Previous article: Strategic Reserves and Game of Power I - Crypto Order in the Trump Era
Author: Zeke, Researcher at YBB Capital
On March 6, US President Trump signed an executive order to formally establish the US Bitcoin Strategic Reserve. David Sachs, Director of Cryptocurrency Affairs at the White House, further clarified the details of the reserve on the social media platform X: about 200,000 bitcoins held by the federal government will be included in this strategic reserve. These assets were confiscated through criminal or civil forfeiture procedures, and it was made clear that "they will not be sold or purchased through the market."
I speculated on some of the progress of the strategic reserve in my March 5th article. Interestingly, the current situation is very consistent with my prediction at the time. Instead of adding altcoins like SOL or XRP to the reserve list, or injecting new fiscal funds into the BTC reserve as he had promised, Trump simply put all the seized Bitcoin into the strategic reserve. What was surprising, though, was how quickly the reserve was implemented—Trump didn’t delay long before using this “trump card.” As the move came out, the market’s illusions about government bulk purchases faded, and BTC fell back to a low of around $77,000. Now, no matter how you look at it, Trump’s remaining strategic options seem to be running out. But it’s worth pondering: Is this really the limit for this “crypto president” who has dominated business and politics for decades? 1. Gold, oil, and then BTC?
The collapse of the Bretton Woods system, the cracks in the petrodollar, and the rise of Bitcoin all represent the continuous evolution of the dollar anchor.
The establishment of the Bretton Woods system in 1944 marked that the US dollar became the "ultimate anchor" of the global monetary system by being linked to gold (US$35/ounce). The core logic of this system is that the physical scarcity of gold supports the credit of the US dollar, and the network effect of the US dollar amplifies the liquidity of gold. However, the Triffin dilemma exposed the fatal flaw of the system - global trade expansion requires the outflow of US dollars (US deficit), while maintaining the credit of the US dollar depends on US surplus and sufficient gold reserves. In 1971, Nixon announced the decoupling of the US dollar from gold, breaking away from the shackles of gold and maintaining the hegemony of the US dollar. This proves that any monetary system rigidly linked to physical resources will eventually collapse due to the irreconcilable conflict between resource scarcity and economic expansion. The end of the gold standard forced the United States to seek a more flexible anchor. The first oil crisis in 1973 gave Nixon the answer: the importance of oil to modern industry is beyond doubt. The following year, US Treasury Secretary William Simon and his deputy Gerry Parsky were sent to Saudi Arabia to sign the "Irrevocable Agreement". The United States promised to provide military protection and security guarantees to Saudi Arabia on the condition that Saudi Arabia agreed to denominate all oil exports in US dollars and use excess oil revenues to purchase US Treasury bonds. The era of petrodollars thus began, with oil replacing gold as the new anchor of US dollar credit. The petrodollar system operates through a closed loop of "oil trade-US dollar remittance-US debt purchase". Wall Street packages these petrodollar debts into derivatives (the scale will reach 610 trillion US dollars in 2023) and dilutes credit risks through "debt monetization". The essence of this circular logic is that the United States imposes "seigniorage" on the world through oil trade. But now, with the US fiscal deficit high (7% of GDP per year) and the national debt exceeding $36 trillion this year, the system has become a Ponzi scheme of borrowing money to repay debts. As the de-dollarization of oil trade gradually expands, this cycle will inevitably collapse. So what will happen next? Who will fill the gap left by oil?
Trump currently holds two powerful cards - Nvidia and Bitcoin. In the AI narrative, Nvidia plays the role of the "Digital Middle East". Everyone needs computing power, but only I can produce it. Unfortunately, a certain country in the East has taken a "small and beautiful" approach to AI computing power, so computing power and digital oil are not synonymous (or some countries may be self-sufficient in oil) until the era of AI agents fully arrives.
