(NEW YORK) — The price of bitcoin topped $107,000 for the first time this week, climbing to a fresh high days after President-elect Donald Trump reaffirmed support for a U.S. bitcoin strategic reserve akin to its strategic oil reserve.
The world’s largest cryptocurrency has seen its price climb more than 50% since the election of Trump, who voiced support for bitcoin on the campaign trail.
Proponents of a potential government stockpile of bitcoin say it could diversify the nation’s financial holdings and prevent other countries from dominating the ascendant digital currency market. Critics warn, however, that the highly volatile asset lacks the type of financial or national security import that would warrant a strategic reserve.
Here’s what to know about a U.S. bitcoin strategic reserve, according to experts:
How would a bitcoin strategic reserve work?
A U.S. bitcoin strategic reserve would amount to a substantial government holding of bitcoin similar to the country’s stockpile of oil or gold.
A strategic reserve typically acts as a safeguard against an emergency shortage or another sudden event that would require the government to draw upon its stockpile of a given asset.
For instance, the strategic petroleum reserve, or SPR, was established after the Arab Oil Embargo triggered an energy crisis in the early 1970s with devastating consequences for the U.S. economy. The SPR, in turn, provides an emergency source of oil that protects the U.S. against a sudden supply crunch.
A bitcoin strategic reserve would help ensure the U.S. plays a significant role in the cryptocurrency market, which supporters view as a fast-growing part of the global financial system, Nik Bhatia, a professor of finance and business economics at the University of Southern California who studies cryptocurrency, told ABC News.
“Bitcoin has now become the largest decentralized asset in human history,” Bhatia said.
“Having some ownership in the network would be natural for the U.S. given its leadership in technology,” Bhatia added, citing the nation’s role in the invention of the internet.
What are the benefits and drawbacks of a bitcoin strategic reserve?
Speaking at a pro-bitcoin conference in July, Trump said a U.S. bitcoin strategic reserve would ensure the country exerts influence over bitcoin and prevents China from controlling the digital currency market.
Supporters of a bitcoin strategic reserve also say the asset would help diversify the nation’s financial holdings, protecting it from the potential decline in value of other assets, such as the U.S. dollar or gold.
Some proponents have said bitcoin holdings could help the U.S. pay down its national debt, since the price of bitcoin has recently climbed.
“While U.S. adversaries acquire traditional gold from a position of relative financial weakness, the U.S. can countermove by stockpiling digital gold in a way that amplifies its incumbent financial strength,” the Bitcoin Policy Institute, a nonpartisan think tank that supports a bitcoin strategic reserve, said earlier this year.
Some critics say bitcoin, launched 15 years ago, remains a relatively new asset lacking the kind of social utility or financial import that would necessitate a strategic reserve.
“You’re going to be hard pressed to say someone needs bitcoin the day-to-day way that they need petroleum,” Ananya Kumar, deputy director for future of money at the GeoEconomics Center, a part of the nonpartisan Atlantic Council, told ABC News.
Since the price of bitcoin is highly volatile, a large purchase of the asset could end up threatening the nation’s financial stability rather than safeguarding it, some critics say.
When asked about forecasts of future bitcoin gains that could ease the nation’s debt, Kumar says the long-term outlook for bitcoin remains uncertain. “The coin’s price has obviously been rising over time, but I’m not sure if that rise will continue,” Kumar said.
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