President Trump attended the White House cryptocurrency summit on Friday, accompanied by cryptocurrency czar David Sachs (right) and Treasury Secretary Scott Bacent. This week, the Trump administration announced a project that the cryptocurrency industry loves, while skeptics detest it, and most people, quite reasonably, do not care much about it: the 'Bitcoin Strategic Reserve.'
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Here is a simple introduction to it:
What is the Bitcoin Strategic Reserve?
According to the executive order signed by Trump, the U.S. will essentially consolidate all the Bitcoin it has obtained through criminal and civil forfeiture and hold it as a reserve asset — similar to how gold and oil are stored.
Supporters of this initiative argue that in a hypothetical future where cryptocurrencies replace conventional currency issued by central banks, this reserve could serve as a means to hedge against financial instability. They believe that investing in Bitcoin could help pay off national debt. (Of course, once the U.S. sells its holdings of Bitcoin, it would lead to a drop in Bitcoin prices. And unlike oil, the U.S. cannot power its economy with Bitcoin.)
The argument for establishing Bitcoin reserves is essentially that there is a very small possibility that the Federal Reserve will mismanage the dollar completely. Jason Yanowitz, co-founder of cryptocurrency news platform Blockworks, stated: 'That possibility is very, very small. But in that case, assets like gold and Bitcoin would indeed become a means to hedge against dollar devaluation and inflation.'
Critics question whether it is wise to tie America's financial future to a purely speculative and highly volatile asset. They argue that this reserve is merely a scheme to enhance the value of Bitcoin, thereby increasing the portfolios of early investors, such as about 30 CEOs from the cryptocurrency industry who gathered at the White House on Friday to meet with the president.
How will it work?
The White House executive order states that this reserve will be established using only Bitcoin seized by law enforcement. (Over the years, the U.S. has accumulated approximately $17 billion worth of Bitcoin through various legal cases. Typically, the Treasury would sell these held Bitcoins to compensate victims and support law enforcement efforts.)
Officials have consistently emphasized that taxpayer money will not be used to acquire more Bitcoin.
However, the executive order authorizes the Treasury and Commerce Departments to develop a strategy for purchasing more Bitcoin 'without increasing the budget burden.'
Cryptocurrency czar David Sachs stated before the White House cryptocurrency summit on Friday: 'We are only allowed to purchase more Bitcoin if it does not increase the deficit, debt, or use taxpayer funds.'
Why did Bitcoin's price drop after this announcement?
Many cryptocurrency investors had hoped to take a more proactive approach to buying Bitcoin, rather than just repurposing the government's existing Bitcoin reserves.
After President Trump signed the executive order to establish the Bitcoin Strategic Reserve, the price of Bitcoin fell from about $90,000 to $85,000 on Thursday night.
Around Friday's cryptocurrency summit, there may be some sentiment of 'buy the rumor, sell the news.'
The dollar is the global reserve currency. Why does the U.S. still need Bitcoin reserves?
The dollar is the pillar of global finance. The goal of creating Bitcoin was to replace the dollar, not support it. This is one of the reasons economists are skeptical about Bitcoin reserves — the last thing they want to do is undermine people's confidence in the dollar.
What exactly is Bitcoin?
In short, it is computer code. It is not a tangible item you can hold in your hand — if you own Bitcoin, you must store it in a digital wallet protected by a long string of passwords, which you absolutely must not lose; otherwise, you could end up like many early Bitcoin users who had millions of dollars in cryptocurrency they could not access.
Although Bitcoin is called a cryptocurrency, you can't buy much with it.
If you can withstand the price volatility of Bitcoin, then the most compelling reason to use Bitcoin is to treat it as a store of value — a kind of 'digital gold.' This is especially attractive for those living in countries with weak national currencies. Proponents of the digital gold theory point out that while Bitcoin may fluctuate significantly in price over a day or week, it has increased more than 1,000% over the past five years.
Bitcoin is the most popular cryptocurrency in the world, but there are thousands of other cryptocurrencies.
Key Takeaways
Cryptocurrencies (including Bitcoin) are notoriously high-risk investments. This sector has a complicated history filled with many compelling scams. So, like any investment, caution should be exercised, and thorough research should be done.
