Can Trump Make Bitcoin Useful?

Holding bitcoin is cool again. U.S. President Donald Trump’s vow to make the U.S. the “crypto capital of the world” has helped send the price of the digital currency soaring to eye-popping six-figure highs.

Wall Street banks and money managers are preparing to pounce as investors hope Trump can turn the often-derided token into a mainstream financial asset and usher in a golden age for cryptocurrency.

The president has signed an executive order aimed at “promoting American leadership in digital assets,” and this month David Sacks, a leading figure in the cryptocurrency and artificial intelligence sectors and venture capitalist, unveiled plans for upcoming legislation.

Enthusiasts are particularly excited about the prospect of a national reserve of Bitcoin, which would solidify the U.S. government’s endorsement of the asset and could further boost its price. “The first thing we have to consider is the feasibility of the Bitcoin reserve,” Sachs said.

However, it is unclear how such a reserve would work and what it would mean for Bitcoin. If — or when — prices fall, would taxpayers be the ones to ultimately pick up the tab? In 2022, the collapse of the high-profile exchange FTX triggered a wave of bankruptcies as investors dumped cryptocurrencies.

Some are already worried: Elliott, a prominent U.S. hedge fund, recently warned that Trump’s embrace of cryptocurrencies will lead to an “inevitable collapse” and “could cause severe damage in ways we cannot yet foresee.”

Bitcoin prices are currently trading near their highest point since the coin’s creation in 2009 — but a closer look at the 16-year history since founder Satoshi Nakamoto mined the first bitcoins shows that surges in price are usually followed by sharp declines.

Here are some historical nodes of Bitcoin:

• In 2009, the first transaction between Bitcoin and the US dollar took place on the BitcoinTalk forum, where a user exchanged 5,050 Bitcoins for $5.02 via PayPal.

• In May 2010, Florida programmer Laszlo Hanyecz used 10,000 bitcoins to buy two Papa John's pizzas worth $20.

• Bitcoin reaches $1 per coin.

• Bitcoin's volatility was first apparent when its price plummeted from $30 after major exchange Mt. Gox was hacked.

• Cryptocurrencies have stabilized, with price fluctuations being relatively mild in 2012.

• Bitcoin’s first “halving” event: a pre-programmed change to the source code cuts mining rewards in half — designed to control inflation.

• The price of Bitcoin surpassed $100, driven by global economic uncertainty and the European banking crisis.

• Bitcoin surged to $1,000 per coin amid positive talk from U.S. regulators and the emergence of China as a major market — a move researchers later attributed to price manipulation.

• After another hack, Mt. Gox suspended withdrawals and eventually collapsed, sending Bitcoin prices tumbling.

• The price of Bitcoin bottomed out around $200 and remained stable.

• The technology behind Bitcoin - blockchain - has attracted the interest of major banks such as Barclays and Goldman Sachs.

• Bitcoin's second halving event.

• The price of Bitcoin exceeds the price of an ounce of gold.

• The price of bitcoin surged to nearly $20,000 in a speculative frenzy ahead of the launch of the first bitcoin “futures” contract.

• The long “crypto winter”: The bubble burst in 2017 and prices fell sharply.

• The third halving event.

• Bitcoin has rebounded to $20,000 and is seen as a "safe haven" amid the financial uncertainty caused by the coronavirus pandemic.

• Bitcoin hit new highs amid excitement over Coinbase's Nasdaq listing, the first U.S. cryptocurrency exchange to go public.

• Tesla bought $1.5 billion worth of Bitcoin.

• China has declared all cryptocurrency activity “illegal” and expanded its ban on trading and mining.

• El Salvador becomes the first country to adopt Bitcoin as legal tender.

• The value of cryptocurrencies TerraUSD and Luna plummeted, triggering a market crash.

• Sam Bankman-Fried’s FTX exchange collapsed, sparking panic and leading to the closure of many other cryptocurrency companies.

• In January 2024, a spot Bitcoin exchange-traded fund was launched and the price soared.

• The fourth halving event.

• Trump is elected president. Bitcoin soars to $100,000 a coin. ( *Laszlo’s 2010 pizza order is now worth $1 billion. )

• Bitcoin climbs to $109,000 in anticipation of a U.S. executive order supporting cryptocurrencies.

