The US election results are monopolizing the debate in the crypto world. Donald Trump’s victory has taken Bitcoin to levels never seen before. In fact, for days now, a single Bitcoin is nearing $100,000, which has investors holding their breath. Other altcoins are joining in this euphoria, breaking new records. This includes Solana, as well as XRP — Ripple’s currency — which has seen triple-digit growth.

The cryptocurrency sector — already euphoric about the election of a pro-crypto president who wants to gut financial regulations — is now awaiting the materialization of the numerous promises that the Republican candidate made during the 2024 campaign.

Experts warn that it remains to be seen whether the tycoon will actually be able to honor his announcements. But, for the moment, the industry’s wishes seem to be fulfilled. SEC Chairman Gary Gensler — who has been skeptical and sometimes hostile to cryptocurrencies over the years — has already announced that he will step down as head of the securities market supervisor on January 20 at noon, just as Trump takes office. Meanwhile, the Republican recently named Scott Bessent as his nominee for the Department of the Treasury.

Bessent — in an interview with Fox Business earlier this year — said that cryptocurrencies “are about freedom and the crypto economy is here to stay. These assets are attracting young people, who haven’t participated in the [stock market].” But one of the promises that most excites the industry and investors is the possibility of creating a strategic reserve of bitcoins in the U.S. Trump mentioned this project back in June, during the Bitcoin 2024 conference held in Nashville, Tennessee. The proposal has deeply resonated with the sector.

What is a strategic bitcoin reserve?

A strategic reserve is a set of external assets that are immediately available and under the control of the monetary authorities. They’re meant to meet the financing needs of the balance of payments, or to intervene in the foreign exchange markets in order to influence the exchange rate, to name just some examples. In this way, a bitcoin reserve would be similar to the gold and foreign currency reserves held by central banks. There are also strategic reserves of basic raw materials, such as oil.

The pioneering cryptocurrencies would be incorporated into the mix of assets that the North American country has on its balance sheet, with the aim of diversifying reserves. However, the project isn’t clearly laid out and there’s still much speculation on the matter, starting with the basic question of which authority would be responsible for managing it. Would it be the Federal Reserve? Or another institution? And the no less important question concerns how to pay for it. Bitcoins could be purchased after selling off other assets — such as gold or bonds — increasing debt, or expanding the Federal Reserve’s balance sheet, an operation that is colloquially known as “printing money.”

This reserve would also include the bitcoins that the U.S. administration has seized to-date: some 208,109, worth almost $20 billion at the current market price. These include the cryptocurrencies confiscated in 2013 from Ross Ulbricht, the founder of Silk Road, a dark web that operated exclusively in bitcoin. Users would traffic drugs and hire hitmen, among other things. During the election campaign, Donald Trump promised to commute Ulbricht’s life sentence upon reaching the White House.

What does the proposal look like?

The most concrete proposal so far is that of pro-crypto Republican Senator Cynthia Lummis, who introduced her Bitcoin Act of 2024 (Boosting Innovation, Technology and Competitiveness through Optimized Investment Nationwide Act) in the Senate. This project provides for the Treasury and the Federal Reserve to buy 200,000 bitcoins each year for a period of five years, until reaching one million units. This would represent about 5% of the total global supply of bitcoins, which is around 21 million. The reserve would subsequently be maintained for a minimum of 20 years. The idea is that this reserve would serve as a hedge against the devaluation of the U.S. dollar, to strengthen national balance sheets and support future debt issues.

In the legislation, the proposed mechanism to purchase the cryptocurrency has two elements: on the one hand, the surplus that the Federal Reserve returns to the Treasury (i.e. the profits of the U.S. central banking system) would be used to buy bitcoin. On the other hand, it proposes that the central banks of each state reassess the gold certificates they hold, to better reflect the value of the metal in the current market. They must then deliver the difference to the Treasury, which will use the funds to buy bitcoin.

Noelle Achenson — author of the Crypto is Macro Now newsletter — explains that the Fed has certificates on its balance sheet that represent the gold held by the Treasury. The total valuation is approximately $10.5 billion. However, this value is based on a legal price that, since 1973, has remained constant at $42 per ounce. If valued at current prices, the stored gold would be worth about $643 billion.

Beyond the federal administration, states are also moving to have their own bitcoin reserves. Mike Cabell — a member of the Pennsylvania House of Representatives — recently introduced a bill for the creation of a strategic bitcoin reserve to allow the state treasury to invest up to 10% of its funds in bitcoin. The aim of this legislation is for the cryptocurrency to serve as a hedge against inflation. However, the details of the proposed regulations are still unknown.

What have other countries done?

El Salvador has been a pioneer in creating a strategic crypto reserve. In fact, the Central American country was the first to adopt bitcoin as legal tender in September of 2021. The government has since acquired up to 5,944 bitcoin, valued at more than $560 million at the current market price, according to the country’s Bitcoin Office. Added to this is the kingdom of Bhutan, which owns 12,218 bitcoins, valued at $1.2 billion, according to data from the firm Arkham Intelligence. The firm details that the fortune of this crypto state comes from bitcoin mining operations (taking advantage of the national orography for the generation of electrical energy) carried out by the country’s investment arm, the state-owned conglomerate Druk Holdings.

