Reserve bubble: Why adding cryptocurrencies to strategic holdings could undermine the U.S. economy

The United States is preparing to create a strategic reserve of Bitcoin and other cryptocurrencies — a move that fulfills a campaign promise made by then-candidate Donald Trump. Now that it is back in the White House, the Trump administration claims that this initiative will bolster America’s leadership in digital finance. But economists are skeptical. Rather than strengthening the U.S. position, they warn, the move could backfire, damaging the country’s financial standing globally. At best, the move may enrich a select few. At worst, it could set a troubling precedent for other nations.

• 1.From crypto-skeptic to reserve architect
• 2.A crypto reserve that doesn’t do what reserves are meant to do
• 3.Enter the crypto arms race
• 4.Economists see a nightmare scenario

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From crypto-skeptic to reserve architect

During his first term, Donald Trump wasn’t exactly a fan of crypto. In 2019, he declared that Bitcoin and other cryptocurrencies were “not money,” calling them volatile saying they were “based on thin air.” He insisted that the only “real currency” was the U.S. dollar. But his stance shifted dramatically over time.

On the campaign trail in 2024, Trump vowed to make the United States the “crypto capital of the world.” He took aim at then-SEC Chairman Gary Gensler for tightening crypto regulations and proposed the creation of a strategic Bitcoin reserve. True to his word, after returning to office, Trump signed a presidential directive to that effect. As a result, roughly 200,000 bitcoins — seized by federal authorities in criminal and civil cases — will now be allocated to this reserve. The Treasury Department and the Department of Commerce are tasked with figuring out how to acquire more Bitcoin without using taxpayer money.

Other cryptocurrencies will be held in a separate fund, with no plans for additional government purchases. According to Trump, this fund will include Ethereum, XRP, Solana, and Cardano. The president is also working to shield the reserve from reversal by future administrations by ensuring that overturning the policy would require congressional approval, or at least a court challenge.

Back in 2019, Trump dismissed Bitcoin as being “made of air.” Now, he wants the U.S. to be the world leader in crypto

Yet many investors were disappointed. They had expected a far more ambitious approach — similar to one outlined by Senator Cynthia Lummis (R-WY), who proposed that the government buy one million bitcoins over five years and hold them for at least two decades.

Trump’s plan does not set a target size for the reserve. Instead, it directs the Treasury to find “budget-neutral” means of expanding its holdings beyond the initial 200,000 bitcoins. The market reacted swiftly: Bitcoin prices fell, and the total value of the crypto market dropped nearly 17% after the action was announced.

A crypto reserve that doesn’t do what reserves are meant to do

Governments typically maintain two types of reserves: resource and currency reserves. The first are created in order to store commodities — oil, precious metals, grain, other foodstuffs — without which a crisis could quickly spiral out of control. Such reserves can also be used to stabilize market prices. For instance, China’s strategic pork reserve of 200,000 tons helps hold meat prices in the country steady. Monetary reserves, meanwhile, are used by central banks to protect their own currency during times of crisis, allowing them to fight inflation by selling foreign currency from reserves and thereby creating artificial demand for the national currency.

The Bitcoin reserve doesn’t fit into either model. The U.S. does not need crypto the way it needs oil or grain, nor will offloading Bitcoin in a crisis help prop up the dollar — in fact, using the reserve that way would more likely spark outrage among Bitcoin loyalists. And even absent a selloff, merely concentrating control of an asset designed to be decentralized makes many investors uneasy.

A crypto reserve would not serve the traditional purposes of either resource or currency reserves

The tasks that the crypto reserve will address remain vaguely defined. The proposal’s proponents, Trump chief among them, express confidence that the reserve will contribute to stability through diversification — expanding the government’s resources beyond traditional assets. Additionally, it is seen as an investment based on the expectation of Bitcoin’s future appreciation. Trump even stated that stockpiling cryptocurrency would finally allow the U.S. to resolve its national debt issue. Furthermore, the reserve could help legitimize cryptocurrencies themselves, which many institutional investors still view with suspicion due to their price volatility and decentralization.

One of the arguments being made in favor of Trump’s Bitcoin initiative compares the proposed 21st century reserve to the gold stored at Fort Knox. However, this comparison is not entirely appropriate. First, gold is a much more time-tested reserve asset than Bitcoin, and second, for a specific period in U.S. history — from 1944-1971 — the Bretton Woods system mandated that the dollar be convertible into gold at a rate of $35 per ounce (Richard Nixon began moving the country off of the gold standard in 1971). Now, however, gold is no longer relevant to the health of the dollar, and there is growing debate over whether the Fort Knox reserve is even necessary.

The creation of a “digital gold” reserve has raised concerns that Trump might use the gold reserves at Fort Knox to purchase Bitcoin. Technically, this would align with the principle of budget neutrality (a purchase without increasing net government spending). Incidentally, Trump’s chief economic advisor, Stephen Miran, had previously suggested selling gold — but in exchange for foreign currency or government bonds, not digital currencies.

