Key takeaways
- The US Treasury plans to invest $76 billion in Bitcoin over five years, positioning it as a long-term hedge against inflation and economic instability.
- Bitcoin will be stored in secure, Treasury-managed vaults, with robust custodial measures to ensure safety and transparency.
- Bitcoin’s inclusion could reduce US debt and offer a diversification tool, though its volatility and market impact remain concerns.
- The initiative may solidify Bitcoin’s legitimacy and foster global institutional adoption, potentially stabilizing its price over time.
The United States Department of the Treasury, established in 1789, manages the federal government’s finances, collects taxes, issues currency and oversees public debt. Its core responsibility is to safeguard the nation’s financial stability, fund government operations and foster economic growth.
The Treasury operates by issuing debt instruments such as Treasury bills, notes and bonds, which are considered among the safest investments globally due to the full backing of the US government.
The notion of adding Bitcoin (BTC), the apex cryptocurrency, to government treasuries was first explored internationally by smaller economies such as El Salvador, which adopted BTC as legal tender in 2021.
What are Treasury assets?
Treasury assets are holdings that form part of the federal government’s financial reserves. These assets typically include cash reserves, gold and securities. Treasury assets are chosen based on a number of key criteria. Here are the criteria and how Bitcoin in its current state fulfills the criteria.
Liquidity
Liquidity is the ability to quickly convert an asset to cash without significant loss. The higher the liquidity, typically, the better the health of the asset. Bitcoin is one of the most liquid digital assets globally, with trillions in annual trading volume. The Treasury could liquidate holdings quickly, although large transactions might affect market prices.
Safety
Assets must have minimal risk of default or depreciation. Assets with high counterparty credit risk or exposure to volatile markets may not be a good fit. Bitcoin is decentralized and resistant to censorship, offering a hedge against political or economic instability. However, risks include cyberattacks and the need for secure custodial solutions.
Stability
Treasury assets should not exhibit extreme volatility in their valuation. Bitcoin’s volatility remains its greatest drawback. Its value can swing significantly within hours, which contrasts with the Treasury’s preference for stable assets such as US bonds or gold.
Yield
While safety is paramount, generating modest returns helps sustain government operations. Unlike traditional Treasury assets, Bitcoin does not generate interest. Yet its price appreciation over the past decade makes it a strong candidate for capital gains. For example, if Bitcoin’s historical annualized growth of ~200% continues, it could vastly outperform traditional assets.
Bitcoin in the US Treasury
Proponents of adding BTC to the US Treasury have argued that Bitcoin, with its capped supply of 21 million coins and decentralized nature, can serve as a hedge against inflation and currency debasement.
Companies such as MicroStrategy and Tesla gained attention for adding Bitcoin to their corporate treasuries, showcasing its potential as a reserve asset. This strategy was driven by the view that Bitcoin could outperform traditional fiat reserves and serve as an uncorrelated asset to hedge against economic uncertainties.
Donald Trump’s victory in the November US presidential elections and his nomination of crypto-friendly Paul Atkins for the Securities and Exchange Commission chair have played a key role in fostering a bullish sentiment in the crypto market, driving Bitcoin’s price to $100,000.
The 2024 Nashville announcement
In Q3 2024, the Trump administration made a groundbreaking announcement in Nashville, revealing plans to allocate a portion of the US Treasury’s reserves to Bitcoin. The move aimed to diversify the nation’s asset base and harness the perceived benefits of digital assets. Specific details included:
- Allocating 2% of Treasury reserves to Bitcoin
- Phased purchases over 24 months to minimize market disruptions
- Custody to be managed by private-sector partners in collaboration with government-regulated institutions.
The announcement sparked intense debate across political and economic circles, with critics questioning the rationale and potential risks, while proponents hailed it as a bold step into the future of finance.
The Bitcoin bill to establish a strategic Bitcoin reserve
Senator Cynthia Lummis introduced the BITCOIN Act of 2024, which proposes the US Treasury establish a national Bitcoin reserve by acquiring 1 million BTC over five years, with annual purchases of 200,000 BTC. This initiative positions Bitcoin as a strategic asset to hedge against inflation, reduce national debt, and strengthen the US’s financial leadership globally.
Here are the key highlights that you should be aware of:
Investment plan
- The Treasury will invest approximately $76 billion in Bitcoin, acquiring it incrementally over five years to mitigate price shocks.
Secure storage
- Bitcoin will be held in Treasury-managed digital vaults for a minimum of 20 years.
