Will the Fed buy Bitcoin?


Content overview

1. Even if the market value of Bitcoin rises to more than 1 trillion U.S. dollars, the proportion is still small relative to the circulation supply of 19.4 trillion U.S. dollars, but it cannot be ignored that the market value of Bitcoin is still growing rapidly;

2. Even if it knows that Bitcoin may challenge the status of the U.S. dollar, it is still difficult for the Fed to “seize” control of Bitcoin;

3. If the Fed adds Bitcoin to its reserves, it may increase the value of Bitcoin and it will also compete with the central banks of other countries.

What exactly is Bitcoin?

The answer seems to be divergent. Some people say that Bitcoin is crypto gold, some say that Bitcoin is a store of value and a hedging tool, and some say that Bitcoin is money . If we compare Bitcoin with the global legal currency M0 supply, now Bitcoin The currency is already the fifth largest currency in the world.

Of course, compared with the global currency king-the U.S. dollar, Bitcoin is still a “little potato”. Although the market value of Bitcoin has risen to more than 1 trillion U.S. dollars, it is relative to the 19.4 trillion U.S. dollar circulating supply. The proportion is still small. But it should not be ignored that the market value of Bitcoin has increased by about 55 times in the past four years, and has increased by more than 100 times in the past seven years, so it is not impossible to compare Bitcoin with the US dollar.

The Federal Reserve must know Bitcoin. Its chairman Jerome Powell has described Bitcoin as a “speculative store of value like gold” and pointed out that “almost no one uses Bitcoin for payment” . You know, the Federal Reserve holds more than 44 billion U.S. dollars in foreign currency, so what prevents them from adding Bitcoin to this “list”? In fact, there are many reasons why the Fed can’t do this at all. Let’s take a look at Planet Jun (WeChat: o-daily).

The end result of the Fed buying Bitcoin may be counterproductive

First of all, Bitcoin has a long way to go before it is favored by the Federal Reserve. For example, Nimrod Lehavi, the co-founder and CEO of Simplex, believes that Bitcoin may not have attracted the attention of the Fed. If the Fed is to seriously consider buying and holding Bitcoin, more listed companies may need to buy Bitcoin. Although Tesla in February 2021 purchased $ 1.5 billion of Bitcoin, but also led to more institutional investment ‘s interest in Bitcoin, but the current purchase transaction level, the number of these institutional investors actually not Unless the Bitcoin transaction volume is roughly the same as the U.S. dollar, the Fed is unlikely to see Bitcoin as a “threat”.

Since the price of bitcoin is largely driven by supply and demand, if the Fed buys some bitcoin, both retail and institutional investors may follow up and try to reserve more bitcoin. In turn, this may eventually lead to a severe shortage of sellers, reducing supply and possibly driving greater market demand for Bitcoin. In fact, the same situation has already happened at the end of 2020. As institutional investors “hoard” Bitcoin, we see a rapid rise in market prices.

Depending on the market’s reaction, this may push the price of freely circulating Bitcoin to a certain level so that the circulating market value will reach or exceed its value before the Fed intervenes-but the problem is that Bitcoin’s trajectory seems to be in line with the Fed’s requirements exactly the opposite. Simon Peters, market analyst at eToro, explained:

“If the Federal Reserve announces the purchase of Bitcoin, it is likely to send a wrong signal to the market, because Bitcoin itself is challenging the centralized control of the global currency by centralized institutions.”

Will the Fed buy Bitcoin have “unexpected” consequences?

The Fed actually “possibly” want to buy Bitcoin for two main reasons:

1. By purchasing Bitcoin, you can gain majority control over Bitcoin. After all, Bitcoin is now considered the second largest reserve currency in the world;

2. Buy Bitcoin and then “manipulate” its price, so as to maintain the status of the US dollar as the world’s reserve currency.

But the problem is that whether it is for any of the above two purposes, it may have unintended consequences, and may even backfire in the end. First, if the Fed wants to control Bitcoin as a reserve currency, it must acquire and control the distribution and circulation of most Bitcoin. However, if the Fed chooses to do this, it may eventually compete with the central banks of other countries, because once it chooses to buy, the Fed will send a signal to the world that Bitcoin is a powerful asset. The problem is that if other countries are aware of this and have similar willingness and purchasing power, then the Fed’s purchase of Bitcoin may eventually become a “draft” or even fail.

Nevertheless, some people in the industry still feel that the Fed should buy Bitcoin sooner. In October 2020, there was news that Iran may be seeking to incorporate Bitcoin and other possible cryptocurrencies into its reserve currency, and that the country’s legally registered cryptocurrency miners have also been required to mine cryptocurrencies at less than Sold to the Central Bank of Iran (CBI) at the market rate.

How much money does the Federal Reserve have now? Is it enough to buy Bitcoin?

According to the latest official report of the Federal Reserve, the current total value of its reserve assets is approximately US$144.89 billion, of which the largest piece (US$52.9 billion) is held in special drawing rights (supplementary foreign exchange assets), and the second largest (44.5 billion US dollars) U.S. dollars) are foreign currencies, mainly Japanese yen (CNY), Euro (EUR) and British pound (GBP).

