When does a Bitcoin reserve make sense?

 [[{“value”:”That is the topic of my latest Bloomberg column, here is one excerpt: Now enter Bitcoin. Senator Cynthia Lummis of Wyoming has introduced a bill to have the Treasury create a $67 billion (at current value) stockpile of the cryptocurrency, and Republican presidential nominee Donald Trump supports the idea, saying it would be “a permanent national asset to benefit all
The post When does a Bitcoin reserve make sense? appeared first on Marginal REVOLUTION.”}]] 

That is the topic of my latest Bloomberg column, here is one excerpt:

Now enter Bitcoin. Senator Cynthia Lummis of Wyoming has introduced a bill to have the Treasury create a $67 billion (at current value) stockpile of the cryptocurrency, and Republican presidential nominee Donald Trump supports the idea, saying it would be “a permanent national asset to benefit all Americans.” The bill may not be a serious piece of legislation — it is highly unlikely to pass — but it raises a serious question: Under what circumstances can governmental purchases of cryptocurrency be justified?

And:

To see one version of the case for government purchases of Bitcoin, consider Argentina, where past hyperinflation has made both dollars and Bitcoin very popular. Inflation rates are declining under President Javier Milei, but Argentina’s currency future will probably still feature both currencies. Milei even suggested as much recently.

El Salvador is another case in point. The country already is fully dollarized, and President Nayib Bukele has been taking steps to encourage crypto use and investment. So far his intended crypto revolution has not taken off, but the country does offer highly favorable terms for crypto users and investors. If crypto rises in importance, some of that financial activity may take place in El Salvador, if only for regulatory reasons.

In short, there might be a number of governments that use dollars and crypto as a significant part of their natural monetary base, along with the domestic currency (if it still exists). In fact, the more dollarization spreads, the more the demand for crypto and Bitcoin may rise.

Many countries are aware of the advantages to using the dollar, but they may also come to see crypto as a useful tool that weakens the ability of the US government to apply financial sanctions. The end result may be more dollarization — but with crypto as a complementary back-up financial system. Crypto also could give those countries more elastic money supplies, in case they find Fed policy too tight for their economy.

To bring it back to domestic US concerns: If crypto and the dollar are complements internationally, the US government might want to encourage crypto as a way to expand the reach of the dollar. The dollar truly would become further entrenched as the global reserve currency, boosting possible levels of US consumption.

But not yet.

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 Economics, Uncategorized