On July 31st, 2024, Senator Cynthia Lummis (R-WY) introduced bill LIP 24548 829 to establish a Strategic Bitcoin Reserve within the United States Federal Government.

What Action Will the U.S. Take if it Passes?

Titled as the “Boosting Innovation, Technology, and Competitiveness through Optimized Investment Nationwide Act of 2024” or “BITCOIN Act of 2024,” the program calls for the purchase of “not more than 200,000 Bitcoins per year over a 5-year period, for a total acquisition of 1,000,000 Bitcoins.”

Why Are They Doing This?

The bill cites six findings by Congress driving the decision, paraphrased as follows:

1. Digital assets are becoming more prevalent in an evolving global financial landscape.
2. Bitcoin adoption has been widespread, and it has served as a medium of exchange and store of value for over a decade.
3. Just as gold reserves have promoted national financial security, Bitcoin represents a digital-age asset offering a similar benefit.
4. Hedge against economic uncertainty and monetary instability.
5. Bitcoin has unique properties: it’s decentralized and finitely scarce.
6. Diversification of national assets.

The U.S. Government Wants Bitcoin because it’s Finitely Scarce?

There are currently over 19,700,000 bitcoin in circulation.

The bitcoin algorithm only allows for a total of 21,000,000 bitcoin to be created… ever.

With 94% of the supply already in circulation, the remaining 1,300,000 bitcoin are set to be mined over the next 116 years, with the final bitcoin scheduled to be fully mined around the year 2140.

After that, the only way to obtain bitcoin will be through trade with a current bitcoin owner.

200,000 Bitcoin Per Year… is That A lot? Let’s Do Some Quick Math

How is new bitcoin created?

Currently 3.125 bitcoin are issued as a block reward when a new block is mined and added to the blockchain. This happens approximately every 10 minutes—or six blocks per hour for our math below.

3.125 bitcoin * 6 blocks per hour * 24 hours per day * 365 days = 164,250 bitcoin created each year.

Not only will the US government have to buy up every bitcoin mined each year to accomplish their goal of 200,000 bitcoin per year, they’ll also need to convince some other bitcoin holders to part with their bitcoin if they want to meet their 200,000 bitcoin per year target.

In 2028, the block reward will be cut in half from 3.125 bitcoin per block to 1.5625 bitcoin per block. Annual bitcoin creation will be approximately 82,125 bitcoin per year at that time, making it difficult for the US government (or anyone) to purchase 200,000 bitcoin per year.

What Could This Mean for Bitcoin’s Price?

According to BlackRock research, bitcoin adoption is growing at a faster pace than internet and mobile phone adoption.

U.S. ETF Buying Demand

On November 7th, bitcoin ETFs had their largest day of net inflows in history, with the equivalent of 19,525 bitcoin purchased (roughly $1.38 billion net inflows in one day).

Only roughly 450 bitcoin were created on November 7th.

On November 11th, bitcoin ETFs added $1.11 billion in net inflows.

Again, only roughly 450 bitcoin were created on November 11th.

As of November 11th, bitcoin ETFs have experienced $28.14 billion in total net flows since their launch 10 months ago in January 2024. They’ve had to buy over 1,000,000 bitcoin to back their ETFs.

MicroStrategy Buying Demand

Through the announcement of their 21/21 Plan, MicroStrategy intends to buy $42 billion of bitcoin over the next 3 years. At a price of $76,000 per bitcoin, that would mean the purchase of 552,631 bitcoin over the next 3 years.

Using our block reward math above, only 486,750 bitcoin will be created over the next 3 years—not enough for Microstrategy to purchase from miners.

As we stated earlier, due to halving, new supply issuance will continue to decrease over time, all while demand has been increasing.

A quick economics lesson: What happens to price when supply decreases and demand increases?

In either scenario, price goes up… in this case, both a supply decrease and demand increase seem to be happening at once—and this seems likely to continue for the foreseeable future.

And now the largest economy in world history is formulating a plan to buy 1,000,000 bitcoin?

Will other countries follow, creating a bidding war for an already limited bitcoin supply?

Mike Novogratz, CEO of Galaxy Investment Partners, believes so, telling Bloomberg that a U.S. move to establish a Bitcoin reserve may lead to other nations following suit. This would further fuel demand and contribute to a rapid increase in Bitcoin’s valuation, potentially pushing the price to $500,000 for one bitcoin.

As Warren Buffett has often said: “Never bet against America.”

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.