Bitcoin is in the news again. It is on one of its wild bull runs. New all time highs are being made on a weekly, if not daily basis. What sparked the current rally in Bitcoin was the re-election of Donald Trump as the next President of the USA. One of Trump’s election promises was for the US to buy one million Bitcoins as a strategic reserve. If that happens, it would of course be a huge event for the future of the crypto currency.

As documented on this blog, my position on Bitcoin has long been that it cannot succeed on the free market to become a real currency. That is because, it has no use value outside of trying to be money. The best outcome one can hope for is that it will remain a speculative asset that will continue to jump up and down like a yoyo.

However, I did say that the only thing that could make Bitcoin a currency is if a state of a significant size were to get behind it and back its currency with Bitcoin. I so far have held the opinion that this would be very unlikely to happen. Should I change my mind? Is this announcement by Trump this unlikely game changer for Bitcoin? Let’s find out.

As far as I can tell, there are only two possible reasons why the US might want to establish a Bitcoin reserve. The first one is to have enough Bitcoins in an emergency. That is to say, if the US government were to get into any financial difficulties, it could then sell its Bitcoins to pay its bills. Bitcoin would essentially be a different way of holding a cash reserve.

This plan, however, would make no sense. First of all, any kind of cash reserve could reasonably only be established in times of budget surpluses. The US, however, has huge deficits. That means it would need to go into debt to establish such a reserve. That makes no economic sense, as it could also go into debt later, when it gets into financial trouble.

In addition, one million Bitcoins would be a substantial amount of the Bitcoins in existence. Like with any other commodity, the price of Bitcoin is determined by supply and demand. If the US government wanted to sell its saved Bitcoins in an emergency, this would result in the Bitcoin market being flooded with supply. As a consequence the price of Bitcoin would crash, resulting in a significant loss for the government.

For any government, it makes no sense to hold a cash reserve for emergencies in anything else than its official currency. But even then, the same thing would happen as with Bitcoin. If the government floods the market with its own currency, the value of that currency would go down. In other words, we would see inflation.

Today, all governments are on a fiat currency standard. That means, they don’t need to hold any reserves. If they want to flood the market with currency units, they can just create those units out of thin air. And they are all making good use of that possibility. We can therefore safely conclude that a Bitcoin reserve as a cash reserve makes no economic sense.

The second possibility is to establish a Bitcoin reserve with the plan in mind to back the official currency – in this case the US Dollar – with those Bitcoins. That would not be a bad idea. I would certainly be in favour of it. Since the supply of Bitcoin is limited, it would limit the supply of Dollars and therefore abolish the fiat money system. Wonderful! This really would be the game changer that I was talking about.

But is this going to happen? I would still say that it is extremely unlikely for a number of reasons. First of all, no government likes to be restricted in its money supply. That is why we have a fiat money system in the first place. Restricting the money supply would take a huge amount of power away from the state.

Trump is no exception. In his first administration, he spend money like a drunken sailor. He even criticised the FED for being too restrictive. If Trump were to back the US Dollar with a hard asset, he would reside over a huge deflationary collapse of the US economy, an event that no government would likely survive.

I do, however, think that it is not impossible for governments to eventually back their currency with a hard asset. This might become the only way to re-establish trust in a collapsing US Dollar. However, for several reasons, this asset is unlikely going to be Bitcoin. It is likely going to be Gold, and it is probably not going to happen soon.

That is because Bitcoin is still very new and very volatile. As a result, it lacks trust with most market participants. This is not true for Gold. Gold has been a store of value for thousands of years and it is universally accepted as such worldwide.

In addition, it would be a bit more difficult to exchange Dollars for Gold as it is a heavy physical asset. This is an advantage from the perspective of a government, who does not want its currency to be easily exchangeable for the backed asset. That would allow for a little bit more wiggle room for fractional backing.

Most importantly, however, it is not going to be Bitcoin because the US already has a large gold reserve that it could use to back the Dollar. As a consequence, why use Bitcoin instead of Gold? The Bitcoin reserve would still need to be established at a substantial cost. Trump has of course not talked about backing the Dollar with Bitcoin. It is not clear what he wants this Bitcoin reserve for. He has almost certainly not thought this through.

I will however give a very speculative path towards a Bitcoin backed Dollar. This really is a wildly speculative conspiracy theory, but it is just enough plausible to mention it. It more and more looks like that the creator of Bitcoin is not some mysterious lone genius. Instead, Bitcoin seems to originate within the intelligence community of the US deep state. Why would they have created Bitcoin? The obvious reason is that they want everyone to get into digital assets. Digital assets can easily be controlled. Therefore, the digitalisation of everything would mean a huge power grab for the state. But maybe they had something else in mind.