Let's look at the second card: Bitcoin. The idea of Bitcoin as a strategic reserve originated from a proposal submitted to Congress by Senator Lummis last year. He believed that the purchasing power of the US dollar has been declining, and Bitcoin's annual growth rate is as high as 55%, making it an excellent hedge against inflation and a new type of value storage to replace gold. Trump even said, "Give them a little cryptocurrency check, give them some Bitcoin, and then wipe out our $35 trillion."
Whether it is pegging the US dollar to Bitcoin or using it to repay US debt, I have always opposed these ideas. The first reason is the above-mentioned-the collapse of the Bretton Woods system. The hard cap of Bitcoin is 21 million, which is far scarcer than gold. The United States cannot repeat the mistakes of the Triffin dilemma. Secondly, the volatility is too great. Currently, there are only 200,000 bitcoins in reserve, worth less than $20 billion, which is only 0.056% of the US debt. In order to achieve an effective peg, the United States needs to hold at least 30% of the circulating supply of bitcoins (about 6 million), or significantly increase the value of bitcoin and stabilize its price - neither of which seems realistic. Third, pegging the dollar to bitcoin will only accelerate the marginalization of the dollar. How to convert bitcoin into a global tax base is another unresolved issue.
Judging from the current implementation of the strategic reserve, the Trump administration obviously cannot find a better entry point in the short term. But the speed at which this card was played forced me to rethink: Do they have a bigger trump card?
My personal thoughts extend from the speculation in the previous article:
1. The scarcity of Bitcoin does not mean that all cryptocurrencies are scarce. The design of most public chain tokens is a deflationary mechanism. The US dollar is currently backed by oil and has a face value of gold. The structure of the digital Fort Knox may be mixed: BTC is gold, and public chain tokens such as ETH or SOL are oil. With the large-scale application of "crypto cities", can a US-style crypto closed loop be formed? For example, various stablecoin projects such as Usual and Tether are constantly promoting the so-called US dollar settlement. Their structural mechanisms or profit sources are closely related to US debt. Does this have some similarities with the petrodollar system?
2. At this stage, it is reasonable not to buy or sell, but if the final action is limited to this, then it is too early to announce the news. Trump is not stupid, and his crypto team is not stupid either. There are growing rumors in the industry that the US sovereign wealth fund (still in the planning stages) will buy cryptocurrencies. I tend to think that this sovereign wealth fund is likely to be his trump card. 3. Initially, I thought Trump was just making empty promises to the crypto industry for the benefit of its underlying network. However, given the current situation, we may need to have more ambitious goals. It is only a matter of time before mainstream countries follow suit with strategic reserves. Personally, I think BTC is the most acceptable, but SOL and even XRP may surpass ETH in status (as adoption advances). 4. The largest unit in the crypto war is no longer the public chain. Trump seems to be integrating the largest CEX, public chains, and various giant projects, but it is still unclear how he will integrate them, and how those who resist will fight back?
5. Rumor has it on Wall Street that Trump is planning a self-destructive recession to force the Fed to cut interest rates. Whenever the market looks promising to improve, Trump and Musk (DOGE) strike hard. So, is Trump also trying to suppress the crypto market? Turning the highest expectations into a bubble? However, I don't quite agree with this. First, the AI bubble in the US stock market is undeniable - although it cannot be compared with the Internet bubble in 2000, overheating is certain. Secondly, Trump and Musk's tough measures will inevitably trigger a backlash, and a counterattack from the left is inevitable. The so-called "recession" is actually the result of the joint efforts of both sides.
Regarding points 1, 3, and 5, I can only speculate at this stage, but for points 2 and 4, I believe I can expand further.
On February 3 this year, Trump signed an executive order to establish the US Sovereign Wealth Fund next year, requiring the US Department of Commerce and the Treasury to submit a plan within 90 days, including financing mechanisms, investment strategies, financial structures and governance models, aiming to finance infrastructure, supply chains and strategic industries.
