Original article by: Arunkumar Krishnakumar
Original translation: TechFlow
Key Takeaways
The U.S. Treasury Department plans to invest $76 billion in Bitcoin over the next five years as a long-term hedge against inflation and economic instability.
Bitcoin will be stored in secure vaults managed by the Treasury, with strict custody measures in place to ensure the safety and transparency of assets.
The inclusion of Bitcoin has the potential to reduce U.S. debt and serve as a diversification tool, although its volatility and market impact remain a focus of concern.
Such a plan could solidify Bitcoin’s legitimacy and boost adoption among global institutions, potentially stabilizing its price in the long term.
The U.S. Treasury was established in 1789 to manage the financial affairs of the federal government, including collecting taxes, issuing currency, and overseeing the public debt. Its primary responsibilities are to maintain the nations financial stability, fund government operations, and promote economic growth. The Treasury operates by issuing Treasury bills, notes, and bonds, which are considered one of the safest investments in the world because they are fully backed by the U.S. government.
The idea of incorporating the top cryptocurrency into government finances was initially explored by smaller economies such as El Salvador, which adopted Bitcoin as legal tender in 2021.
What are fiscal assets?
Treasury assets are a portion of the federal government’s financial reserves and typically include cash reserves, gold, and securities. Several key criteria are considered when selecting treasury assets. Here are those criteria and how Bitcoin meets them in its current state.
Liquidity
Liquidity refers to the ability to quickly convert an asset into cash without significant losses. Higher liquidity generally means better health for the asset. Bitcoin is one of the most liquid digital assets in the world, with trillions of transactions annually . The Treasury can liquidate holdings quickly, although large transactions can affect market prices.
Security
Assets must have minimal risk of default or devaluation. Assets with high counterparty credit risk or exposure to volatile markets may not be suitable. Bitcoin is decentralized and censorship-resistant, providing a hedge against political or economic instability. However, risks include cyberattacks and the need for secure custody solutions.
stability
Treasury assets should not exhibit extreme valuation fluctuations. Bitcoin’s volatility remains its biggest drawback. Its value can fluctuate significantly within hours, which contrasts with the Treasury’s preference for stable assets such as U.S. bonds or gold.
income
While security is critical, generating modest returns helps keep governments afloat. Unlike traditional fiscal assets, Bitcoin does not generate interest. But its price appreciation over the past decade makes it a strong candidate for capital appreciation . For example, if Bitcoins historical annualized growth rate of about 200% continues, it could far outperform traditional assets.
Bitcoin at the U.S. Treasury
Those who support the inclusion of Bitcoin in the U.S. Treasury believe that Bitcoin can be used as a hedge against inflation and currency depreciation because of its hard supply cap of 21 million and its decentralized nature.
Companies like MicroStrategy and Tesla have gained attention for adding Bitcoin to their corporate treasuries, demonstrating its potential as a reserve asset. This strategy is driven by the belief that Bitcoin can outpace traditional fiat reserves and serve as an uncorrelated asset to hedge against economic uncertainty.
Donald Trump’s victory in the US presidential election in November and his nomination of pro-crypto Paul Atkins as chairman of the Securities and Exchange Commission played a key role in the crypto market, driving the price of Bitcoin to $100,000.
2024 Nashville Bulletin
In the third quarter of 2024, the Trump administration announced a major plan in Nashville to invest part of the U.S. fiscal reserves in Bitcoin. The move is intended to diversify the countrys asset portfolio and take advantage of the potential advantages of digital assets. Specific details include:
Invest 2% of fiscal reserves in Bitcoin
Phase the purchase over 24 months to minimize market impact
The hosting is a joint responsibility of private sector partners and government regulators.
The announcement sparked a heated debate in the political and economic spheres, with critics questioning its rationale and potential risks, while supporters saw it as a bold step towards the future of finance.
The Bitcoin Act to Establish a Strategic Bitcoin Reserve
Senator Cynthia Lummis proposed the Bitcoin Act of 2024, which proposes that the U.S. Treasury Department establish a national Bitcoin reserve, with a plan to acquire 1 million Bitcoins within five years, 200,000 per year. The move aims to use Bitcoin as a strategic asset to fight inflation, reduce national debt, and enhance the United States global financial leadership.
Here are the key takeaways from the plan:
Investment Plan
The Treasury Department plans to gradually invest about $76 billion in Bitcoin over five years to mitigate the impact of price fluctuations.
Secure storage
The bitcoins will be stored in a digital vault managed by the Treasury Department for at least 20 years.
