Former President Trump's recent endorsement of crypto assets and his proposal for a US digital assets strategic reserve have sent shockwaves through the crypto market. While Trump's support has boosted the value of certain cryptocurrencies, experts argue that the volatility and lack of intrinsic value of these assets make them unsuitable for a national strategic reserve.
When Donald Trump named crypto assets that would be included in a new US digital assets strategic reserve on his Truth Social platform over the weekend, he set the crypto market alight. The next day, when he pledged to push ahead with 25 per cent tariffs on Canada and Mexico and double the tariffs on China, that same market fell more than five times as much as the US sharemarket. That really says everything you need to know about crypto assets. They are a leveraged exposure to risk markets.
When the US sharemarket falls, which it did by almost 2 per cent in response to the tariffs, crypto assets also fall – but by far more. A cartoon image of the US president holding a “Bitcoin” at a store in Hong Kong. Trump, who used to dismiss crypto assets as a “scam”, is now a convert.Crypto advocates talk up digital assets as a hedge against inflation and as a potential source of support for the US dollar, but the announcement of the tariffs, which will be inflationary and economically destructive for the US, saw the crypto market tumble almost 10 per cent and the US dollar slide about 1 per cent against a basket of America’s major trading partners’ currencies. The hedging argument is based on the finite supply of Bitcoin. If there is a relationship with inflation, however, it is probably a negative correlation. Crypto assets don’t generate income, and when inflation is rising, so do interest rates. As a result, the opportunity cost of holding, say, Bitcoin also increases – and therefore, its price deflates. Trump, who used to dismiss crypto assets as a “scam”, is now a convert, even if he hasn’t explained why he converted, other than that the Biden administration was sceptical of the sector and wanted to tighten regulation of it.A national strategic reserve, Trump said on Truth Social, would “elevate this critical industry after years of corrupt attacks by the Biden administration.” That the sector backed him financially, with donations of more than $US100 million ($161 million) to his election campaign, has been cited as a reason. He does, of course, have more direct financial exposures through his family’sand he and his wife Melania’s meme coins (launched just ahead of his inauguration, despite the obvious conflicts). Trump Media has also announced plans to spend big on digital assets.Trump didn’t say how a strategic reserve of crypto assets would make America great, nor, indeed, how the US might acquire the assets or how it would manage them once acquired. And he has yet to explain why America needs a strategic digital assets reserve. The assets he nominated for inclusion in the strategic reserve were XRP, Solana and Cardano. He subsequently added Bitcoin and Ethereum. The post lifted the entire cryptomarket, adding more than $US300 billion to its value, before his tariffs announcement wiped out a similar amount. The US government does own some digital assets. It holds more than 200,000 Bitcoins, worth more than $US17 billion, mainly the confiscated proceeds of crime that have been used to compensate the victims. It probably holds smaller amounts of other digital assets, but they haven’t been disclosed.Trump’s expanding interests in crypto adds another dimension to the string of conflicts that the many cryptoboosters in his administration face.Unlike America’s strategic reserves of oil, its foreign exchange stabilisation fund, foreign exchange reserves or gold holdings, digital assets have no industrial use, no intrinsic value, generally are an extremely limited medium of exchange, have limited liquidity and are highly volatile, as we’ve seen over the past 48 hours. Because an asset like Bitcoin has a capped volume of tokens – only 21 million of them can ever be minted, with 19.8 million already in circulation – they have been seen as a hedge against inflation, but their history (and, other than Bitcoin and Ethereum, the nominated assets don’t have much history) shows their strongest correlation is with risk.The sheer volatility of cryptos argues against treating them as the kind of relatively stable assets that might normally be thought of as appropriate for a national strategic reserve. Bitcoin, for instance, has fluctuated between a high of $US106,000 and a low of less than $US54,000 in just the past year. Over the past five years, it has traded below $US7000. Cardano has traded between 32 US cents and $US1.23 over the past year, and XRP between 42 US cents and $US3.27. XRP has been as low as 3 US cents within the last five years. That volatility and the limited volumes of tokens in circulation (particularly with Bitcoin) make them a perfect vehicle for speculation, while the lack of regulation – there’ll now be even less since Gary Gensler, former chair of the US Securities and Exchange Commission and arch sceptic of digital assets, resigned before Trump could sack him – makes them the perfect targets for frauds and scam
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