Context:
The announcement from US President Donald Trump on forming a strategic cryptocurrency reserve has already caused a sharp increase in the crypto market and put serious concerns among economists. The reserve will comprise Bitcoin, Ethereum, Ripple, Solana (SOL), and Cardano (ADA).
Major features of the strategy for the strategic crypto reserve
Purpose & Structure
- The reserve is modeled around the US Strategic Petroleum Reserve, intended to stabilize markets during disruptions.
- Unlike products like oil, which have a supply demand basis for these actions, cryptocurrency cannot be said to have that same basis.
- The move could signal official recognition of cryptocurrencies as a legitimate financial asset.
Expected Effects on Markets
- The estimated seized cryptocurrencies in the USA sum up to about $17 billion, while China boasts an approximate $19 billion.
- An actual reserve might act as a precursor to more central banks and sovereign wealth funds adding crypto assets to their portfolios, sustaining price increases over a long term.
- US interference in cryptocurrency markets will bring heightened price “volatility” sensitive enough in nature to contribute to sky high gains.
Concerns & Controversies
Undermining the US Dollar
- The USA issues the world reserve currency (USD) and can invoke printing money as a means for global transaction settlement.
- Such a development might weaken confidence in the dollar and raise questions concerning the US government faith in its own currency as it creates a crypto reserve.
Market Manipulation Potential
- In case the President controls the reserve instead of being administered under the Federal Reserve, it may allow Trump intense leverage over crypto markets.
- A huge buy or sell operation from the US government would probably cause huge price fluctuations favoring those who are privy to inside information.
- Trump and his close allies, including Elon Musk, are known to have personal crypto interests, raising conflict of interest concerns.
Centralization Risks
- In contrast to Bitcoin and Ethereum, which are still considered decentralized, companies like Ripple, Solana, and Cardano are run by private entities.
- This could be politically complicated and regulatory if certain government linked entities own substantial amounts of money.
The US strategic cryptocurrency reserve may, in consequence, herald a new global financial landscape by accelerating the mainstream acceptance of the economic phenomenon. However, it also raises serious issues regarding potential financial instability, conflict of interest, and the role of the US dollar.
