Bitcoin is surging. Could it take over? – American Wealth Investing

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The price of bitcoin is soaring in the hope that President-elect Trump’s second term will lead to a more lenient regulatory environment and even a strategic bitcoin reserve.

Trump has promised to make America “the crypto capital of the planet,” and since his electoral victory, bitcoin’s value has skyrocketed more than 40 percent — nearly crossing $100,000 for the first time Friday.

Bitcoin, which has been likened to “digital gold,” is the largest and oldest cryptocurrency, a form of digital money that can be traded online without relying on traditional banks.

The president-elect is planning a new crypto advisory council that will work with Congress on crypto legislation and establish his “promised bitcoin reserve,” Reuters reported this week.

The idea of a strategic bitcoin reserve has already gained momentum at the state level. In Pennsylvania, two GOP House representatives recently introduced legislation that would allow the state treasurer to invest “up to 10 percent” of the State General Fund, the Rainy Day Fund and the State Investment Fund in bitcoin.

At the federal level, Sen. Cynthia Lummis (R-Wyo.) intends to reintroduce a bill that would form a strategic bitcoin reserve, she told the Washington Examiner. Lummis previously introduced the BITCOIN Act in July, but it didn’t move forward.

Proponents of a strategic bitcoin reserve say it could be a hedge against inflation and allow the U.S. to remain at the forefront of financial innovation. Meanwhile, critics worry the asset is too volatile and fear that promoting it could chip away at the dollar’s reserve currency status.

What are the potential benefits of a strategic bitcoin reserve?

A strategic bitcoin reserve is exactly what it sounds like — the U.S. would buy a large amount of the cryptocurrency and hold it as a reserve.

National reserves are meant to act as a buffer against market volatility. The Strategic Petroleum Reserve — the world’s largest stockpile of emergency crude oil — is one well-known example, but the U.S. also has reserves of gold and emergency medical supplies.

If passed, the Lummis plan would kick off a bitcoin purchasing program to acquire approximately 5 percent of the total bitcoin supply over time. If that happens, bitcoin’s value could surge to new heights, and Lummis thinks her proposal can help reduce the national debt, though that’s questionable.

The Bitcoin Policy Institute (BPI), a bitcoin research and advocacy organization, recently made the case for a strategic bitcoin reserve, arguing it would ease fears of currency devaluation and strengthen the credibility of the U.S. financial system.

BPI said embracing bitcoin would also allow the U.S. to gain an advantage over adversaries attempting to undermine America’s dollar dominance.

“While China and Russia double-down on analog gold, the U.S. can countermove to digital gold,” the BPI report said.

One of the main arguments in favor of bitcoin is that its limited supply protects it from the inflationary pressures other currencies face. Only 21 million bitcoins can ever be mined and nearly 19.9 million are already in existence. In theory, if market demand remains strong, bitcoin’s price could be propelled long-term.

What are the risks?

Bitcoin may be surging now, but price swings are a major concern.

After climbing to nearly $69,000 in November 2021, bitcoin’s price fell to about $33,000 in January 2022, losing more than half of its value in just a few months. And after the collapse of Sam Bankman-Fried’s FTX, bitcoin fell below $17,000 in late 2022.

That volatility presents a risk to the U.S. government, which could incur significant losses if bitcoin fails to go up in value. Those fears are amplified by the fact that bitcoin isn’t a tangible asset like gold.

“In the absence of any fundamentals, [cryptocurrencies] are driven entirely by supply and sentiment-driven demand,” James Mackintosh of The Wall Street Journal noted in a recent column.

Eswar Prasad, a senior fellow at the Brookings Institution, shares that concern.

“Bitcoin, in particular, has essentially become a purely speculative financial asset, whose value seems to hinge solely on its scarcity rather than any useful purpose it serves,” Prasad wrote in a New York Times op-ed.

Others, like the Atlantic Council’s Ananya Kumar, point out that stockpiling bitcoin doesn’t make much sense compared to a petroleum reserve.

“Oil is one of the basic inputs that powers our economy and daily living — crypto is not,” she wrote.

Kumar added: “Holding a bitcoin reserve would be the equivalent of the government holding a lot of iPhones in case it needed to intervene to reduce iPhone prices in the future. It is not a crucial commodity or input in our economy.”

Will bitcoin replace the dollar?

While more companies have started accepting cryptocurrency as a form of payment, bitcoin is unlikely to replace the dollar any time soon.

Even if every consumer and business had access to it — which they currently don’t — bitcoin’s unstable value makes it hard to imagine as a widespread medium of exchange.

Prasad put it like this: “It is as though your $10 bill could buy you a beer on one day and a bottle of fine wine on another.”

Price swings aren’t the only problem. Bitcoin also has high transaction fees and slow processing times, rendering it “ineffective as a means of payment,” Prasad noted.

The dollar has been the world’s main reserve currency since the end of World War II and is still the most widely used currency for international trade.

With that said, recent geopolitical shifts have put the dollar’s dominance at risk, prompting some nations to consider alternatives. Over time, digital assets like bitcoin have the potential “to significantly alter the currency landscape,” according to a Morgan Stanley report.

“These innovations, while still in their nascent stages, hold opportunities to both erode and reinforce the dollar’s hegemony in global finance,” wrote Andrew Peel, head of digital asset markets at Morgan Stanley.

A recent J.P. Morgan analysis also warned about “de-dollarization” but said a “meaningful erosion of dollar dominance” would likely take decades.

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