Trump Orders Creation of Bitcoin Strategic Reserve: Market Reaction Falls Short, Controversy Ensues

Trump Orders Creation of Bitcoin Strategic Reserve: Market Reaction Falls Short, Controversy EnsuesOn March 7, 2024, the White House will host its first cryptocurrency summit, drawing global market attention. Prior to this, President Trump's executive order establishing a strategic Bitcoin reserve has sparked considerable interest, yet the market reaction has been far less enthusiastic than anticipated, even generating significant controversy

Trump Orders Creation of Bitcoin Strategic Reserve: Market Reaction Falls Short, Controversy Ensues

On March 7, 2024, the White House will host its first cryptocurrency summit, drawing global market attention. Prior to this, President Trump's executive order establishing a strategic Bitcoin reserve has sparked considerable interest, yet the market reaction has been far less enthusiastic than anticipated, even generating significant controversy.

According to David Sacks, the U.S. cryptocurrency czar, the reserve will be based on approximately 200,000 Bitcoins already held by the federal government, confiscated from criminal and civil cases. The government intends to hold these Bitcoins as a store of value, adopting a "hold-only" strategy with no selling and no taxpayer burden. This mirrors historical precedents like the Strategic Petroleum Reserve, the National Stockpile of medical supplies, and the Helium Reserve, aiming to secure access to crucial assets during crises and stabilize prices.

However, the inclusion of Bitcoin in a strategic reserve has perplexed many U.S. analysts. The highly volatile nature of Bitcoin, a risky asset, casts doubt on its suitability as a "safe" and "strategic" asset. The Trump administration's rationale for establishing a Bitcoin reserve has prompted various interpretations.

Analysis of the Trump Administration's Motives for Establishing a Bitcoin Reserve:

First, Trump has consistently positioned himself as a "cryptocurrency president," easing cryptocurrency regulations since taking office. This series of actions is interpreted as a multifaceted strategy encompassing the reshaping of USD hegemony, securing a dominant position in digital finance, pursuing commercial interests, and solidifying his voter base. Republican Senator Cynthia Lummis believes the Bitcoin reserve will not only change America but the world, securing America's global leadership in financial innovation.

Second, the move suggests the Trump administration is bullish on Bitcoin's appreciation potential, hoping to counter inflation and national debt by "hoarding digital gold." This official endorsement of cryptocurrency could accelerate institutional adoption and encourage other nations to establish similar reserves. Indeed, El Salvador has already established a cryptocurrency reserve, Switzerland is planning a referendum on a similar initiative, and countries like Brazil, Germany, and Russia are actively considering or taking steps towards creating their own cryptocurrency reserves.

Finally, the U.S. "Bitcoin hoarding" could significantly influence the future formation of international cryptocurrency regulations.

Market Reaction Falls Short of Expectations:

Trump's executive order, however, failed to boost Bitcoin prices as anticipated; instead, it caused a roughly 5% price drop. Other cryptocurrencies such as Ethereum, Ripple, Cardano, and Solana previously mentioned by Trump on social media, leading to market speculation about their inclusion in the reserve also declined by 4% to 8% within an hour.

The market's negative response stems primarily from two factors:

Firstly, the Trump administration's approach to establishing the Bitcoin reserve fell short of expectations. The market anticipated continued government purchases and accumulation of Bitcoin, not simply reclassifying the nearly 200,000 already held Bitcoins as a reserve asset. This "hands-off" approach means no new capital inflow to drive up prices; some crypto enthusiasts even characterize the reserve as "a pig in lipstick" without further buying plans.

Secondly, the executive order lacked clarity on whether other cryptocurrencies like Ripple would be included, creating market uncertainty.

Ongoing Controversy:

Trump's initiative has also sparked considerable controversy:

1. Insider Trading Risks: Concerns have been raised that the cryptocurrency reserve could become a breeding ground for fraud and insider trading. For example, an anonymous trader reportedly bet $200 million on Bitcoin hours before Trump's announcement, subsequently cashing out with a $6.8 million profit. This has fueled skepticism about the federal government controlling such a large amount of decentralized currency, seen by some as ironic.

2. Market Manipulation Suspicions: The Federal Reserve openly opposes government-led Bitcoin accumulation, emphasizing that "monetary policy should not be tied to crypto assets." The government's substantial Bitcoin holdings could potentially influence prices through policy manipulation, raising concerns about a conflict of interest "being both player and referee."

3. Effectiveness Concerns: Some U.S. financial experts deem the idea of using a cryptocurrency reserve to leverage purchases of risky assets and repay national debt as foolish and absurd. The effectiveness of a Bitcoin reserve in combating inflation is also highly uncertain. Austin Campbell, a professor at NYU Stern School of Business, suggests this move could actually threaten the global value of the dollar, arguing that the government should maintain a dollar-denominated fiscal order rather than pursuing speculative ventures.

Despite the criticisms, Trump's plan to make the U.S. the "global crypto capital" continues. The White House's March 7 cryptocurrency summit will be closely watched for Trump's statements and their impact on crypto assets. This move will have profound implications for the global cryptocurrency market, and its outcome warrants continued observation.