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Is bitcoin a strategic asset?

Yesterday, the Treasury Department released data indicating that US national debt has risen to an all-time high of over $35 trillion.

With the Treasury also announcing plans to borrow another $740 billion in just the three months from July to September, it’s clear that there are many more such all-time highs to come. 

But fear not!

At Bitcoin Nashville this weekend, Senator Cynthia Lummis announced her one weird trick to fix the seemingly intractable problem of runaway deficit spending: 

“With a strategic Bitcoin reserve, we will have an asset that can cut our debt in half by 2045.” 

This is an appealing idea — a silver bullet to solve our epidemic of government debt without the hard work of raising taxes or cutting spending in the same way that Ozempic might solve our obesity epidemic without the hard work of dieting or going to the gym. 

But is it realistic?

Let’s do the math.

(Important disclosure: I’m bad at math.)

A recent report from the Treasury Department forecasts US federal government debt to be about 200% of GDP in Lummis’ target year of 2045.

(Two hundred percent might be a best-case scenario as it optimistically assumes we have no pandemic-type budget-busting catastrophes between now and then, and most implausibly, that politicians behave semi-responsibly.)

If the economy grew a modest 5% a year over that period in nominal terms (half growth, half inflation), US GDP would be about $77 trillion in 2045, so US debt (at 200% of GDP) would be about $154 trillion. 

Yikes.

Senator Lummis proposes to cut that debt number in half by buying 5% of bitcoin’s supply. 

Five percent of bitcoin (currently worth $65 billion) would therefore have to be worth roughly $77 trillion (100% of GDP) by 2045.

That back-of-the-napkin math suggests that Lummis expects bitcoin to 1,200x over the next 20  years.

(Assuming 2.5% inflation, it would have to 760x in real terms.)

Is 1,200x a lot?

One way to think about it is: If the US government bought 5% of bitcoin at $70,000 tomorrow (without moving the price!), in order to cut our deficit in half by 2045, bitcoin would have to immediately trade up to $52,300,000 per coin — and then keep pace with inflation for the next 20 years.

Alternatively, the price of bitcoin would have to increase at a rate of 42% per year over 20 years, taking its market capitalization to $1.2 quintillion.

A $1.2 quintillion market cap would probably make bitcoin worth about 20x the entire US stock market.

It’s possible, of course. But I don’t know, it seems pretty ambitious.

Maybe we should play it safe and buy stocks instead?

Bitcoin stabilization fund?

The US government has never bought stocks, but some governments do — the central bank of Switzerland, for example, owns about $150 billion in US equities. 

However, the Swiss buy those with the dollars they receive when intervening in currency markets to keep the franc from appreciating too much against the world’s reserve currency (the US dollar). 

As the issuer of the world’s reserve currency, the US government doesn’t have that problem to worry about — which means it also doesn’t have that particular excuse to buy stocks.

The precedent of other governments buying assets like equities is therefore not a reason for the US government to do so.

The US government does hold gold, of course, but it doesn’t buy gold.

The last time the US government acquired a significant amount of gold was when FDR signed the Gold Reserve Act of 1934.

In addition to seizing about 95 tons of gold from private citizens (not a precedent that bitcoiners should want to invoke), the Gold Reserve Act established the Exchange Stabilization Fund, which tasked the US Treasury with intervening in currency markets to ensure a stable dollar exchange rate.

It has rarely needed to, though.

The stabilization fund’s 8,100 tons of gold, 8.7 billion euros and 5.6 billion yen have sat effectively idle for decades.

All of which is to say, there is no precedent for the idea of adding bitcoin to the government’s balance sheet. 

The US government’s horde of gold is an anachronism and therefore not a basis to buy digital gold today.

The small amount of foreign currency the government holds serves no real purpose and is therefore not a basis to buy crypto currency.

That doesn’t mean establishing a strategic bitcoin reserve is necessarily a bad idea — but it does mean that it’s an entirely new one.

Strategic bitcoin opinion

The new idea behind the strategic bitcoin reserve is simple: The US government should solve its endemic debt problem by buying an asset that will go up, a lot.

As much as I enjoy shortcuts, that instinctively seems like a bad idea to me. 

I wouldn’t want the government buying up shares in companies or tracts of high-end real estate, for example — I wouldn’t trust them to buy the right ones, for one thing, and I wouldn’t want them messing up private markets, for another. 

Is bitcoin any different?

You might argue that bitcoin could someday be the currency of an economy as large as Europe or Japan, in which case the Treasury might own it in the same way it now owns euros and yen.

But that’s speculative at this point, and even if it happened, the Treasury’s holding of euros and yen is small.

You might also argue that holding bitcoin would give the US dollar legitimacy in the same way that holding gold does — but that’s a relic of the gold standard that the US formally abandoned way back in 1971. 

An asset-backed monetary system might be better than a fiat one, I don’t know, but I do know you can't get there from here.

In that sense, I don’t see what’s particularly “strategic” about owning bitcoin at the moment.

To me, Lummis’ proposal seems like an effort to make bitcoin strategic by getting the government to buy it.

If so, I think she’s got the order of operations reversed.

Bitcoin should aspire to become so useful that the US government has a strategic reason to buy it. 

Otherwise, the only argument to do so is “number go up.”

Could bitcoin’s number go up faster than the US national debt?

Sure, maybe.

But that’s just an opinion — and I’m not sure it’s a particularly strategic one.

— Byron Gilliam

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