Donald Trump, now back in power, is rumored to be faced with a financial dilemma that could reshape the U.S. economy and the global markets: will he back the dollar or gamble on Bitcoin?
On one side, he’s firmly defending the dollar, threatening heavy tariffs against BRICS nations that dare to abandon the greenback. On the other, he’s purportedly considering a national Bitcoin reserve, which would position the U.S. as the first major government to accept crypto in an official capacity.
These two positions are in direct conflict, and the outcome will have significant implications for trade, crypto markets, and America's financial future.
Bitcoin as a National Reserve Asset
If Trump goes through with his plans to buy 200,000 bitcoins annually for five years, that’s a total of one million bitcoins. But it’s a shaky proposition. After all, Bitcoin is currently trading at $100,000, but its price history is filled with extreme volatility. Prices can change drastically overnight, and Bitcoin isn't the most stable asset.
Using Bitcoin as a national reserve is akin to building a foundation on quicksand. The risks associated are enormous for the economy of the world's most powerful nation.
And then there’s the funding. If Trump is serious about selling off U.S. gold reserves to fund his Bitcoin ambitions, he’s making a controversial choice. Gold has long been seen as a bastion of stability during economic downturns. Swapping it for Bitcoin, a digital currency that’s barely 15 years old, is a risky maneuver. If Trump does make America go all-in on Bitcoin, he will inadvertently weaken the dollar, just as Arthur Hayes forecasted.
A Bitcoin-backed national reserve would send a powerful message to global markets about crypto’s future. But would this also erode confidence in the dollar as the leading reserve currency?
The Dollar's Future and the Crypto Wallet Market
If a government-backed Bitcoin reserve were to emerge, it would likely generate increased demand for Bitcoin, consequently raising its price. Should the federal government acquire Bitcoin, it would exert buy pressure on the market, especially if they purchase significant amounts. This could lead to higher Bitcoin prices, given the finite supply of 21 million coins facing escalated demand.
Establishing a Bitcoin reserve might offer some stability to the market. The knowledge that the government has a vested interest in Bitcoin could prevent severe disruptions. But critics are quick to point out that Bitcoin's history of volatility makes it a less than ideal choice as a reserve asset.
The proposed Bitcoin reserve could create a large wealth transfer to existing Bitcoin holders. The top fraction of wallet addresses owns a significant share of Bitcoin. A government buy-up would enable these holders to cash out without crashing the market, raising concerns about wealth concentration in the crypto space.
Regulatory and Institutional Challenges Ahead
Establishing a Bitcoin reserve would necessitate significant regulatory and institutional adjustments. The Bitcoin Act of 2024, proposed by Senator Cynthia Lummis, indicates the Treasury and Federal Reserve would manage the reserve. This would bring Bitcoin further into the traditional financial system, potentially altering how cryptocurrencies are regulated and perceived.
Critics have raised concerns about several risks associated with using Bitcoin as an asset. Its volatility and the immaturity of the crypto market make it an unreliable option for emergency situations. Moreover, the plan to lock Bitcoin reserves for two decades undermines the very purpose of a strategic reserve, which should be accessible during short-term emergencies.
Summary: A Cautious Path for America
Trump isn’t the only one raising alarms. Financial experts at UBS Wealth Management are advising investors to be cautious of the dollar’s strength, suggesting it may not last. They recommend shorting currencies like the euro, British pound, and Australian dollar.
In contrast, currencies like the Swiss franc are now seen as safer options. UBS favors buying the franc if it goes above 0.90 against the dollar.
Not every currency will benefit equally from the current climate. Currencies like the Canadian dollar and Mexican peso, which rely heavily on U.S. exports, could suffer if Trump's tariffs create disruptions. The same could apply to China.
In the end, Trump is likely to favor the dollar. Despite his lofty Bitcoin plans, the risks of undermining U.S. financial power are too significant. He’ll confront BRICS with tariffs, maintain the dollar’s dominance, and perhaps give Bitcoin a nod to keep the crypto community satisfied.
But as we know, the dollar is not just America’s currency; it’s a potent weapon. And Trump is aware of that.