- Custodial measures and partnerships are yet to be disclosed but will emphasize robust security standards.
- Both physical and digital infrastructure with the highest level of security will be used to store Bitcoin.
Liquidation guidelines
- The proposal outlines strict liquidation rules, allowing sales only under specific scenarios. For instance, digital assets from forks or airdrops in the strategic Bitcoin reserve cannot be sold or disposed of within five years unless authorized by law.
- These restrictions aim to stabilize market impacts and maintain Bitcoin’s value as a hedge against economic downturns.
Transparency and monitoring
- The act mandates transparent reporting and secure custodial frameworks.
- Blockchain-based monitoring systems and independent audits will be implemented.
- Quarterly reporting of transactions and Bitcoin reserve balances is required.
The bill has gained momentum due to political alignment in Congress and support from industry leaders. It aims to position the US as a global crypto leader while sparking debates about economic risks and volatility associated with cryptocurrency.
Implications for the US Treasury’s risk profile
- Volatility risks: Bitcoin’s price volatility is significantly higher than traditional Treasury assets. The Treasury would need robust risk management strategies to navigate potential price swings.
- Liquidity considerations: Although Bitcoin is highly liquid compared to many assets, large-scale transactions by the Treasury could disrupt market prices. Over time, the asset has demonstrated susceptibility to supply and demand shocks, influenced by its position within the market cycle.
- Hedge against inflation: Bitcoin’s finite supply makes it an attractive hedge against inflation, providing diversification to the Treasury’s reserve strategy.
Impact on US government debt
Credit rating agencies might reassess the US Treasury’s risk profile. Holding Bitcoin could be seen as speculative, potentially affecting the US’ AAA credit rating. Bitcoin may not check the three criteria, namely liquidity, safety and stability, as satisfactorily as perhaps gold.
As a result, any downgrade in credit ratings could lead to higher yields on Treasury bonds, increasing the cost of debt servicing. However, if Bitcoin outperforms, it could strengthen the Treasury’s financial position, offsetting this risk.
US debt instruments, traditionally a safe-haven asset, might face scrutiny from conservative investors. Conversely, institutional investors with a pro-Bitcoin stance might increase demand. The other argument against serious scrutiny would be that only 2% of the entire Treasury assets is expected to be in Bitcoin, per the Nashville announcement.
Impact on Bitcoin’s price
A major purchase by the US Treasury could trigger a significant rally in Bitcoin’s price, solidifying its status as a macroeconomic asset. However, even before the US Treasury starts buying Bitcoin at scale, the announcement that the Federal Reserve is evaluating Bitcoin as a reserve currency could create a supply shock resulting in a sharp rise in prices.
The approval of US-based spot Bitcoin exchange-traded funds (ETFs) brought much-needed legitimacy and credibility to the asset and the asset class. The move by the US Treasury to hold BTC as a reserve asset could catalyze further institutional adoption globally, reinforcing Bitcoin’s legitimacy in financial markets.
With the US Treasury as a significant holder and major nation-states and large corporations buying Bitcoin, the apex crypto asset might see reduced volatility over time, akin to gold in earlier decades.
US national debt and Bitcoin reserves
The US government’s national debt, exceeding $33 trillion in 2024, is a pressing economic concern. The idea of leveraging Bitcoin reserves to alleviate this debt poses intriguing possibilities. If Bitcoin experiences substantial price appreciation, the Treasury could sell portions of its holdings to reduce debt.
Assume the US holds $50 billion in Bitcoin reserves at an average purchase price of $30,000 per coin. If Bitcoin’s price rises to $150,000 per coin, the reserves would be worth $250 billion, creating a profit of $200 billion.
While this would only dent the overall debt, it could make meaningful contributions to specific fiscal programs or interest payments. Bitcoin reserves could serve as a geopolitical and financial tool, reducing reliance on fiat reserves and diversifying away from traditional assets subject to inflationary pressures. Additionally, Bitcoin might help counterbalance deficits in scenarios where inflation erodes the value of the dollar.
In the short term, Bitcoin is unlikely to become a primary tool for managing national debt. Its role would be more complementary, offering diversification and potential inflation hedging. However, if Bitcoin matures into a globally accepted, stable reserve asset akin to gold, it could play a larger role in fiscal strategies.
For now, Bitcoin’s real contribution lies in modernizing the Treasury’s approach to asset management, signaling openness to innovation while maintaining a focus on long-term fiscal sustainability.
Written by Arunkumar Krishnakumar