Cecil Bohanon and John Horowitz: Trump’s creation of bitcoin reserve gives currency validation

President Trump recently ordered the creation of a strategic bitcoin reserve and U.S. digital asset stockpile. The reserve will be established from the bitcoins the federal government already holds and from future legally authorized criminal or civil asset forfeiture by federal departments and agencies.

The federal government’s gold reserves at Fort Knox and elsewhere come to some 261 million troy ounces, and its strategic petroleum reserves held on the Gulf Coast come to just short of 400 million barrels. The White House crypto-czar reports that the federal government currently owns about 200,000 bitcoins. Establishing the bitcoin reserve and U.S. digital asset stockpile is a validation, recognition and an elevation of cryptocurrencies to being legitimate and respectable financial assets.

But just what is a digital asset such as bitcoin? Bitcoin was launched in 2009 as a digital currency designed for payment as a substitute for government currencies. The core challenge was preventing the digital equivalent of counterfeiting. In other words, how to prevent people from copying the digital currency. The copying problem was solved through a consensus mechanism called blockchain, which creates a publicly distributed ledger of verified transactions.

Bitcoins were (and are) created and collected by “miners” who complete complex arithmetic tasks through computers. The tasks require extensive computing power and use a lot of electricity. In 2022, 0.38% of the world’s electricity consumption was estimated to be used in mining bitcoin.

New bitcoins are continually being created, but the underlying software protocol limits the supply of bitcoin to 21 million units. The difficulty of the computing tasks necessary to produce new units of bitcoin increases over time. This protocol and limiting supply are central to making bitcoin valuable. It is estimated that bitcoin will continue to be mined until 2140.

Bitcoin is not tied to physical assets like gold or fiat currency and is without government mandate. It is not issued, regulated or guaranteed by any central authority or government. Instead, it relies on a decentralized network and cryptographic algorithms to maintain trust and security.

As a medium of exchange, bitcoin faces competition from other currencies and payment systems. Indeed, bitcoin has not become a generally accepted medium of exchange. It is a widely held but volatile asset. Although most investors and seemingly all regulators have been quite suspicious of bitcoin, a $10,000 investment in Bitcoin at its 2017 peak would be worth more than $45,000 today. Nothing affords acceptance like success.•

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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to [email protected].