Clearly, support from U.S. officials is positive for Bitcoin prices.

Last year, the top U.S. securities regulator approved the launch of regulated funds that hold the cryptocurrency, paving the way for pension funds, endowments and other large money managers to invest in the token, encouraged by the Trump administration’s strong support for the industry.

“This was basically unthinkable two years ago,” said Yesha Yadav, associate dean at Vanderbilt University Law School. She added that before Trump’s return to Washington, bitcoin’s price “was driven by novelty and excitement, and this time there’s real institutional support.”

Many believe the price could rise further. Larry Fink, the billionaire founder of BlackRock, the world’s largest asset manager, recently said that if more sovereign wealth funds considered holding Bitcoin, its price could reach $700,000.

“Bitcoin has found a way to work with the government,” said Matt Hogan, chief investment officer at cryptocurrency asset manager Bitwise. He added that Trump’s endorsement “removes the last existential threat to Bitcoin.”

Now, some lawmakers are pushing the government to go further. Senator Cynthia Loomis of Wyoming is leading the charge to create a strategic reserve of bitcoin.

Strategic Reserves

A reserve asset is often a critical resource that can be used in times of crisis. For example, the United States currently has an emergency oil reserve that can be used to respond to oil supply shocks, while many countries have gold reserves.

Loomis said the rising value of Bitcoin could be used to reduce U.S. debt. In July, she introduced a bill that would have the U.S. buy 200,000 Bitcoins from the market each year for five years until the reserve reaches 1 million.

Because cryptocurrencies are largely anonymous, it would be extremely difficult to track who Washington is buying Bitcoin from — and criminals and hostile governments could profit from those purchases.

Danielle Bryan, executive director of the nonprofit watchdog Project on Government Oversight, said the U.S. government's interest in cryptocurrencies raises significant "national security implications because the types of investors involved in cryptocurrencies are inherently problematic."

“This is a very strange idea,” said Hilary Allen, a professor at American University’s Washington College of Law. “We need something that won’t be eroded by inflation, we need hard money and real reserve assets. The funny thing is, there is nothing less ‘hard’ or less real than Bitcoin,” she added.

The U.S. government currently holds nearly 200,000 Bitcoins, tokens confiscated through criminal investigations. The U.S. government has previously sold some of its holdings through auctions — however, many hope the government will now resist selling those coins.

More optimistic people like Loomis hope that the U.S. will start actively buying more Bitcoin, which could push up the price of Bitcoin. “Any action that doesn’t involve selling existing reserves is positive,” Hogan said.

Supporters say Bitcoin will be an effective reserve asset because of its limited supply. Due to the algorithm written into the Bitcoin production code, there will always be only 21 million Bitcoins. They argue that this scarcity increases the value of Bitcoin because holding Bitcoins now means they will be worth more in the future - which also distinguishes Bitcoin from other cryptocurrencies.

• While the nature of cryptocurrency means ownership is anonymous, some public information does exist.

• Grouping the top 1,000 Bitcoin holders by ownership type gives us a clearer picture of the largest players.

• Governments of countries such as the United States and the United Kingdom hold 200,000 and 60,000 bitcoins respectively, which were confiscated through criminal investigations. El Salvador and Bhutan obtained bitcoins through mining.

• Several asset managers, including BlackRock, now operate Bitcoin exchange-traded funds (ETFs), and BlackRock holds more than 550,000 Bitcoins.

• Centralized cryptocurrency exchanges hold tokens on behalf of their customers, with Coinbase holding over 1 million Bitcoins.

• Several companies have already bought Bitcoin — chief among them Michael Saylor’s Strategy, which until recently was known as MicroStrategy, a software company turned Bitcoin HODLer.

• The mysterious Bitcoin creator Satoshi Nakamoto holds about 1 million bitcoins that have never been traded - almost 5% of the total supply and worth nearly $100 billion.

• Outside of the top 1,000 holders, there are approximately 8 million bitcoins whose owners are unknown .

• It is believed that between 1.5 million and 2.5 million Bitcoins are lost and inaccessible to their owners.

