Given that the Fed only reserves more than $43 billion in foreign currency; what is preventing it from adding Bitcoin to the reserve list?
Bitcoin is often referred to as digital gold, store of value, etc. In fact, if its market value is compared with the M0 money supply of legal tender, it can be called the sixth largest “currency” in the world.
Of course, compared with the world’s reserve currency, the US dollar, Bitcoin is still insignificant. Based on the current market value of approximately US$250 billion, Bitcoin only accounts for a small part of the US$18.87 trillion in circulating supply. However, considering that the market value of Bitcoin has doubled 20 times in the past 4 years and 100 times in the past 7 years, it is conceivable that one day it will be comparable to the US dollar, and this is not an unrealistic prediction.
The Fed certainly knows Bitcoin. Its chairman Jerome Powell once described Bitcoin as a “speculative store of value like gold”, but “almost no one uses it to pay.”
Given that the Fed only reserves more than $43 billion in foreign currency, what is stopping it from adding Bitcoin to this list? Here are some reasons.
Backfire
First of all, there is still a long way to go before Bitcoin is considered by the Fed. Simplex co-founder and CEO Nimrod Lehavi believes that Bitcoin is probably not on the radar of the Federal Reserve. “Before the Fed starts to consider buying and holding Bitcoin, more public companies need to buy cryptocurrency,” he told Decrypt. “Until Bitcoin starts to roughly level with the U.S. dollar in terms of trading volume, the Fed is unlikely to see it as a threat.”
Because the price of Bitcoin is mainly driven by changes in supply and demand, once the Federal Reserve buys Bitcoin, retail investors and institutional investors are likely to seize the opportunity and start hoarding Bitcoin. This in turn may lead to a sharp shortage of sellers, a severe decline in supply, and may also push up the demand for the remaining cryptocurrencies.
Then, according to the market reaction, this will also promote the price of freely circulating Bitcoin, and its circulating market value will match or exceed the value before the Federal Reserve’s intervention. This is exactly the opposite of what the Fed hopes to achieve.
Simon Peters, market analyst at eToro, told Decrypt: “If the Fed were to buy Bitcoin, it might advertise wrong information because this asset was created to challenge governments and centralized global currencies.”
The Fed may want to buy Bitcoin for two main reasons. The first is to obtain majority control of what it considers to be the world’s next reserve currency, and the second is to push its value down to maintain the status of the US dollar as the world’s reserve currency. As we will see soon, if the Fed buys Bitcoin for either of these two purposes, it may have unintended consequences and is more likely to prove to be counterproductive.
In order to allow itself to control Bitcoin as a reserve currency, the Federal Reserve needs to obtain and control most of the issuance and flow of Bitcoin. However, the Fed is likely to compete with the central banks of several other countries, as this will strongly indicate that the Fed considers Bitcoin a powerful asset. At that time, depending on the wishes and purchasing power of other countries, the Fed may eventually be at a disadvantage.
Nevertheless, the Fed may have to act as soon as possible. In October 2020, cryptocurrency miners legally registered in Iran were required to sell their cryptocurrencies to the Central Bank of Iran (CBI)-after possibly selling at a below-market price, Iran may be seeking to inject bitcoin and potentially other cryptocurrencies Its reserve assets.
Reserve status
According to the latest official report, the U.S. reserves consist of assets valued at US$1.3961 billion, of which the largest piece (US$51.7 billion) is held as special drawing rights (supplementary foreign exchange assets), and the second largest piece (43 billion US dollars) U.S. dollars) are held as foreign currencies, mainly in Renminbi (CNY), Euro (EUR) and British Pound (GBP).
Even if the United States converts all assets in its reserves into Bitcoin, it still controls less than half of the Bitcoin in circulation. Or more realistically, if the Fed uses Bitcoin as its largest reserve (instead of special drawing rights), it will only hold 17.6% of the circulating supply of Bitcoin, and this level of magnitude cannot be used for other countries and companies. Or how individuals use cryptocurrency to have a significant impact.
Given that Bitcoin mining is basically free in the United States, and there is no established channel to directly enter the newly mined Bitcoin into the Fed’s vault at a favorable price, the Fed is likely to be forced to use the market from a public exchange or over-the-counter trading platform. Buy Bitcoin at a price. In addition, due to the inability to ensure priority access to Bitcoin, the Fed may find that it is difficult to obtain large amounts of Bitcoin without pushing up external demand for this cryptocurrency-which will further weaken the Fed’s efforts to build Bitcoin reserves .
Full control of Bitcoin is not feasible
Although it may be technically feasible to buy some or even most of the bitcoins sold on open trading platforms and over-the-counter (OTC) platforms, it is unlikely that the United States will get access to it, except for almost complete control over cryptocurrencies. Satisfaction, that is, the United States needs to buy most of all existing bitcoins and maintain this control when new bitcoins are minted.
However, this may be an infeasible challenge because a large portion of Bitcoin will be locked for various reasons and may never be traded or sold on public platforms.
For example, about 3.7 million bitcoins may be irretrievably lost, while another unknown amount of bitcoins will be locked in different time periods using different time lock smart contract primitives-this primitive can be used Restrict the acquisition of bitcoins before a certain date.
Although the Fed may purchase a large number of currencies that reach open trading platforms, fierce competition from other countries, institutions, and individual investors will also prevent the Fed from achieving majority control-especially considering that at present, almost two-thirds Of Bitcoin mining is in China.
Bitcoin standard
Assuming that Bitcoin still maintains its market value after being purchased by the Fed, it will take decades for the Fed to build a considerable Bitcoin reserve because as of 2020, the Fed’s annual operating budget is only $4.77 billion.
Simon Kim, CEO of Hashed said: “It is not easy for the Fed to recognize Bitcoin as the ultimate solution to the Fed’s expansionary policy. What the Fed has to do is to oversupply the market with dollars and increase the value of the U.S. dollar.”
There are two ways to potentially speed up this process. The first and easiest way is to substantially increase the Fed’s spending and increase the speed of buying Bitcoin from the public and private markets. The second method is to set and enforce a fixed exchange rate between USD and BTC; it is even possible to prohibit the possession of more than a fixed amount of Bitcoin, just like the Executive Order No. 6102 signed by Franklin Roosevelt during the Great Depression, prohibiting the hoarding of gold .
However, this may lead to the formation of a black market exchange rate, similar to the black market exchange rate in Venezuela and Iran due to capital controls. In addition, it may also mean a lack of confidence in the US dollar, which will further promote the development of motivation to hoard Bitcoin.
