Can Trump Make Bitcoin Useful?

Compiled by: Block unicorn

It’s cool to own Bitcoin again. U.S. President Donald Trump’s vow to make the U.S. the “crypto capital of the world” helped propel the price of Bitcoin to an eye-popping six-figure high.

Wall Street banks and money managers are preparing to pounce. 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.” This month, David Sacks, a leading figure in the cryptocurrency and artificial intelligence fields and a 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 a Bitcoin reserve,” Sacks said.

However, it’s unclear how such a reserve would work and what it would mean for Bitcoin. If — or when — the price falls, would taxpayers be the ones to ultimately foot the bill? In 2022, the collapse of the well-known exchange FTX triggered a wave of bankruptcies and investors rushed to sell cryptocurrencies.

Some people are already worried: Elliott, a well-known US hedge fund, recently warned that Trump’s embrace of cryptocurrencies will lead to an "inevitable collapse" and "could cause serious damage in ways we cannot yet foresee."

The price of Bitcoin is currently trading near its highest point since the creation of the token in 2009 - but a closer look at the 16-year history since founder Satoshi Nakamoto mined the first batch of Bitcoins will show that the surge in prices is usually followed by a sharp drop.

Here are some of the historical nodes of Bitcoin:

• In 2009, the first transaction between Bitcoin and the US dollar was carried out on the BitcoinTalk forum, and a user exchanged 5,050 Bitcoins for $5.02 through PayPal.

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

• Bitcoins reach $1 apiece.

• Bitcoin volatility first becomes apparent, with prices plummeting from $30 after major exchange Mt. Gox is hacked.

• The cryptocurrency stabilizes, with more modest price swings in 2012.

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

• Buoyed by global economic uncertainty and the European banking crisis, bitcoin prices break $100.

• Against positive comments from U.S. regulators and China becoming a major market, bitcoin soars to $1,000 a coin -- a move researchers later attribute to price manipulation.

• After another hack, Mt. Gox halted withdrawals and eventually collapsed, sending bitcoin prices tumbling.

• Bitcoin prices bottomed out around $200 and have remained stable.

• The technology behind bitcoin — blockchain — has attracted interest from major banks like Barclays and Goldman Sachs.

• Second bitcoin halving event.

• Bitcoin prices surpass the price of an ounce of gold.

• A speculative frenzy ahead of the launch of the first bitcoin “futures” contract saw bitcoin prices soar to nearly $20,000.

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

• Third halving event.

• Bitcoin rebounds to $20,000 and is seen as a “safe haven” amid the financial uncertainty caused by the coronavirus pandemic.

• Bitcoin hits new highs amid excitement over Coinbase’s Nasdaq listing, the first U.S. cryptocurrency exchange listing.

• Tesla buys $1.5 billion in Bitcoin.

• China declares all cryptocurrency activity “illegal” and expands ban on trading and mining.

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

• Cryptocurrencies TerraUSD and Luna plummet in value, sparking market crash.

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

• Spot Bitcoin exchange-traded funds launch in January 2024, sending prices soaring.

• Fourth halving event.

• Trump is elected president. Bitcoin price surges to $100,000 per coin. (*Laszlo's 2010 pizza order is now worth $1 billion.) Bitcoin climbs to $109,000 in anticipation of U.S. executive order supporting cryptocurrencies. Clearly, support from U.S. officials is good 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. They have been encouraged to do so by the Trump administration's strong support for the cryptocurrency industry. "This was basically unthinkable two years ago," said Yesha Yadav, associate dean of Vanderbilt University's 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 prices can 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 of cryptocurrency asset manager Bitwise, adding that Trump’s support “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 Reserve

  A reserve asset is typically 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 deal with oil supply shocks, while many countries have gold reserves.

  Loomis said Bitcoin’s rising value could be used to cut U.S. debt. In July, she introduced a bill seeking to 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 are inherently problematic.”

  “It’s a very bizarre idea,” said Hilary Allen, a professor at American University’s Washington College of Law. “We need something that’s not going to be eroded by inflation, we need hard currency and real reserve assets. And the funny thing is, there’s nothing less ‘hard’ or less real than Bitcoin,” she added.

  The U.S. government currently holds nearly 200,000 bitcoins, tokens seized 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 voices like Loomis hope the U.S. will start actively buying more bitcoins, which could drive up the price. "Any action is bullish as long as it doesn't sell existing reserves," Hogan said.

  Proponents say bitcoin will be an effective reserve asset because it has a limited supply. Due to algorithms written into the bitcoin production code, there will always be only 21 million bitcoins. They argue that this scarcity increases the value of bitcoins because holding them now means they will be worth more in the future - which also distinguishes it from other cryptocurrencies.

  

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

  

  • Grouping the largest 1000 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), with BlackRock holding more than 550,000 Bitcoins.

  

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

  

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

  

  • 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.

  

  • Beyond the top 1,000 holders, there are about 8 million bitcoins whose owners are unknown.

  

  • Between 1.5 million and 2.5 million bitcoins are believed to be lost and inaccessible to their owners.

  

  • There are still more than 1 million bitcoins that have not been mined yet.

  The US isn’t the only country considering investing in cryptocurrencies. The Czech central bank is considering adding bitcoin to its reserves, but other countries are shying away.

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

  She added that “reserves must be liquid, safe and reliable” and that “they should not be subject to suspicion of money laundering or other criminal activities.”

  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 as a currency. Its historical extreme volatility is the primary problem - we need coffee to cost the same in the morning and afternoon, for example, which requires the currency to remain stable so that users can trust its value.

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

  As a result, the experiment of using it as a legal tender has failed. El Salvador tried to do so in 2021, but was met with strong opposition and poor take-up.

  “The original vision was to be peer-to-peer electronic cash, not an asset that was part of a balanced portfolio,” said Christine Smith, CEO 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, and you can’t deny that, even though there have been a lot of cases where people have said, ‘This is the end of bitcoin,’” said Omid Malekan, an adjunct professor at Columbia Business School.

  Institutional investment

  Making bitcoin a mainstream financial asset would require massive participation from Wall Street banks, fund managers, pension plans and other large institutional players.

  Until recently, most people wouldn’t dare hold the 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 probably going 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 to scale back lawsuits against digital asset companies. Meanwhile, Trump’s cryptocurrency task force is looking at issues like how best to regulate token offerings and facilitating access to banking services for crypto 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, underscoring Wall Street’s eagerness to make money from cryptocurrency trading.

  Bitcoin transactions surge in 2024

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

  Source: CCData

  Investors have bought Bitcoin indirectly through regulated exchange-traded funds launched last year, which have attracted more than $110 billion.

  "Investors have gone from thinking it was a mistake to hold a position in cryptocurrencies to realizing it's a mistake not to have an outlook on Bitcoin," Smith said.

  Bitcoin has shifted from its original mission - to build an alternative financial system away from the prying eyes of governments and big companies. Now, Bitcoin believers are cheering 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, with cryptocurrency companies at risk of needing bailouts.

  Crypto’s volatility, risk of price collapse and use of leverage mean that as it becomes more mainstream, it “could destabilize the broader financial system” and generate “systemic risks … with severe negative consequences for the real economy,” the New York Federal Reserve has warned.

  A cryptocurrency crash could affect the broader U.S. and global economies if the value of governments’ holdings plummets and investments are seen as unwise. Spillover effects to bond markets 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.