Even if the United States converts all assets in its foreign exchange reserves into Bitcoin, it can still only control less than half of the Bitcoin in circulation. Or more realistically, if the Fed takes Bitcoin as its largest controlling interest (instead of special drawing rights), it means that they will control approximately 17.2% of the circulating supply of Bitcoin—really too little. The ratio cannot even have a significant impact on how other countries, companies or individuals use cryptocurrencies.

Given that Bitcoin mining is basically a “free game ” in the United States , and the Federal Reserve has not established a channel to introduce newly mined Bitcoin directly into reserves at a preferential price. Therefore, the Fed is likely to be forced to buy Bitcoin from cryptocurrency exchanges or over-the-counter trading platforms. Due to the inability to ensure priority access to Bitcoin, it may be difficult for the Fed to ensure the safety of large amounts of Bitcoin without increasing external demand for cryptocurrencies , which will further weaken the Fed’s efforts to build its own Bitcoin reserves.

It is basically impossible for the Fed to fully control Bitcoin

From a technical point of view, it is feasible to buy a large amount of Bitcoin through cryptocurrency exchanges and over-the-counter trading platforms, but even so, the Fed still cannot fully “control” Bitcoin, because the Fed has many other conditions that it cannot meet, such as :

1. Even if the Fed buys most of the bitcoins in circulation in the current market, it may not be able to control the newly minted bitcoins.

2. At present, a lot of bitcoins are locked for various reasons and may never be traded or sold on public platforms. For example, about 3.7 million bitcoins may be irretrievably lost.

3. More than 10% of the bitcoin supply has not yet entered the circulation market, and subsequent mining can only be gradually released from each new bitcoin block.

Therefore, the Fed’s desire to “control” Bitcoin may be an unrealistic challenge.

Tips for the Fed to buy Bitcoin

If Bitcoin still maintains its current market value during the Fed’s purchase process, it means that it may take decades for the Fed to build a substantial Bitcoin balance, because so far, the Fed’s annual operating budget is only $4.77 billion (2020 Annual data).

Simon Kim, CEO of Hashed, explained:

“For the Fed, it is not easy to admit that Bitcoin is the ultimate solution to the Fed’s expansion policy . This is almost an acknowledgment to the market that the additional supply of U.S. dollars to the market is the main reason for the depreciation of the U.S. dollar.”

However, there are two ways to “help” the Fed potentially speed up this process:

* The first and simplest method is to substantially increase the Fed’s spending so that it can increase the speed of buying Bitcoin from the public and private markets.

* The second option is to set and enforce a fixed exchange rate between the U.S. dollar and Bitcoin. This method may even prohibit the possession of more than a fixed amount of Bitcoin. This is the same as the situation when the US President Franklin Roosevelt signed Executive Order 6102 in the past. Similarly, the law prohibited gold hoarding during the Great Depression.

However, if the Fed does so, it may also lead to the formation of a black market exchange rate, similar to the underground exchange rates of Venezuela and Iran due to their capital controls, and may tell the world that even the Fed lacks confidence in the US dollar. Maybe it will further encourage more people to hoard Bitcoin.

If the Fed does not buy Bitcoin, can local governments lead the way?

Although the Fed is unlikely to add Bitcoin to its “safe” in the short term, it may be different for local governments-in fact, many U.S. states and local governments have begun to consider investing in Bitcoin or accepting it. Bitcoin is used for local services. The most typical one is the city of Miami. Recently, the Miami Economic Management Committee passed a resolution by Mayor Francis Suarez, allowing employees of companies in the city to receive part of their wages in the form of Bitcoin , And also supports the use of Bitcoin to pay taxes.

Francis Suarez also recently tweeted that the city of Miami will begin to analyze the possibility of using its own reserves to invest in bitcoin-which means that Miami may be the first example of local governments using government funds to invest in cryptocurrencies. Mayor Francis Suarez supported Bitcoin in three ways on Twitter:

• Priority to national legislation

•Pay employees with Bitcoin

• Use city government funds to invest in Bitcoin

On February 5, the St. Louis Federal Reserve Bank (one of the 12 banks that formed the Federal Reserve) issued a report that also showed that they have been paying close attention to the emerging Decentralized Finance ( DeFi ) industry. The report shows that the Federal Reserve Bank of St. Louis is fully aware of the advantages that decentralized finance can provide over traditional financial systems, including: lower transaction costs, increased transaction speed and transparency.

Although decentralized finance is currently mainly based on the Ethereum blockchain, it includesPolkadot,CosmosAnd other agreementsCross-chainTechnology is developing rapidly, which means that the adoption of public DeFi technology in the future may indirectly lead to an increase in the popularity of Bitcoin, and ultimately pave the way for the Fed to adopt or invest in Bitcoin.

Do you think the Fed will buy Bitcoin? If the Fed does buy Bitcoin, does it mean that they will face the US dollar? May wish to share it with Planet Jun (WeChat: o-daily) in the comment section below.

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