On March 2, U.S. President Trump posted on social media, stating that he would establish a U.S. cryptocurrency reserve centered around Bitcoin and Ethereum.
It was originally a super positive signal, but the market taught everyone a lesson. Within 24 hours, there were dramatic rises and falls, and even more absurdly, some insider addresses profited significantly by operating in advance.
Many people think that establishing a cryptocurrency reserve is a good thing. Why did the price experience a surge only to quickly decline? This article will delve into understanding what determines the price of Bitcoin and what the future holds for it.
First, we must emphasize that if you do not understand the mechanism of dollars and U.S. debt, you will not understand Bitcoin's price. Since Bitcoin went through the ETF, its binding with the dollar has deepened, and it can even be said that Bitcoin is a stock in NASDAQ. Based on this argument, our macro analysis of Bitcoin will be much clearer.
Secondly, according to reports from the Wall Street Journal, the cryptocurrency reserves that Trump mentioned are entirely derived from various illegally obtained Bitcoins that have been confiscated, and they will not be spent. In fact, this news has already announced the upper limit and future of Bitcoin.
A Macro View on Bitcoin
From a macro perspective, the dollar is U.S. debt, and U.S. debt is the dollar. To summarize the mechanism of dollar issuance in one sentence:
The U.S. uses taxes and national credit as guarantees to cash out the future using government bonds as tools. This cash-out tool can be government bonds, gold, or other assets that the U.S. can control and that are recognized worldwide.
In simple terms, when you want to take out a loan to buy a house, you will use your future income as collateral, using the house as a tool to cash out your future. The cash-out money is then used to buy the house. Therefore, as long as U.S. government bonds always have buyers, the U.S. can cash out future money for present use, where the cost of cashing out is the interest rate.
If the U.S. can issue a large amount of government bonds and there is a buyer for all of them, then the cash-out money will flood into various capital markets, and Bitcoin will rise significantly.
So we have reached a very, very important conclusion:
The U.S. debt crisis is the core driving force behind Bitcoin's rise. The price of Bitcoin is rising precisely because the scale of U.S. government bonds continues to expand, leading to skyrocketing prices for all assets, including Bitcoin.
In reality, rather than saying that the prices of assets like Bitcoin are rising, it is more accurate to say that the dollar is depreciating against other goods. It is not other assets that are rising in price, but rather the dollar that is depreciating. Therefore, when someone says Bitcoin can solve the U.S. debt crisis, they are reversing cause and effect and flipping the logical sequence.
From a financial perspective on Bitcoin
Let us first delve into the issuance mechanism of the dollar and U.S. debt:
The left side of this diagram represents the balance sheet of the Federal Reserve, which is the U.S. central bank, while the right side represents the U.S. Treasury and U.S. banks.
Therefore, to understand Bitcoin from a financial operations perspective, one must deeply understand this diagram.
The balance sheet of the Federal Reserve has two crucial items on the asset side: U.S. government bonds and MBS. MBS was added after the 2008 subprime mortgage crisis. The two most important items on the liability side are the TGA account and the bank reserve account. The TGA account is essentially the Treasury's revenue and expenditure account, while the bank reserves are the money that these commercial banks in the U.S. hold at the central bank.
If we were to draw a balance sheet for the Treasury, then on the asset side, it would include the TGA account and fiscal revenue, while the liability side would consist of U.S. government bonds and fiscal expenditure.
If we were to draw a balance sheet for banks, the asset side would include bank reserves and loans, while the liability side would include bank deposits. In fact, the asset and liability sheets of the Treasury and commercial banks contain many items. For the sake of simplicity, let’s abstract a few important items to explain the principles more easily.
Dollar and U.S. Debt Issuance Mechanism
The issuance of currency in the U.S. is almost identical to the issuance of U.S. debt, which is why we keep saying that U.S. debt equals dollars, and dollars equal U.S. debt. When overseas and domestic buyers of U.S. government bonds disappear, the Federal Reserve must step in to back them up. At this time, on the asset-liability sheet of the Federal Reserve, it will need to debit government bonds and credit the TGA account, which is equivalent to the Federal Reserve absorbing the government bonds that the Treasury cannot sell and then transferring the money to the U.S. Treasury. This way, it is as if the U.S. Treasury's credit side of government bonds has shifted to the Federal Reserve's debit side. In reality, this process is about transforming liabilities into assets.
And this process can be completed just by typing on a computer. In fact, this is the essence of how the U.S. prints money; it does not literally use a printing press to print money; it is simply a straightforward bookkeeping process. The U.S. Treasury's liabilities, namely U.S. government bonds, are converted into assets for the Federal Reserve. This is what printing money means. Thus, in reality, the asset side of the Federal Reserve is almost entirely liabilities, including U.S. government bonds and MBS.
