Donald Trump and the Strategic Bitcoin Reserve - Opportunities, Risks and Political Motives

Donald Trump remains true to his reputation: he has once again made headlines by sharing an outlandish idea. At a Bitcoin conference in Nashville, Trump announced that the USA could create a national Bitcoin reserve under his new presidency. While crypto fans responded with enthusiasm to this announcement, numerous economists have expressed doubt as to whether such a strategic measure would be feasible or make actual sense.

Shortly after, the Republican candidate further stoked the debate by announcing the start of his own cryptocurrency platform, The DeFiant Ones. He did not, however, provide any details.

Trump & Bitcoin: Stroke of Genius or Campaign Trail Promise?

What's Trump's Bitcoin plan all about? Crypto expert Alfred Taudes sheds light on the 10 key questions about the Bitcoin Reserve and offers valuable insights into the opportunities and risks:

1. What’s the Rationale of Donald Trump’s Announcement?

“He is mainly out to get votes,” says Alfred Taudes, the founder of the Research Institute for Cryptoeconomics at WU and the research lead of the Austrian Blockchain Center. The idea behind Trump's Bitcoin announcement: he aims to attract voters who have invested in bitcoin and might profit from rising rates as a result of such a state-owned reserve. In the past, Trump himself did not think much of cryptocurrencies, but it seems that he is eager to present himself as an alternative to bitcoin-critical Democrats in the current campaign. Particularly Senator Elizabeth Warren does not tire of criticizing cryptocurrencies as the legal tender of criminals and calling for strict regulations.

2. How Could a Strategic Bitcoin Reserve Be Established?

According to a draft bill, the country would acquire bitcoin step by step until it reaches one million bitcoins. “This could only be done over time in order to avoid manipulating the market,” Alfred Taudes explains. Acquiring bitcoin, however, is not as difficult as stockpiling them via federal institutions. “This requires a certain kind of infrastructure as the wallets and passwords used in the private sphere would not work here.” What’s needed is a solution that guarantees that several people could access the assets in a secure way that precludes any fraud attempts.

3. What Would Be the Benefits of a Bitcoin Reserve?

Trump argues that, if the value of bitcoin keeps rising and the US holds a considerable reserve, it could use the gains to pay off national debt. If other countries then follow suit, the bitcoin’s value would climb even further.

4. What Are the Risks Associated with a Federal Bitcoin Reserve?

In addition to keeping the bitcoin safe, plummeting exchange rates pose a risk (which applies to other forms of assets as well). What is more, if the bitcoin blockchain were to be compromised, the reserve’s value could even drop to zero. “Bitcoin would, however, not be the only reserve anyway; it would be an addition to other assets, such as gold,” Alfred Taudes specifies.

5. Do Countries Already Own Bitcoin?

The US currently has a reserve of about 210,000 bitcoins, the bulk of which has been seized from criminals. Most recently, the German government sold confiscated bitcoin, particularly from illegal streaming providers, on the exchange. By January 2024, the country’s authorities had seized bitcoin worth about EUR 3 million in the state of Saxony alone. Such assets are subject to special regulations and cannot be used to build a reserve.

6. What Are Trump’s Plans for Bitcoin Mining?

Donald Trump wants all Bitcoin not yet in circulation to be mined in the USA in future. Following the ban of mining in China, the US already counts among the countries where the most bitcoin are mined, along with countries such as Kazakhstan.

7. Could Bitcoin Be Used for a National Reserve in Europe as well?

At present, there is no prospect of a state Bitcoin reserve in the EU. It’s out of the question for countries such as Austria to embark on this path alone. And the ECB does not care for bitcoin one bit: official statements by the central bank have been mostly critical so far.

8. Where Is Bitcoin Headed?

The value of bitcoin has strongly fluctuated in the past years. Following a rise after the last halving (an event taking place every four years during which the reward for mining new bitcoin blocks is halved in order to slow the growth of supply), it dropped several times before rising again. “Before the recent crash, also crypto assets were concerned because by now they are tightly interwoven with the conventional financial system,” Alfred Taudes explains. Investors who hold a large amount of bitcoin or another cryptocurrency – usually referred to as crypto whales – use downward trends to buy bitcoin at a cheap rate. If past developments are any indication for the future, however, the price of bitcoin can be expected to climb again soon.

9. Are Crypto Assets Generally Gaining in Importance?

A survey by Yougov commissioned by Bitpanda revealed that 20% of all Austrians have already invested in cryptocurrencies. Particularly younger people are interested in this kind of asset. “To today’s young people, crypto is what gold used to be to older generations,” says Alfred Taudes. Bitcoin and other cryptocurrencies have become an asset class of their own right in Austria and around the world, as can be witnessed by the great success of the Austrian platform Bitpanda, which already counts four million customers and is particularly busy in the retail segment. Bitpanda also cooperates with banks to make it easier for investors to acquire crypto assets. “Bitcoin has been finding its way to the institutions for some time now,” Taudes concludes.

10. Is Bitcoin Really a Big-Time Polluter?

Due to the high energy consumption during mining, it is often claimed that Bitcoin is bad for the climate. Is that really the case? “We’ve been hearing a lot of nonsense in this regard,” Alfred Taudes explains, pointing out that energy consumption does not directly translate into environmental pollution. It depends on the type of energy used, just as is the case for charging EVs. “Miners are always eager to use the cheapest energy, as it accounts for 70% of their costs.”

While the south of China was the preferred region for mining due to its coal power plants in the past, today miners increasingly rely on cheaper electricity produced by wind and solar power plants. “For the miners, it makes no difference whether these energy forms are consistently available or not.” That is why many miners are currently moving to Texas, where green electricity is still affordable.

Conclusion: Trump's Bitcoin Reserve - the Future of Cryptoassets?

Donald Trump's proposal to introduce Bitcoin as a state reserve brings both innovation and challenges. Overall, it is clear that Trump's plan could have far-reaching implications for the future of cryptoassets and international financial policy. It remains unclear how this proposal will affect the election campaign and what reactions American voters will show.

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