US President Donald Trump’s full embrace of digital assets has sent shock waves through the cryptocurrency market, driving a price surge while creating both new opportunities and heightened risks for investors and corporations.
Last week, Mr Trump said on his Truth Social network that the US was looking into creating a strategic reserve of digital assets, naming Bitcoin, Ethereum, Solana, XRP and Cardano as its potential core holdings.
The move rippled through financial markets, pushing Bitcoin up as much as 11 per cent to $95,000 on March 2, before retreating slightly to $88,000 on March 6, as traders scrambled to reposition their bets.
A crypto reserve, akin to Fort Knox for gold, would legitimise the asset class by establishing government-backed holdings. The US could use the stockpile to support its policy goals, potentially as a hedge against inflation.
But does this signal true mainstream adoption of digital assets, or are we witnessing yet another speculative frenzy? And should investors and corporations bet on crypto, or will a national reserve turn into a taxpayer-funded gamble?
The announcement comes on the heels of a tumultuous period for digital assets in which $800 billion was wiped from crypto markets in recent weeks, as the industry reeled from a series of scandals, including a record-breaking $1.5 billion Ethereum hack.
Investors, initially euphoric after Mr Trump’s November election victory, had been growing impatient with the new administration’s slow pace on crypto reforms. Many had expected immediate legislative changes to favour digital assets.
Instead, they got a so-called “memecoin” launch by Mr Trump himself – an experiment that ended with an 83 per cent collapse in value from a brief high, with the president encountering major criticism over the move.
Yet, the moment the US President name-checked crypto as a possible strategic reserve, sentiment reversed quickly. While the rally extended, many traders took the opportunity to lock in profits, causing Bitcoin to slip a bit from its recent highs.
One question no one seems to be asking is: if crypto collapses, who foots the bill in a US reserve?
The idea of a national crypto reserve is odd. Traditionally, reserve assets like gold serve as a hedge against inflation and economic downturns. Bitcoin, despite its growing acceptance in mainstream finance, remains a highly volatile asset – one that has seen multiple cycles of meteoric rise and catastrophic decline.
Last year’s all-time high of $109,225 was driven by two primary factors: the scheduled “halving” event – where Bitcoin’s issuance rate was cut in half, reducing supply – and Mr Trump’s election victory.
US law makers remain divided. Proponents argue that an official crypto reserve would force global recognition of the asset and accelerate institutional adoption. However, sceptics warn that taxpayer dollars could end up underwriting severe losses if the price crashes.
Yet, the fundamental case for Bitcoin remains unchanged. First, there is limited supply – capped at 21 million coins, a limit hardcoded into its protocol by its pseudonymous creator, Satoshi Nakamoto.
Second, there’s rising institutional investment. The approval of Bitcoin exchange-traded funds in the US last year, following a decade of rejections, attracted new investors to the asset and supported its price. The funds from big-name asset managers like BlackRock, Franklin Templeton and Invesco pulled in more than $110 billion from investors by the start of this year.
However, the volatility of Mr Trump’s influence means Bitcoin is now even more of a short-term casino than ever before. Traders hang on every word, and markets swing wildly based on his statements.
There are big implications for traditional finance. If the US reserve goes ahead, the days of dismissing crypto as a fringe asset are over. Hedge funds, wealth managers and even corporate treasuries will be forced to consider holding digital assets, if they do not already.
Companies like MicroStrategy, Tesla and Block (then called Square) have already allocated portions of their cash reserves to Bitcoin. This strategy is often employed as a hedge against inflation and potential devaluation of fiat currencies – government-issued money.
But with wider adoption comes the potential for systemic risk. If pension funds, endowments and sovereign wealth funds start holding digital coins in significant quantities, what happens if prices plunge?
Could a major downturn spill over into traditional financial markets? Could the Federal Reserve or US Treasury be forced into interventions to stabilise prices?
For investors and corporations holding crypto, the message is clear: Bitcoin is here to stay, but its price volatility is likely to remain extreme. They must ask themselves a fundamental question: what is Bitcoin’s real value?
If they believe in its long-term potential as a hedge against inflation and a decentralised alternative to fiat currency, then allocating a portion of investment portfolios or treasury reserves to Bitcoin makes sense.
But if they see it as a speculative mania driven by political theatrics, they may be better off staying on the sidelines.
For now, one thing is certain: Bitcoin has never been more entwined with US policy, and with Mr Trump at the helm, it is more volatile than ever. Every statement, every policy shift and every regulatory move is likely to trigger rapid market reactions. Investors who understand this new reality will either thrive or find themselves on the wrong side of yet another brutal crypto cycle.
Bitcoin’s fundamental mechanics remain unchanged: limited supply, increasing adoption and a maturing market structure. However, Mr Trump’s full-throated endorsement has introduced a new wild card, turning crypto into a political asset as much as a financial one.
Ultimately, Bitcoin’s fate as a reserve asset will depend on whether governments can stomach its unpredictability. If the US does follow through on large-scale crypto purchases, it could usher in a new era of financial legitimacy for these assets.
The real question now is: what will outlast Mr Trump’s presidency? In other words, what remains unchanged? Will Bitcoin still hold its place? If so, will adoption have grown?
In the midst of market turbulence, taking a long-term perspective is the key to seeing beyond the noise.
José Parra Moyano is the professor of digital strategy at IMD
