First we had Trump with the strategic reserve. Florida. Alabama.
The list keeps growing.
On the day that Microsoft shareholders voted down the idea to add Bitcoin to the company's treasury, the state auditor of Alabama came out in favor of setting up a Strategic Bitcoin Reserve (SBR).
This is starting to gain a lot of traction.
We are seeing a number of calls for governments, within the United States, to go down this path. It is a trend that is starting to be picked up by other countries.
Of course, El Salvador already set this in motion with its decision to use Bitcoin as legal tender. That is coming under attack as the IMF is looking to remove that in exchange for a loan to the country.
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The Bitcoin Reserve Momentum
A few entities are public with their Bitcoin move.
El Salvador and Microstrategy are the two leaders in this area. Outside of them, we also have Elon Musk and Tesla. The latter purchased $1.5 billion before selling 75% of the total. After that move, due to the massive price appreciation, we are see the holdings now worth more than $1 billion.
Going beyond that, it was speculated that Musk himself and SpaceX also purchased a large amount of BTC. If that is the case, those values have skyrocketed due to the bull market.
Bitcoin is taking on a new position when it comes to reserve and capital allocation.
Part of this is the approval of Bitcoin Spot ETFs. Once that happened, it made it easier for entities to gain exposure to this asset.
For example, a number of pension funds made sizeable purchases over the past year, something that is in profit at the moment. Entities like this can enter through this vehicle since it is regulated akin to any other stock purchase.
While this is not part of the reserve concept, it does show how Bitcoin is spreading as an asset class.
Bitcoin: The Basis of Collateralization
Many still hold onto the idea of Bitcoin being a medium of exchange. I think it was basically eliminated at the base layer, since the network has limitations. Innovators are seeking to build out the Lightning, a network that lacks incentivization. To me, this brings up the question of who will ultimately be running the network.
What is quickly emerging is the idea of Bitcoin as a HODL asset. This is nothing new since early Bitcoiners were the original HODLers. There is a difference this time.
When Wall Street HODLs something, it is not done passively. The asset, even when held, is put to work. We see this with US Treasuries and repledge agreements.
Bitcoin is shaping up to be an asset that is going to follow suit. It has properties which, over time, should help the price to keep appreciating. While volatility could preclude it being used on a short term (i.e. overnight) lending, for longer duration loans, it could be ideal.
A simple idea is to think about a mortgage.
Under this arrangement, a property is purchased using the asset as the collateral. The borrower usually requires some down payment to help the lender offset the risk.
Default means the property is lost.
If we switch this up a bit, we can see how Bitcoin could be used as a replacement for the property. Since mortgages in the United States tend to be 15 or 30 years, volatility isn't really a problem.
A borrower puts up $300K in Bitcoin for the purchase of a property. By making the payments, the borrower is up to date with the loan. If, however, he or she falls behind, the Bitcoin is taken due to default.
The borrower still has the property.
This is a simple example of something that could become much larger.
Redesigning government Finance
What is government entities started to acquire Bitcoin as a reserve? This could establish a baseline of holdings which could be utilized for future financing purposes.
At present, governments basically borrow or tax. That is the funding routes available.
Let us take a municipality that is holding $100 million in BTC. It needs to raise $10 million for a utility project. Presently, the path is to float bonds, which is pays off over a few years.
By putting up $10 million in Bitcoin, there is no need to float the bonds. The municipality is leveraging an asset of value for present day liquidity. More importantly, it is doing this with an eye on future value.
What happens after 5 years? The loan is paid off and the Bitcoin is returned. Actually, here is where it gets interesting. What is that $10 million in Bitcoin worth? If we look at any 5 year window, we see the price goes up.
Perhaps that BTC went up $5 million. If the municipality has to return to the market for financing, it can do so at an higher amount since it is sitting on $150 million (presuming no Bitcoin was sold).
Confidence Growing
There is nothing magical about any of this.
Finance, along with money, is a human creation. Ultimately, the vehicles used boil down to confidence. When people have trust in an asset, it carries value. If that disappears, we see things crash.
Bitcoin is gaining confidence across the financial spectrum. If governments travel down this path, we can see how a system with this as part of the base layer could emerge.
My guess is we end up seeing entities that pick up Bitcoin utilizing it as a collateral mechanism. We could see this emerge on a global basis since it is a constant asset.
The process will start once a few of these government entities start to pass legislation allowing for the purchase of Bitcoin as part of the reserve.