin as part of their sovereign wealth funds or even start to "back" their currencies with Bitcoin, then the U.S. will still have plenty of time to act.

U.S. institutions, investors, and individuals hold more Bitcoin than anyone else. If the U.S. government truly wants Bitcoin, it has ample means to acquire it at any time.

They could purchase Bitcoin on the open market. In my view, it is more likely that they would choose a cheaper method, such as setting price caps, banning private ownership, and forcibly exchanging Bitcoin held by Americans, just as they did with gold in 1933.

They could also simply confiscate Bitcoin held on domestic platforms; U.S. custodians are by far the largest custodians. They could nationalize Bitcoin mining companies. They could raise capital gains taxes and insist on payment in kind. They could arrest individuals known to hold large amounts of Bitcoin and seize their funds. They could invest resources in developing quantum computing capable of stealing about 4 million Bitcoins vulnerable to quantum attacks.

"Wait… not like that." But that is the point. You cannot dictate how the U.S. government acquires Bitcoin. If you successfully persuade them of Bitcoin's merits, and they are truly determined to reserve Bitcoin, they will do so in the politically most advantageous way.

This may not necessarily align with the best interests of American Bitcoin holders. If given the choice between purchasing 1 million BTC at $1 million each and confiscating 1 million Bitcoins through other means, they would choose the more efficient method.

How Should We Support the Dollar Without Bitcoin?

The long-term creditworthiness of the U.S. government is undoubtedly concerning. The debt-to-GDP ratio is nearing a historic high of 120%. Interest costs as a percentage of GDP are at their highest level in 60 years and continue to rise. Federal net spending as a percentage of GDP is at its highest level in the past century, second only to the levels during and immediately after World War II.

Although the deficit has decreased from its pandemic highs, it remains elevated, and if a recession hits, we have little room to maneuver. The reckless spending of the past four years has led to an inflation outbreak, and we are still dealing with the aftermath.

Over the past quarter-century, the dollar's share of global foreign exchange reserves has declined from 70% to 60%. After the U.S. seized Russian reserves in 2022, certain buyers are now cautious about purchasing U.S. Treasury bonds.

All of this suggests that the dollar may face long-term issues, although there does not appear to be an imminent crisis. If we experience an economic downturn and the government finds itself unable to engage in large-scale stimulus spending, this situation could change, as interest rates are already quite high, and we are facing massive deficits.

If it were up to me, I would do the following:

• Do everything possible to increase GDP growth. This means cheaper energy, fostering high-growth industries like AI, and unleashing the private sector.
• Cut the scale of government spending to reduce the deficit, as the wastefulness of government spending far exceeds that of equivalent capital in the private market.
• Limit political interference in the dollar market, for example, recognizing that the dollar's sanctioning power conflicts with its international utility.
• Allow inflation to persist for a time to reduce the real debt burden.

The good news is that incoming Treasury Secretary Scott Bessent's 3-3-3 plan essentially accomplishes this. We do not need Bitcoin.