Crossed Wires: Bitcoin, the biggest State Capture of all

As the Bard wrote, something is rotten in the state of Denmark. Bitcoin has moved, quite suddenly, from an alternative store of value (alternative as in appealing to only a certain adventurous and tech-literate class of retail investors) to something now lustfully groped and fondled by none other than the US government.

This unseemly coupling includes US President Donald Trump’s gleeful announcement of bitcoin as a national reserve asset, which has kicked up a whole lot of dust. Presumably, the dust will settle somewhere, but until that somewhere becomes clear, there is a lot of guessing going down. The ground under bitcoin’s future has shifted.

Following Trump’s recent Strategic Bitcoin Reserve executive order, to everyone’s surprise, the bitcoin price did not so much fly as plummet (to paraphrase the famous Monty Python line). The order was the single most positive development within the bitcoin ecosystem over its short 15-year lifespan. It was plucked out of relative obscurity and elevated to a financial peerage on the same terms as gold and oil — and yet its price crashed. WTF?

The bitcoin price has long been fuelled by alternating periods of intense optimism and pessimism, fear and greed. Historically, snippets of bad news, like a hint of adverse regulation or a high-profile hack of some unrelated crypto project, could quickly send bitcoin holders stampeding for the exits. Conversely, even small positive signs (like kind words from a respected investor in traditional finance) would see huge amounts pouring into the market within hours.

The bitcoin market and its price have always been driven by small investors. For those with strong stomachs and an appetite for vertigo, it was quite a bit of fun, but retail investors no longer move this market. Bigger forces are at play.

One theory circulating about the BTC price drop is that some of the original pioneers and developers from bitcoin’s early years have cashed out in disgust. This theory is partially supported by the observations of wallet watchers who monitor bitcoin transfers. Why? For these early adopters, bitcoin was conceived in opposition to government — it was supposed to be money beyond the control of government. Private money. Untouched by the grubby hands of central banks and free of onerous and opaque oversight.

If bitcoin is now seen as an embryonic tool of the US government, it is not unreasonable to surmise that some of these OGs (original gangsters) would want to bail out — this is not what they signed up for. Some of them own a huge amount of BTC, having mined it in the days when its price was negligible. Their cashing out would certainly depress the price.

There is some irony here, of course. Part of bitcoin’s DNA is its anonymity; it is virtually impossible to associate a name with a transaction. It could even be the case that one or more of its creators (perhaps even Satoshi Nakamoto) is depressing the value of bitcoin — killing their darling.

Another factor influencing the price may be bitcoin assets seized by various law enforcement agencies now being quietly turned into cash, or perhaps it is the effect of recently settled crypto company bankruptcies distributing BTC to claimants who might be selling them.

But these factors seem like small beer — tiny ripples in a much bigger pond. While Trump may not fully understand global finance, international debt, monetary policy or international capital flows, he is certainly surrounded by people who do — which brings us to a recent article by the famed left-wing former finance minister of Greece, Yanis Varoufakis, titled The Crypto Time Bomb. Varoufakis is brilliant, verbose and opinionated — not always right but widely followed.

US financial hegemony

The article itself is quite technical, focusing on stablecoin narratives rather than bitcoin (an entirely different kettle of fish). However, his underlying message resonates: the decision to establish this reserve has a laser-focused goal — the extension of US financial hegemony.

How will this new reserve help? One way would be to arrest spiralling US debt. A report from VanEck provides a calculator which projects that, if the price of BTC rises by 25% per year (a modest figure compared to historical movements), US national debt could be reduced by 36% by 2049.

How can the US ensure such price growth? That’s simple — it will buy a lot of bitcoins. The very act of the largest economy in the world doing so will bring other buyers along for the ride, including other countries. This is akin to the Warren Buffett effect, big money becomes the pied piper. In crypto, the big buyers are called whales and the US, as the biggest whale of all, can easily move prices.

Some recent draft legislation by Senator Cynthia Lummis proposes purchasing 200,000 bitcoins a year for five years using "budget-neutral" funds — a tricky term allowing for broad funding mechanisms (covered in my recent article on this subject). If this Bill passes into law (likely), BTC accumulation will begin in earnest.

So why has the price gone down? If you know that a huge price rise is on the horizon, do you buy or sell? Most would buy. But rich and savvy traders often do the opposite, pushing prices down further so they can enter at lower levels when timing is imminent. That’s why they’re rich — they know how to exploit superficial analyses by lesser traders.

There’s another fascinating dimension to this embrace of bitcoin. As the US isolates itself behind tariffs and adversarial policies towards many nations, VanEck suggests, “It’s very possible bitcoin will be widely used as a settlement currency for global trade by countries seeking to avoid USD sanctions.”

The US, aware of this possibility, may see a land grab for digital assets like bitcoin as both an offensive and defensive strategy against those who want to minimise their reliance on the dollar. Add to this the administration’s promised support for US-based miners via tax breaks and energy subsidies and a clearer picture emerges: the US, unsurprisingly, is taking aggressive action to protect its dominant role in global finance.

As digital assets start to colonise more territory, the US wants to stake its claim first — regardless of what Satoshi Nakamoto envisioned for his creation.

For anyone who has read and been convinced by Nakamoto’s nine-page white paper and his ingenious mechanism to free money from the clutches of governments and central banks, that is indeed a great pity. DM

Steven Boykey Sidley is a professor of practice at JBS at the University of Johannesburg, columnist-at-large for Daily Maverick, and partner at Bridge Capital. His new book, It’s Mine: How the Crypto Industry Is Redefining Ownership, is published by Maverick451 in South Africa and Legend Times Group in Europe/UK.