There have long been rumours that the US has no gold left. It is possible that Fort Knox is empty as the government long ago sold the gold into the open market. In that case, the US would need to establish a new gold reserve to be able to back the Dollar with it. This would represent a huge challenge, as buying thousands of tons of gold in the open market would be pretty much impossible in a short period of time. Gold is too scarce for that. At the very least, the price would need to be many multiples of what it is today. In addition, a lot of governments have competed over buying gold in the last 15 years. Therefore, if the gold really is gone, it would be pretty impossible to back the Dollar with gold if it had to come to that.

On the other hand, if Bitcoin really comes from within the US state, then it is likely that the US already owns a lot of Bitcoins. That would change the strategic calculation away from a Gold backing towards a Bitcoin backing. But as I said, this is highly highly speculative. It would be extremely risky to bet your money on this outcome.

If the US does not already have a lot of Bitcoins, the question arises whether she is actually able to buy one million Bitcoins. This is a substantial amount of the Bitcoins in existence. In order to do that, it would need to offer a price high enough for some of the idealistic holders of Bitcoin to sell, which might be fairly high.

For every 100k Dollars of price per Bitcoin, buying one million would cost 100 billion Dollars. As I write this, the price is already around 100k$. Therefore, in order to buy one million Bitcoin the price would need to be substantially higher. This means that this plan would result in a very serious expense in the US budget. The US however is already bankrupt, it has no money to play with.

If the US really was seriously thinking about buying one million Bitcoins to back their currency with them, it would be of great importance to not announce this in advance. Announcing it in advance would make this project impossible to realize. If a US government were to say that from a date x it will start purchasing one million Bitcoin in the open market, the price would explode right there. Knowing that there will be a significant buyer coming into the Bitcoin market, who will pay any price, most traders on the planet would try to front run that trade. This would bit up the price to an astronomical level, which would make this project too expensive for the government.

At the same time, if the government were still to go ahead with it, it would result in an epic price crash once the administration is finished buying. At that point, the price would be very high, the biggest buyer would have disappeared and no one in their right mind would bet on higher prices. We would see the biggest Bitcoin price crash in its history, and that is saying something. It is very questionable whether Bitcoin could recover from it.

If this was a serious project, the real strategy would need to be to do this top secretly. While trying to buy, the government would need to try everything to crush the price of Bitcoin so that it can buy the dip. This way, by buying the dips in small chunks, it might be possible to build up one million Bitcoins over several years of buying. Trump, however, just made this impossible by publicly announcing the plan. He will have no choice but to abandon this project. This will of course result in the sharp reversal of the current rally.

In conclusion, Trump’s announcement to buy a million Bitcoin is not a game changer in the sense that it will make Bitcoin a currency. The US government would not be able to buy that many Bitcoins. To the contrary, if Trump’s announcement is a game changer than only in the sense that it will likely speed up the decline of Bitcoin.

What are the consequences for Bitcoin investors? Be smart and sell your Bitcoins into the rally. If Bitcoin survives you can then buy them back after the next crash. This is how to trade a speculative asset. Do not try to time the top. You will not succeed. No one can predict that, and certainly not a small trader.

The problem I have with these rallies is that it is a zero sum game and there are now professional traders in this market. These traders do not care about the idealistic vision of some Bitcoiners. They just want to make fiat money gains, which means they want your money. The way to get your money is, by telling you to hold or buy more while they are selling into the rally.

A good example of that is Michael Saylor, the founder of MicroStrategy. Saylor has in a major way influenced the current rally by announcing that his company is going to purchase 42 billion Dollars of Bitcoin in the coming three years. If Saylor really just wanted to own more Bitcoin, why would he announce this in advance? That makes no sense as that will drive up the price before he could buy.

The only way to make sense of this is that the goal is not for MicroStrategy to own more Bitcoins, but to drive up the price of Bitcoin. As a consequence, the price of the MicroStrategy shares will go up and Saylor will be able to sell his shares into the rally. MicroStrategy will likely go bankrupted in the coming years, as it is little more than a Ponzi scheme. Saylor, however, won’t care about that as his cashed out fiat gains will be unaffected by that. See how that works? Not everyone in the Bitcoin space is your friend.

My fear is always that the wrong people are going to profit from these rallies. I would like to see more idealistic libertarians get rich instead of Goldman Sachs, JP Morgan, Blackrock or Michael Saylor getting even richer. But you are not going to beat these professional traders if you hold on to your Bitcoins thinking you will be able to time the top. You are not going to be smarter than them. The only way to beat them is to sell when there is a rally, which is now.

I wish more people understood this. This rally is not a great event that will make the world a better place. Instead, it will suck in small investors with their life savings. That money will then end up in the pockets of the already rich share holders of the big Banks. Be smart and cash in some of those profits, if you have any.

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