Other nations that own the pioneering cryptocurrency have mainly accumulated it through confiscations, as is the case of the United States. But beyond the North American country, other states have been collecting bitcoin in recent years. The United Kingdom, in fact, has an account with 61,245 tokens, worth more than $6 billion.

Experts also point to China as one of the largest holders of this cryptocurrency. In November of 2020, authorities confiscated 194,775 bitcoin from members of the PlusToken Ponzi scheme, a scam operating in the Asian country that promised its victims “constant” double-digit returns. The perpetrators of this scam collected cryptocurrencies worth billions of dollars, which they then used to buy properties and luxury cars for themselves or their relatives. However — according to Arkham Investments — it’s unclear whether the Chinese government still owns these seized bitcoins, or has since sold them.

What do the analysts say?

The experts consulted by EL PAÍS disagree on the possibility of this project being carried out. Luis Garvía — director of the Financial Risk graduate program at the Madrid-based Catholic Institute of Business Administration (ICADE) — is blunt: “It seems absolutely reasonable to me that any government should have a part of its reserves in bitcoin. Diversification is very important,” he emphasizes.

Carlos Salinas — a professor in the master’s degree program in Blockchain and Digital Asset Investment at the IEB — believes that the promise of creating a bitcoin reserve is one of the main drivers of the asset’s surging price. However, he doubts that the U.S. can accumulate such a large quantity of bitcoin, although he doesn’t rule it out entirely. And, if the proposed legislation indeed sees the light of day, other nations — such as Russia, China, Brazil, or India — wouldn’t want to be left out: “At the last highs of bitcoin in 2021, we saw the FOMO, but in this current bullish phase, we’re [dealing] with institutional FOMO. We don’t know how big this can become,” he warns

For his part, Javier Molina — a senior market analyst at eToro — doubts that bitcoin can ever be considered a store of value like gold, nor that there will ever be a large-scale adoption of the currency by governments, at least in the short and medium-term. “While the idea that bitcoin could one day play a role similar to that of gold as a store of value — like ‘digital gold’ — may be interesting, I think we’re still far from seeing a race for digital reserves at the government level,” he opines.

David Tercero-Lucas is a professor of Economics at ICADE. He specializes in cryptoassets and digital currencies. He highlights that, while bitcoin shares certain characteristics with traditional assets — such as gold, for example, given its scarcity and its independence from centralized entities — it lacks other essential characteristics typical of reliable reserve assets. “Gold has a millennia-old history as a store of value; it’s widely-accepted and has industrial uses that reinforce its usefulness. Currencies, such as the dollar, are backed by robust states and financial systems. Bitcoin, on the other hand, is extremely volatile and its value depends more on speculative expectations than on tangible fundamentals,” he details.

Therefore, according to this expert, selling gold to buy this cryptocurrency is risky, especially since its capacity to serve as a strategic reserve in crisis contexts has never been validated in the long-term. He also points out that the idea that this asset cannot be sold for 20 years — one of the requirements included in the Bitcoin Act — doesn’t offer financial resilience in the short-term. In fact, it contradicts the purpose of a strategic reserve, which should be available to stabilize the economy in emergency situations.

Santiago Carbó — a professor of Economics at the University of Valencia — agrees with this analysis. He warns that the proposed U.S. legislation sets a dangerous precedent: “Bitcoin has been anything but a stable value until now.” He trusts in the orthodoxy of the Federal Reserve to prevent this project from being approved, while still recognizing the growing acceptance of this cryptocurrency among investors. He also points to the lack of transparency in the crypto market, its lack of maturity and high levels of risk that make it unreliable as a reserve asset.

The expert consulted by EL PAÍS who’s most wary about the launch of a strategic reserve is Manuel Villegas, a digital asset analyst at Julius Baer. For him, there’s still a lot of noise around the idea. “The market has anticipated a lot and I think it hasn’t yet fully understood that this is [a serious] proposal. There’s a lot of speculation about what may happen. But the Federal Reserve is an independent authority and, in recent months, Jerome Powell hasn’t been very favorable to this issue,” he warns. Moreover, unlike SEC Chair Gary Gensler, the Fed chairman already made it clear at the last Fed meeting that he doesn’t intend to resign and that Trump cannot fire him.

Add to this another factor: market concentration. According to Villegas, buying 200,000 bitcoins a year in a market as illiquid as the current one could drive prices up excessively. And, on the other hand, it could concentrate a large part of the supply of this cryptocurrency in the hands of the U.S.: “It would become one of the largest holders of the asset, with 5% in reserves. [We also must add] the 3% held by MicroStrategy [which already has about $17 billion worth of bitcoin on its balance sheet] plus the holdings of Marathon and BlackRock,” he concludes.

While Bitcoin investors and the industry are rubbing their hands gleefully at the prospect of the pioneering cryptocurrency’s value skyrocketing even further, prediction markets indicate that this project won’t happen: the odds of the U.S. having its own Bitcoin strategic reserve stand at just 30% on Polymarket.

Translated by Avik Jain Chatlani.

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