In this process, everyone should realize that in fact, government bonds are just a cash-out tool, equivalent to the U.S. Treasury cashing out future money for present use. In other words, it is like the U.S. Treasury's liabilities in the form of government bonds, after going through the Federal Reserve in a roundabout way, end up as cash in the TGA account of the U.S. Treasury.
In simple terms, it means cashing out future money to use in the present.
In simple terms, overseas institutions or U.S. financial institutions are creating dollars. The U.S. Treasury issues bonds, you buy them, overseas central banks buy them, or domestic financial institutions buy them, all of which are creating dollars. What happens if the overseas buyers or domestic buyers disappear? Then the Federal Reserve will need to step in. The bonds on the Treasury's credit side will flow into the Federal Reserve's debit side, then converted into cash, and deposited back into the TGA account.
In fact, the most important prerequisite for this operation is that there must be buyers for U.S. government bonds who are willing to take them on, whether they are overseas buyers, domestic buyers, or the Federal Reserve. Only with a continuously increasing total amount of government bonds can the U.S. cash out from the future to use more future money to speculate on current assets. Therefore, if the total amount of government bonds cannot break through, or if the debt ceiling cannot be breached, then the only path left for U.S. assets is to collapse, because there will be no new dollars and no new liquidity, leading to various problems.
Advantages of U.S. Treasury Bonds as a Cash-Out Tool
As a cash-out tool, U.S. government bonds' greatest advantage lies in the ability to manipulate interest rates to control the flow, direction, and speed of U.S. bonds and dollars, thereby harvesting from the whole world. The prerequisite for this global harvesting operation to continue is that the whole world must recognize U.S. government bonds.
In addition, using U.S. debt as a cash-out tool has another very important advantage: under the condition of controlled inflation and sufficient demand for government bonds, the U.S. can infinitely use government bonds to cash out. To put it simply, the reason lies in the current economic hypotheses that humanity's future is limitless, allowing us to cash out from the distant future. As long as buyers believe in America's future, they can cash out 10-year, 20-year, 30-year, 50-year, or even 100-year government bonds.
Current Status of Bitcoin
Bitcoin lacks the advantages of government bonds because Bitcoin has a limited total supply. Government bonds have no upper limit because humanity's future is limitless, but Bitcoin's total supply is capped at 21 million; once Bitcoin is used up, it is gone.
So if we want to use the same operational logic to manipulate Bitcoin, on the Federal Reserve's balance sheet, you will see debit Bitcoin, credit TGA account, or debit Bitcoin, credit bank reserve account. This bookkeeping is using Bitcoin to act as the basis for the issuance of dollars. This is actually the outcome that many Bitcoin advocates dream of achieving: to make Bitcoin the foundation for the issuance of dollars.
But do U.S. banks and the U.S. Treasury have an unlimited supply of Bitcoin? No, Bitcoin has a limited total supply, but U.S. debt is unlimited. Because in the eyes of Americans, the future of the U.S. is limitless; the U.S. can last for 10,000 years, hence U.S. debt is limitless.
We believe that whether it is the U.S. Treasury, the Federal Reserve, or the President of the United States, they do not like this situation because Trump is someone who loves to create chaos, whether it is trade wars, military conflicts, or technology wars, all of which require money.
The U.S. Treasury has various expenditures, and the Federal Reserve does not like things that inherently have a ceiling. Therefore, I believe that whether it is the President of the United States, the Federal Reserve, or the U.S. Treasury, they actually do not like Bitcoin. Fundamentally, they will not like Bitcoin, as it sets a ceiling on your financing pressure. This approach essentially jeopardizes the future of the U.S., leading it to jump into the fire pit.
Furthermore, Bitcoin has an important characteristic: transparency. On the blockchain, it is transparent. Whether it is the Federal Reserve or the U.S. Treasury, they would not be willing to use Bitcoin to purchase goods and services. Because as long as the wallet address is exposed, all transactions on the chain can be tracked. Recently, when Musk was auditing, everyone should have realized how severe corruption is in the U.S.
Conclusion
The debt crisis is the core driving force behind Bitcoin's rise in price; as long as the total debt in the U.S. continues to increase in the long term, Bitcoin will also rise in the long term. However, specifically, it also depends on where the cash-out dollars flow. Don't just buy the dip in Bitcoin because the total debt is increasing.
Currently, the U.S. government still does not take Bitcoin seriously. Most of Trump's cryptocurrency policies are primarily for harvesting profits. After so many events, it seems Trump never thought about doing anything for cryptocurrency. Moreover, from the analysis of both macroeconomic and financial perspectives, it is destined that Bitcoin's status in the U.S. will not improve in the future.
Currently, Bitcoin is highly tied to the U.S. economy. Our focus needs to shift more towards the U.S. government, the Federal Reserve, and more fundamental issues. Bitcoin is just a rather unqualified financial tool that cannot solve the U.S. debt problem or the issues facing the U.S.
