Crypto Strategic Reserves may look larger in the rear-view mirror than they are

A week can feel like an eternity when the zone’s being flooded with FOMO. Last Sunday, Donald Trump tweeted:

A U.S. Crypto Reserve will elevate this critical industry after years of corrupt attacks by the Biden Administration, which is why my Executive Order on Digital Assets directed the Presidential Working Group to move forward on a Crypto Strategic Reserve that includes XRP, SOL, and ADA. I will make sure the U.S. is the Crypto Capital of the World. We are MAKING AMERICA GREAT AGAIN!

It was a big signal to crypto-world, not for what it said but because of what it implied. The Treasury’s holdings of the XRP, SOL and ADA tokens are literally zero. The Crypto Strategic Reserve therefore had to be a congressionally approved, cashed-up baghodler of last resort. It would be buying tokens on the open market.

Not one word of the tweet was true, however.

According to the factsheet accompanying an executive order signed yesterday by the POTUS, there’s going to be a Strategic Bitcoin Reserve and a Digital Asset Stockpile for other tokens. To build the funds the Treasury will take tokens “forfeited as part of criminal or civil asset forfeiture proceedings”.

Bitcoins “will be maintained as a store of reserve assets”, so held forever. Altcoins (meaning Ethereum, plus any XRP, SOL and ADA it chances upon in future) can be sold but not bought.

Ethereum, having gained then lost reserve-asset status within a week, is down by a bit this morning:

Ether’s dollar price

. . . while XRP, SOL and ADA trade had already resembled a pump-and-dump, Sunday’s tweet-spike having disappeared by halfway through Monday:

XRP

SOL

The US government holds seized bitcoin with a value at spot price of more than $18bn, according to Arkham Intelligence data. The state altcoin, memecoin and shitcoin stockpile appears to be a lot smaller: there’s a few million dollars of ether and not much else.

And because people think it’s funny to send shitcoins to government wallets, America holds more POOP, BabyTrump and Colon than three of the tokens Trump had previously identified as national strategic assets:

(Phil Stafford on MainFT has an excellent summary of what these tickers mean.)

In truth, there was very little chance of a Treasury reserve ever including new purchases of private pseudo-equity. Bitcoin might be trading like a 3x leveraged Nasdaq ETF but in the minds of the faithful, “digital gold” is sacrosanct. Altcoins like XRP, SOL and ADA more closely resemble community currencies. They’re fledgling unregulated white-label fundraising mechanisms for start-ups that don’t yet exist. Resisting centralisation and governmental control is their founders’ whole shtick. Pump-and-dump suspicions aside, traders probably sussed all this pretty quickly.

So, after a brief distraction, we’re back to bitcoin maximalism.

The main point of a US strategic fund, as MainFT’s Brendan Greely said in November, is to stick the Treasury with so much crypto that any restrictive measures become an act of self-sabotage. A side benefit is to remove an overhang that has existed since 2013, when the US confiscated bitcoins from Ross “Dread Pirate Roberts” Ulbricht, founder of the Silk Road dark-web marketplace. (Trump pardoned Ulbricht in January.)

Nevertheless, yesterday’s order indicates in hazy terms that the Treasury might be able to make new purchases for the Strategic Reserve, as long as they’re “budget neutral”:

The Secretaries of Treasury and Commerce are authorized to develop budget-neutral strategies for acquiring additional bitcoin, provided that those strategies impose no incremental costs on American taxpayers.

It’s a distant echo of the bill proposed last July by US senator Cynthia Lummis, which recommended the Treasury buy a million bitcoins using mark-to-market accounting gains on banks’ gold certificates and Fed refunds that don’t exist.

Toby Nangle did a detailed teardown for FTAV of Lummis in November, concluding that while the bill is nonsense, there might still be enough flex in the law to allow bitcoin purchases using the Exchange Stabilization Fund. And maybe the ESF could be drawn down for bitcoin plunge protection in response to a crash, but routine purchases would be practically impossible to execute with any efficiency.

Bitcoin liquidity has been deteriorating. The launch last year of bitcoin ETFs has moved approximately $40bn into cold-storage custody accounts, while Micheal Saylor’s MicroStrategy is holding another $45bn that he says isn’t being lent out. Wash trading probably inflates daily bitcoin trading volumes but velocity — a per-token measure of market activity — is as low as it was in 2012 when a token cost about $10.

With market liquidity so poor, the $40mn or thereabouts of daily new supply takes on an outsized importance. The combined power of the publicly listed mining companies mints maybe 100 of the 450 new bitcoins produced per day, but they’re not adding to liquidity either.

Mara (formerly Marathon Digital) reported a stockpile of 46,734 bitcoins at the end of February, having last year funded new purchases with a MicroStrategy-style issue of convertible notes. Riot Platforms says it makes “strategic purchases” to add to its bitcoin stockpile, which stood at 18,692 bitcoins at the end of February. Core Scientific didn’t disclose how many of the mined bitcoin it sold in February, having sold none in January.

When it comes to matching incremental bitcoin buyers with marginal sellers you probably have to look further afield, in places where power is cheap and dollars are scarce, such as Iran and Russia’s frontier territories. Does the US really want to be making open-market crypto purchases of uncertain provenance?

The Bitcoin Strategic Reserve proposal as it currently stands will move another 200,000 or thereabouts of tokens from temporary to permanent deep-freeze, and not much else. When only a sliver of 19.7mn bitcoins in existence are in active circulation, the formal removal of an overhang can probably be seen as a positive for the bitcoin price.

Meanwhile, the stockpile plan creates an overhang in all other tokens, from Ethereum to Poopcoin. Compared against the talk last year of the US setting up a crypto SWF capable of paying off the national debt, it’s looking a lot like a bait-and-switch.