Hosting measures and partnerships have not yet been announced, but will ensure strict safety standards.
The storage of Bitcoins will be done using the highest level of physical and digital security infrastructure.
Liquidation Guide
The proposal provides for strict liquidation rules, with sales permitted only in certain circumstances. For example, digital assets from forks or airdrops in the Strategic Bitcoin Reserve cannot be sold or disposed of within five years unless authorized by law.
The restrictions are intended to stabilize market influences and preserve Bitcoin’s value as a recession hedge.
Transparency and monitoring
The bill requires transparent reporting and a secure hosting framework.
A blockchain-based monitoring system and independent audits will be implemented.
Requires quarterly reporting of transactions and Bitcoin reserve balances.
The bill, which is gaining momentum thanks to political support in Congress and a push from industry leaders, aims to position the United States as a global leader in cryptocurrency while sparking a discussion about the economic risks and volatility associated with cryptocurrencies .
Implications for the U.S. Treasury’s risk profile
Volatility risk: Bitcoin’s price volatility is significantly higher than traditional treasury assets. Treasury departments need to develop strong risk management strategies to cope with possible price fluctuations.
Liquidity considerations: Although Bitcoin is more liquid than many assets , large-scale transactions by the Treasury could disrupt market prices. Over time, this asset has shown sensitivity to supply and demand shocks during market cycles.
Inflation Hedge: Bitcoin’s limited supply makes it an ideal tool to fight inflation, providing a diversification option for the Treasury’s reserve strategy.
Impact on U.S. government debt
Credit rating agencies may reassess the risk profile of the U.S. Treasury. Holding Bitcoin may be considered speculative and could affect the U.S.s AAA credit rating. Bitcoin may not satisfy the three criteria of liquidity, security, and stability as satisfactorily as gold.
Therefore, any downgrade in credit ratings could cause Treasury yields to rise, increasing debt servicing costs. However, if Bitcoin outperforms, it could strengthen the Treasury’s financial position, offsetting this risk.
U.S. debt instruments, traditionally a safe-haven asset, may come under scrutiny from conservative investors. Conversely, institutional investors with a pro-Bitcoin stance may increase demand. Another argument against serious scrutiny is that, according to the Nashville announcement, only 2% of the entire treasury’s assets are expected to be in Bitcoin.
Impact on Bitcoin Price
Large-scale purchases by the U.S. Treasury could trigger a significant increase in the price of Bitcoin , solidifying its position as a macroeconomic asset. However, even before the U.S. Treasury begins large-scale purchases of Bitcoin, news that the Federal Reserve is evaluating Bitcoin as a reserve currency could cause a supply shock that leads to a sharp increase in prices.
The approval of a local spot Bitcoin exchange-traded fund (ETF) in the United States brings much-needed legitimacy and credibility to the asset and its asset class. The U.S. Treasury’s move to include BTC as a reserve asset could further drive adoption among global institutions, strengthening Bitcoin’s legitimacy in financial markets.
With the U.S. Treasury becoming a significant holder and major countries and large companies buying Bitcoin, the top crypto asset could become less volatile over time, similar to gold in its early decades.
US Treasury Bonds and Bitcoin Reserves
With a national debt of more than $33 trillion by 2024, the U.S. government is a pressing economic issue . The idea of using Bitcoin reserves to alleviate this debt raises interesting possibilities. If Bitcoin experiences a significant appreciation in value, the Treasury could sell some of its holdings to reduce the debt.
Assuming the U.S. holds $50 billion worth of Bitcoin reserves, purchased at an average price of $30,000 per coin, if the price of Bitcoin rises to $150,000 per coin, these reserves will be worth $250 billion, creating a profit of $200 billion.
While this would only have a slight impact on overall debt, it could make a meaningful contribution to specific fiscal programs or interest payments. Bitcoin reserves could serve as a geopolitical and financial tool to reduce reliance on fiat reserves and diversify from traditional assets subject to inflationary pressures. In addition, Bitcoin could help balance deficits in the event that inflation erodes the value of the dollar.
In the short term, Bitcoin is unlikely to become the primary tool for managing national debt. Its role will be more complementary, providing diversification and a potential hedge against inflation. However, if Bitcoin matures into a globally recognized stable reserve asset similar to gold, it may play a larger role in fiscal strategy.
For now, Bitcoin’s real contribution lies in modernizing the Treasury’s approach to asset management , demonstrating openness to innovation while maintaining a focus on long-term fiscal sustainability.
