“I will make sure the US is the Crypto Capital of the World,” he wrote on Truth Social at the weekend.
“We are MAKING AMERICA GREAT AGAIN!”
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Trump didn’t say how a strategic reserve of crypto assets would make America great, nor, indeed, how the US might acquire the assets or how it would manage them once acquired. And he has yet to explain why America needs a strategic digital assets reserve.
The assets he nominated for inclusion in the strategic reserve were XRP, Solana and Cardano. He subsequently added Bitcoin and Ethereum.
The post lifted the entire crypto market, adding more than $US300 billion to its value, before his tariffs announcement wiped out a similar amount.
The US government does own some digital assets. It holds more than 200,000 Bitcoins, worth more than $US17 billion, mainly the confiscated proceeds of crime that have been used to compensate the victims. It probably holds smaller amounts of other digital assets, but they haven’t been disclosed.
Where’s the rationale for a strategic reserve of digital assets?
Trump’s expanding interests in cryptos add another dimension to the string of conflicts that the many crypto boosters in his administration face.Credit: AP Photo/Mark Humphrey
Unlike America’s strategic reserves of oil, its foreign exchange stabilisation fund, foreign exchange reserves or gold holdings, digital assets have no industrial use, no intrinsic value, generally are an extremely limited medium of exchange, have limited liquidity and are highly volatile, as we’ve seen over the past 48 hours.
Because an asset like Bitcoin has a capped volume of tokens – only 21 million of them can ever be minted, with 19.8 million already in circulation – they have been seen as a hedge against inflation, but their history (and, other than Bitcoin and Ethereum, the nominated assets don’t have much history) shows their strongest correlation is with risk.
When investors’ appetites for risk are strong, they soar. When investors become risk-averse, they sink.
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The sheer volatility of cryptos argues against treating them as the kind of relatively stable assets that might normally be thought of as appropriate for a national strategic reserve.
Bitcoin, for instance, has fluctuated between a high of $US106,000 and a low of less than $US54,000 in just the past year. Over the past five years, it has traded below $US7000. Cardano has traded between 32 US cents and $US1.23 over the past year and XRP between 42 US cents and $US3.27. XRP has been as low as 3 US cents within the last five years.
That volatility, and the limited volumes of tokens in circulation (particularly with Bitcoin) makes them a perfect vehicle for speculation, while the lack of regulation – there’ll now be even less since Gary Gensler, former chair of the US Securities and Exchange Commission and arch sceptic of digital assets, resigned before Trump could sack him – makes them the perfect targets for frauds and scams.
Now, for some so far unexplained reason, Trump – while lightening what little regulation there is – is going to give the crypto market a stamp of legitimacy and the credibility that will come from being regarded as an asset class suitable for a national strategic reserve of the world’s key economy.
In fact, the creation of the reserve will do a lot more than that.
To be meaningful, the government would need to add substantially to its core existing holdings of Bitcoin. That new source of large-scale buying will drive up prices, particularly for the small-cap cryptos. Cardano, for instance, has a market capitalisation of only about $US30 billion.
If the US government has a significant exposure to digital assets, it will be motivated to protect that exposure. No wonder the initial post on Truth Social got crypto investors and operators excited – in effect, the US government will underwrite and insure their positions.
If the government were the buyer of last resort, of course, not only would it be there to bail out investors in the threat of a crash, but its presence would probably dampen the inherent volatility of the crypto market and assets.
So, to protect its position and the taxpayer value committed to the reserve, it will essentially need to rig the market.
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Not surprisingly, the crypto bros are enthusiastic and the strategic reserve’s critics are declaring the notion of a reserve a scam, and worse.
Trump’s own expanding interests in cryptos add another dimension to the string of conflicts that the many crypto boosters in his administration face, from Elon Musk to Commerce Secretary Howard Lutnick, whose firm Cantor Fitzgerald manages billions of dollars of Treasury securities for the biggest stablecoin, Tether.
The US doesn’t need any strategic reserves for national security reasons, other than perhaps of oil and in foreign exchange to smooth out currency fluctuations (although the US hasn’t used its exchange stabilisation fund for nearly a decade and a half).
The US has the US dollar, which is still the world’s reserve currency and the dominant currency for international trade and finance. Its pre-eminence and privileged role in global trade and finance could be eventually undermined if America legitimises cryptocurrencies as a reserve asset and other countries follow its lead.
A reserve asset is one widely held by central banks and major financial institutions and widely accepted in international trade and finance. It can be a source of liquidity for financial markets and can provide a pricing benchmark for non-financial traded assets such as commodities.
It needs to be stable, liquid, widely accepted as a medium of exchange, safe and well-regulated to promote trust.
Do the crypto assets Trump has designated for his strategic reserve meet any of those qualities?