• There are still more than 1 million bitcoins that have yet to be mined .

The U.S. isn’t the only country considering investing in cryptocurrencies. The Czech central bank is considering adding Bitcoin to its reserves, but other countries are staying away.

ECB President Christine Lagarde recently said she is “confident” that “Bitcoin will not enter the reserves of any central bank that is a member of the ECB’s governance structure.”

She added that “reserves must be liquid, safe and accountable” and that “they should not be plagued by suspicion of money laundering or other criminal activity.”

Bitcoin's volatility is much higher than other financial assets

30-day rolling standard deviation of price and index levels (%)

Source: Financial Times calculations, London Stock Exchange Group • Bitcoin and gold prices in US dollars

Few people still consider Bitcoin a currency. Its historically extreme volatility is a primary problem — we need coffee to cost the same in the morning as it does in the afternoon, for example — and this requires the currency to be stable so that users can trust its value.

Second, Bitcoin holders are often reluctant to spend their Bitcoins when they believe the price will continue to rise. Bitcoin’s blockchain is also difficult to scale because it cannot handle a large number of transactions in a short period of time.

Therefore, experiments with using it as legal tender have failed. El Salvador tried to do so in 2021 but was met with strong opposition and low acceptance.

“The original vision was to be peer-to-peer electronic cash, not an asset to be held as part of a balanced portfolio,” said Christine Smith, chief executive of the Blockchain Association, a lobbying group. “Over time it’s changed a bit… I don’t see bitcoin as a payment method very much,” she added.

Instead, Bitcoin is most likely to be used as an investment.

“Historically, its price has always gone up, you can’t deny that, even though there have been many instances where people have said ‘this is the end of Bitcoin,’ ” said Omid Malekan, an adjunct professor at Columbia Business School.

Institutional Investment

For Bitcoin to become a mainstream financial asset, it would require massive participation from Wall Street banks, fund managers, pension plans and other large institutional players.

Until recently, most people would have been afraid to hold such tokens for themselves or their clients, fearing they would face backlash from regulators.

Now, under Trump, who wants to make the U.S. the world’s “bitcoin superpower,” those concerns are receding. “We’re likely to see further integration of cryptocurrencies with traditional finance,” Allen said.

U.S. regulators have made it easier for banks and asset managers to custody cryptocurrencies and have begun scaling back lawsuits against digital asset companies. Meanwhile, Trump’s cryptocurrency task force is looking at how best to regulate token issuance and facilitate access to banking services for cryptocurrency companies and traders, all moves that would bring the industry more in line with traditional finance.

“If the rules come out and make it happen… the banking industry is going to move in big on the trading side,” Bank of America CEO Brian Moynihan said recently, highlighting Wall Street’s eagerness to make money from cryptocurrency trading.

Bitcoin transactions to surge in 2024

Number of Bitcoin transfers, daily total and 30-day rolling average (in millions)

Source: CCData

Investors have been buying bitcoin indirectly through regulated exchange-traded funds launched last year that have attracted more than $110 billion.

“Investors went from thinking it was a mistake to hold a position in crypto to realizing it was a mistake not to have an outlook on Bitcoin,” Smith said.

Bitcoin has pivoted from its original mission to build an alternative financial system away from the prying eyes of governments and big corporations. Now, its followers are cheering its acceptance by perhaps the biggest institution of all: the U.S. government.

But policymakers worry that if systemically important investors such as pension plans and central banks start holding bitcoin and its price collapses, the impact on the rest of the financial industry would be broad and cryptocurrency companies could be at risk of needing bailouts.

Cryptocurrency’s volatility, risk of price collapse and use of leverage mean that as it becomes more mainstream, it “could undermine the stability of the broader financial system” and generate “systemic risks … with serious negative impacts on the real economy,” the New York Federal Reserve warned.

A cryptocurrency crash could affect the broader U.S. and global economies if the government’s holdings plummet in value and investments are deemed unwise. Spillover effects to the bond market are a possible risk.

“The origin story of all this is a rejection of central banks and traditional finance, and ultimately my concern is that it ends up being propped up by central banks and governments,” Allen said.