There are about 50 countries and regions in the world that have established sovereign wealth funds, and China's China Investment Corporation and Huaan Investment rank second and third in the world respectively. The investment style of sovereign funds varies from country to country. For example, the Middle East focuses on strategic industries, Norway focuses on stock investment, and China serves private equity, real estate and the Belt and Road Initiative. There are four benefits to establishing a sovereign wealth fund: 1. Smoothing economic fluctuations (hedging resource price risks and optimizing foreign exchange reserve management); 2. Promoting economic structural transformation (such as the Middle East's support for tourism and technology); 3. Gaining global financial influence; 4. Protecting society and building social welfare.
The establishment of the US sovereign wealth fund was mainly driven by the TikTok dispute. Publicly, it is Trump's acquisition of an Internet company loved by the American people, and it is also to solve the fiscal deficit and infrastructure upgrade problems. Privately, this is Trump using his business acumen in the White House to upgrade his power. If conditions permit, this fund may become the main source of funds for crypto strategic reserves. This is not entirely speculation. Lutnik, the key person in charge of the fund and the nominee for US Secretary of Commerce, was the CEO of Cantor Fitzgerald, one of Tether's custodians, and managed related assets. Coupled with the fact that Lutnick is a supporter of Bitcoin, it is not surprising that he is in charge of the planning of the sovereign wealth fund - this seems to pave the way for Trump's crypto family and the interests behind it. In addition, most sovereign funds are registered in offshore financial centers such as the Cayman Islands or Luxembourg, using local laws to circumvent disclosure requirements and thus operate behind the scenes. For example, Saudi Arabia's Public Investment Fund (PIF) holds 320,000 bitcoins through offshore shell companies, which are completely unregulated by sovereign balance sheets. Trump's regrets during his term in 2016 may be fully resolved during this term. As for the source of funds, there are only four options: earn, sell, borrow, or print. Judging from the current situation in the United States, the first two options are the most likely. Trump hopes to fill the fund with tariff revenue or by selling the $5.7 trillion in assets currently held by the federal government. Of course, it doesn't matter which way the fund is established, what matters is the potential size of the ideal fund. If this becomes a reality, the core points are: 1. Government purchases will become a fact; 2. US-centric crypto projects will become the first (and possibly the only) Alpha in the crypto world; 3. Whether the top projects accept investment from sovereign funds will determine their survival.
This month, Binance made two major moves. First, it worked with the UAE royal family to obtain a $2 billion investment from the sovereign wealth fund MGX. There are rumors that Binance has also discussed investments with US officials. The Wall Street Journal even claimed that CZ may have exchanged equity for a pardon for the Trump family. Second, Binance Smart Chain (BSC) is seamlessly integrated into its own CEX, which means that CEX users can now easily participate in BSC's on-chain transactions using stablecoins. These moves highlight the systemic integration of traditional financial and geopolitical forces in the crypto space. Moreover, embracing centralization seems to be the only way out for public chains. Crypto is being divided by countries, and public chains either embrace elites or are embedded in CEXs, and their growth and strength depend on the distribution of traffic. Ethereum, which chooses to remain independent, continues to maintain its proud posture, even as its exchange rate with BTC continues to hit new lows. The crypto community's suspicion of the Ethereum Foundation and Vitalik has lasted for nearly a year. However, from my point of view, Ethereum's survival - and its potential counterattack - is crucial to the crypto world. Today, there are only two paths: surrender or resistance.
Those who surrender will share rewards with the elites and enjoy temporary peace. But if five cities are ceded today and ten cities are ceded tomorrow, what will happen in the future? Web3, which continues to promote centralization, will no longer be Web3. In the end, the seven countries will be unified by the Qin State. Ethereum may have a strange dictator, but it is still the only public chain worthy of being called a decentralized ecosystem. Yes, even today. I am not a staunch supporter of Ethereum, but I don't want to see it become the Handan City of the crypto world.
Ideally, value should exist in the code running on the blockchain, not in a line of signature on an executive order of the White House.
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