Another popular argument is that the value of the strategic reserve could rise rapidly if Bitcoin’s price increases, potentially allowing the U.S. to pay off its national debt. However, these are purely theoretical speculations. Moreover, the plan of action in the event of a significant drop in the coin's price remains unclear. Additionally, for government institutions, profit generation is not the primary goal, as central banks use reserve assets primarily to protect their currency, not to fill the treasury.

Enter the crypto arms race

The U.S. may be leading the charge, but it’s not alone in experimenting with crypto reserves. The World Bank has cautioned that cryptocurrencies aren't suited for this role. Still, such warnings have not stopped governments from dabbling in the market, often by selling confiscated digital assets.

In 2024, Germany sold 50,000 bitcoins. In Brazil, Congressman Eros Biondini proposed requiring the central bank to hold Bitcoin as 5% of its reserves. Bhutan holds nearly $900 million in Bitcoin — roughly 30% of its GDP. Hong Kong floated the idea of adding Bitcoin to its reserves. So far, only El Salvador has actually done so: the country buys one Bitcoin a day and has officially adopted the cryptocurrency as legal tender.

European countries have also shown an interest. Former German Finance Minister Christian Lindner has urged the European Central Bank to consider adding Bitcoin to its portfolio. In Switzerland, a popular initiative called to do the same, but the central bank rejected it, citing concerns about volatility, liquidity, and security.

Even in Russia, proposals have been made to create a crypto reserve. However, when this question was posed to the head of the Central Bank, Elvira Nabiullina, she responded negatively: “For us, the qualities of a reserve currency are very important, such as liquidity, minimal exposure to credit and market risks, so that in a crisis this currency can be used quickly in large volumes without significant loss of value. I do not yet see the circumstances under which cryptocurrency could enter our reserves.”

Still, the creation of such a reserve in the U.S. could serve as a turning point. If the United States or another leading economy — such as China, which is rumored to hold an amount of Bitcoin equal to that of the U.S. — begins to actively accumulate cryptocurrencies, it could lead to a global cryptocurrency “arms race.” However, starting such a trend could backfire on Washington: if nation states and large institutional players start selling their dollars in order to accumulate Bitcoin (or any other cryptocurrency), global demand for dollar reserves could gradually decrease.

In such a cae, the U.S. would ultimately forfeit the “exorbitant privilege” to simultaneously print money and borrow at low rates. Supporting the legal status of Bitcoin while also protecting the hegemony of the dollar will require a delicate balancing act on the part of the Trump administration..

Economists see a nightmare scenario

“To observers, the U.S. crypto reserve might be fascinating, but for those who care about institutional integrity, it’s a nightmare,” says Harvard professor of economics Oleg Itskhoki, who sees Trump’s proposal as a textbook case of how to institutionalize corruption. Trump’s son-in-law, Jared Kushner, is known cryptocurrency enthusiast, and Itskhoki warns that: “When America sneezes, the whole world catches a cold. Now every president can create a reserve stocked with their son-in-law’s crypto. This gives those in power a way to manipulate asset prices. If they hold large amounts of the asset, they benefit. That’s a disaster for anti-corruption norms — and a nightmare for any serious economist.”

Itskhoki also points to the potential political payoff a president could reap by promoting the interests of Bitcoin owners. Crypto fans are a loyal part of Trump’s base, and the reserve could serve as a form of vote buying. Bitcoin surged to a record $100,000 in late 2024 as expectations grew that the government would increase demand for the digital currency. As Itskhoki explains, “The court ruled that Trump’s move was within presidential powers, so now we have a legalized vote-buying scheme. You promise investors their assets will rise in value if you win. Trump’s doing it now, but other populists won’t be far behind.”

The U.S. crypto reserve could serve as a legalized scheme for buying votes

The problem, Itskhoki lays out, is not just corruption, but also the riskiness of the asset: “Bitcoin has no fundamental value. It’s an asset built on the fact that someone wants to buy it, and that there are more and more such people. Therefore, it has a price, but no fundamental value. This is a classic pyramid scheme, or Ponzi scheme. In other words, it’s an asset much riskier than securities, even if it may have high potential returns during certain periods. Therefore, from the perspective of an individual investor, it could be interesting.”

This does not mean that Bitcoin is worthless, only that it is a risky investment. Itskhoki explains how the currency could become genuinely valuable over time: “Imagine if sovereign wealth funds start adding cryptocurrency to their portfolios — suddenly the cryptocurrency magically acquires fundamental value. What happens is what Silicon Valley calls 'fake it until you make it' — you’ve created an asset based on a bubble, which [investment] funds now want to have in their portfolios, and this creates demand. And if such crypto assets take a significant share of the market and grow along with the entire market, then it will indeed become a long-term equilibrium, not just a bubble. This is a bifurcation point for the whole world that we are approaching.”

Bitcoin is a classic Ponzi scheme with no intrinsic value

Nevertheless, Itskhoki remains hopeful that America’s experiment with a cryptocurrency reserve will end with Trump's term. Ideally, the next administration would take a firm stance, making clear that a national Bitcoin fund goes against the core principles of anti-corruption laws. “I still believe that nothing [bad] will happen with the crypto reserve in the U.S., but in other developing countries, it could,” Itskhoki told The Insider.