Bitcoin has risen in value after the Presential election in the US. It is expected that there would be crypto reserve supported by the government. There are crypto friendly legislators who too will find way to make this happen. It is difficult to see how the whole thing is beneficial for the US.
Bitcoin has some positive aspects. It is portable — being digital millions of coins can be carried on a pendrive. It has anonymity — holders are identified by an alphanumeric key. It can be easily transferred anywhere, with no intermediation of government banks and other financial institutions. It can be added to one’s investment portfolio for diversification.
Bitcoin cannot qualify as money — its volatility makes it unsuitable for this role since it is a poor medium of exchange. In most countries, it is not accepted for payment. Bitcoin transactions are slow and costly — they require compute power and energy for validation. Besides, you can lose your coins if you lose the thumb drive. Crypto is a different kind of asset. It is not money itself, but like money in some way.
Bitcoins do not attract interest or generate dividends. If the prices of the coins rise, there is no greater supply. The quantity of the coins is pegged at 21 million, and there are already 20 million Bitcoins. As such, if the demand rises, the prices could reach astronomical levels. The whole stock of Bitcoins at $ 99000 per coin is valued at $ 2 trillion.
Bitcoin lovers favour a government reserve fund in the light of this background. The government can purchase a certain quality of Bitcoins and hold it for a specified period of time. It is in addition to confiscated bitcoins from the criminals. This would escalate the price of Bitcoins, as investors would rush in before the government purchases the Bitcoins.
If Bitcoin is made a small part of an investment portfolio, say 2 per cent, the worth o Bitcoins would be in trillions.
How does it benefit the government or people not holding Bitcoins? Nothing. The government will be holding volatile tokens that do not generate any income. The treasury will have to borrow or print money for such an investment.
Cryptos could be supported by the government by formulating suitable laws and regulations. Cryptos could be made stablecoins supported by deposits at the Fed or treasury securities. There could be legislation to define whether tokens are currencies or securities. There should be rules for consumer protection. The use of cryptos must be banned for anti-social activities.
Crypto technology can facilitate the trade of financial assets or the transfer money across geographies. There should be guardrails to leverage the benefits of crypto technology.