Exciting, Inevitable...But Messy

Friends and associates,

The Trump administration mentioned a bitcoin reserve numerous times on the campaign trail and issued an executive order over the weekend confirming his desire for the US government to buy crypto assets. We support clear crypto regulation from the new administration but this executive order? We’re not on board. The flow of Bitcoin adoption cannot be stopped and we expect the eventual outcome is reserve asset status. But bitcoin is carving out a new financial landscape in unpredictable ways and we cannot control the mess created by fallible centralized figures.

Background: Reserve Assets

Most governments hold strategic reserve assets—typically through their central banks. These reserves serve a few key functions: managing monetary policy, stabilizing exchange rates, and ensuring financial resilience.

For example:

• The Federal Reserve buys U.S. Treasuries to lower long-term interest rates or stimulate risk-taking—something we saw on a massive scale under Quantitative Easing.

• The South African Reserve Bank might sell U.S. Treasuries to counteract extreme currency volatility.

• The People’s Bank of China has historically bought U.S. Treasuries as a tool to weaken the yuan, supporting its export-driven economy.

Generally, it’s the central banks—not the government’s treasury department—that hold these assets. Treasuries, in most cases, focus on managing day-to-day finances: issuing debt, managing cash flows, and covering government expenses. The U.S. is a bit of an exception because the Treasury does hold the government’s gold reserves, a legacy of the gold standard.

What Makes a Good Reserve Asset?

For something to function as a strategic reserve asset, it needs a few key characteristics:

• Deep, liquid markets – The asset must be easily bought or sold in large quantities.

• Global acceptance – Many different economic players need to recognize and trade it.

• Low counterparty risk – Governments need to trust that they can access and use the asset when needed.

• Long-term store of value – Even if the asset is volatile in the short term, it must retain purchasing power over time.

Changing Reserve Asset Dynamics: Gold & U.S. Treasuries

For thousands of years, gold has been the reserve asset of choice because it scores well on all 4 features noted above. Gold is still held by most central banks. In fact, central bank gold purchases have been strong in recent years

Since the monetary regime change in the early 1970s U.S. Treasuries have been the dominant reserve asset. But they’re far from perfect. Compared to gold, they’re inferior in two key ways:

• They are reliant on the credit quality of a centralized government which runs persistent budget deficits and racks up debt at a frantic pace - this undermines their ability to store value over the long-term

• They come with counterparty risk of the centralized issuer. This was less of an issue 30 or 40 years ago, when the U.S. was the undisputed global hegemon. But that’s changed.

Big turning points have emerged with interest rates turning higher and the Russia-Ukraine war.

1. Higher interest rates have resulted in sustained weakness in long-term government bonds. TLT and index of long-dated US Treasury bonds has fallen by >45% in the last 5 years

   

   Source: Trading View

2. The U.S. government froze Russia’s U.S. Treasury holdings, cutting them off from reserves they assumed were untouchable. That was a wake-up call for other governments—especially China, which holds over a trillion dollars in U.S. debt.

If the U.S. government can seize or freeze reserve assets during geopolitical conflicts, then those assets carry risk. And if that risk is high enough, central banks and governments will look for alternatives.

Bitcoin: The Superior Reserve Asset

Bitcoin is cutting through the old reserve asset system, much like a river reshaping a canyon—unstoppable, carving out its place, and forcing the world to adjust. Like gold, bitcoin is pristine collateral—counterparty-free, yieldless, and highly resistant to debasement. It serves the same fundamental function as gold in a reserve portfolio.

But Bitcoin also improves on gold in key ways:

• Easier to Store & Transfer – Bitcoin can be self-custodied on a hardware wallet and transferred globally in minutes. Gold requires vaults, security, intermediaries and transfer is

• Fully Auditable & Transparent – Bitcoin transactions and ownership are verifiable on a public ledger, while gold reserves require trust in opaque audits.

• Internet-Native Money – Bitcoin can be integrated into financial systems without intermediaries, unlike gold, which still requires a trust-based settlement process.

• Turns Stranded Energy into Value – Bitcoin mining monetizes wasted energy, creating economic incentives that gold mining cannot match.

• Fixed Scarcity – Bitcoin has a hard cap of 21 million coins, while gold supply can increase through mining and new discoveries.

• Centralized Control – Bitcoin issuance is governed by code, while gold’s price and supply are influenced by central banks who hold a significant portion of liquid supply and whose incentives are not aligned with holders

These advantages make Bitcoin a fundamentally superior reserve asset. We strongly expect that over time, Bitcoin will displace gold and U.S. Treasuries as the world’s primary reserve asset. The last 15 years of Bitcoin adoption have been a slow but steady march toward this reality. But it’s a long road—monetary shifts of this scale take decades.

Bitcoin vs. Other Crypto Assets

No other cryptocurrency comes close to Bitcoin’s monetary properties and applicability as a reserve asset:

• No other asset has an unchanging monetary policy. Bitcoin’s 21 million cap is fixed—no surprises, no dilution.

• No other asset is as decentralized and secure. Bitcoin operates independently of any central authority, with the highest level of security in the digital world.

• No other asset has built a trust layer over 15 years of uninterrupted operation.

Some sovereign wealth funds may dabble in other crypto sectors—DeFi protocols, decentralized exchanges, on-chain lending—but that’s investment, not monetary reserve strategy. If a government is buying a monetary asset, Bitcoin is the only viable choice.

Can the US (with Reserve Currency Status) Lead This Shift?

Despite Bitcoin’s clear superiority as a reserve asset, we remain skeptical that the U.S. will be the government to execute this shift. The U.S. dollar is still the world’s reserve currency, and any move by the U.S. to accumulate Bitcoin at scale could trigger massive market reactions:

• What happens to U.S. Treasuries? Would this signal the U.S. government abandoning its debt market? How would that impact global interest rates?

• How does the deficit get managed? Would the U.S. be forced into radical fiscal policy shifts?

• What is the geopolitical response? Would this accelerate dedollarization among other major economies?

Beyond the market reaction, there’s also the risk of political and media backlash. The media will likely portray any reserve policy as a wealth transfer from taxpayers to crypto holders. This is a misleading narrative that I would be happy to push back against. But its powerful and certainly compelling if the reserve includes idiosyncratic crypto assets predominantly held by insiders.

Trump’s Crypto Gamble: A Left-Field Move

While I’ve been positive about the potential for clearer crypto regulation under the Trump Administration—new leadership at the Treasury, FDIC, and CFTC, and the FDIC rolling back restrictive policies—I've also said all along that we should expect nonsense alongside progress.

Well, here we are.

Apart from the potentially negative market to the US changing its reserve asset policy and the potentially negative media reaction, this executive order is unwise because:

• The reserve should not include non-bitcoin assets

• A future administration can overturn an Executive Order

Instead of guiding the flow with smart policy, the government is throwing up makeshift dams—clogging the system with altcoins and political games. There’s little point dwelling on what should have happened for too long. The reality is:

• If Trump follows through, expect both buys and eventual sales from the U.S. government’s crypto reserves because the Presidency will change leadership.

• The inclusion of random altcoins will only fuel more speculation and narrative-driven market moves.

• This is going to skew the market focus toward policy announcements rather than fundamentals.

That’s not ideal, but it’s the world we live in.

Adoption is Already Happening Below the Surface

While the media fixates on Trump’s executive order, the reality is that Bitcoin’s role as a reserve asset is already growing—organically and steadily:

Individuals are accumulating – The rise of self-custody and long-term holders continues, with retail and high-net-worth investors treating Bitcoin as a hedge.

Corporations are buying – Companies like MicroStrategy and Tesla have already made Bitcoin part of their treasury strategy. Many more are following

The Better Approach: State-Level Bitcoin Reserves

While the federal-level approach to a Bitcoin strategic reserve is messy—politicized, vulnerable to reversals, and prone to speculative distractions—a state-level approach might actually be the better way forward.

States have more flexibility than the federal government when it comes to financial innovation. We’ve already seen places like Texas and Wyoming take major steps in Bitcoin adoption, and it’s not a stretch to imagine state governments within the US starting to allocate reserves to Bitcoin, especially those looking for financial independence from federal policy shifts.

This decentralized approach to adoption actually mirrors Bitcoin’s own nature—it grows from the ground up.

Despite the inevitable negative narratives surrounding Trump’s move, Bitcoin adoption as a reserve asset is still accelerating. The smart money knows where this is headed—it’s just a matter of time.

Short-Lived Market Reaction

Trump's announcement, unsurprisingly, moved markets—but only briefly. The 10% bounce on Sunday was retraced on Monday. And that in itself is telling.

The bigger picture is macro-driven:

• The dollar has been stronger in recent quarters, tightening global liquidity conditions. Trump’s tariffs are dragging down growth expectations, which is weighing on risk assets.

  

• Equity weakness is spilling over into crypto, reducing risk appetite.

• Crypto internals are less constructive—there has been long-term holder profit taking and weaker on-chain demand

So while we still expect the market to recover later this year, the near-term bias is weaker. There's tough news to digest, and the weight of broader economic conditions is pressing down on crypto markets for now.

The advent of bitcoin ETFs, clearer crypto regulation and the potential for a strategic reserve highlights that we have entered a new era of bitcoin adoption. We expect this era will result in nation state bitcoin adoption because it is a superior technology to gold and US Treasuries. However, we have serious question marks regarding Trump's approach and are prepared to deal with the consequences. Despite the noise, the path to Bitcoin’s reserve status is clear, through individual, corporate and potentially state-led adoption. It’s not a matter of if—but when.

Rob Price, CFA

_{The information contained or attached herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. This presentation may contain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. This email is for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product, service of Sound Money LLC as well as Sound Money Capital LP and Sound Money Capital (BVI), whether an existing or contemplated fund, for which an offer can be made only by such fund’s Confidential Private Placement Memorandum and in compliance with applicable law. Past performance is not indicative nor a guarantee of future returns. Please consult your own independent advisors. All information is intended only for the named recipient(s) above and is covered by the Electronic Communications Privacy Act 18 U.S.C. Section 2510-2521. This email is confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received this message in error please immediately notify the sender by return email and delete this email message from your computer. Copyright 2024 Sound Money LLC. All Rights Reserved.}

_{NOT INVESTMENT ADVICE; FOR INFORMATION ONLY}

_{PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS}