At a Bitcoin conference last weekend, Senator Cynthia Lummis (R-Wyo.) announced forthcoming legislation that would direct the Treasury to buy 1 million Bitcoin, or roughly 5% of the global stock, over five years (which would cost between $60 billion and $70 billion at today’s prices). Lummis claimed that the federal government would be “debt-free because of Bitcoin” if her proposal is enacted, because these Bitcoin could be sold by the federal government at a profit after 20 years. Unfortunately, there are both mathematical and conceptual problems that prevent such an approach from solving the federal government’s budget problems.
Let’s start with the math: The U.S. national debt today stands at nearly $28 trillion (or $35 trillion, if one includes “intragovernmental debt” the general fund owes to other internal government accounting entities such as the Social Security and Medicare trust funds). This year alone, the federal government spent roughly $2 trillion more than it raised in revenue, which had to be covered by borrowing that gets added to our national debt.
By comparison, the total market capitalization of Bitcoin today (which is the total number of Bitcoin in existence multiplied by its current market price) is only around $1.3 trillion — and that’s with Bitcoin’s current price being near its all-time high. If all the Bitcoin in the world isn’t worth enough to cover a single year’s budget deficit, there is no way buying 5% of it can plausibly stem the growth of, let alone pay off, our national debt. For the math to work out, Bitcoin’s market capitalization would have to reach a level that is a multiple of the entire planet’s annual economic output (the International Monetary Fund currently estimates the sum of every country’s gross domestic product to be less than $110 trillion).
But beyond the math, there are serious conceptual problems with the Lummis proposal as even a partial solution. When the government acquires an asset, it is generally reallocating rather than creating wealth. As the government buys up some share of the existing stock of Bitcoin, it would reduce the remaining supply available for others to purchase on the market. If private demand for Bitcoin holds constant, the result would be an increase in the price of a Bitcoin. The beneficiaries of this transaction would be the current owners of Bitcoin (one of whom is Sen. Lummis herself), because they will be in possession of an asset that can be sold at a higher price than the one at which it was originally purchased.
The price increase for Bitcoin, and thus the financial benefit to current owners, is likely to be even greater because, rather than remain constant, private demand would rise as previously wary investors see the U.S. government’s investment as an indicator of the digital asset’s legitimacy. These higher prices would not only increase demand for Bitcoin but could also encourage Bitcoin “miners” to increase supply. Bitcoin mining is an extremely energy-intensive process that relies on advanced graphics processing units (GPUs). If Bitcoin mining drives up demand for GPUs, GPUs themselves will get more expensive, as they did in 2020. In turn, every activity that depends on GPUs — from video editing to gaming — will get more expensive as well.
Perhaps most alarmingly, a boom in Bitcoin mining threatens to stifle promising developments in artificial intelligence (AI). As other Forbes contributors have written, AI has the potential to revolutionize our economy and boost the productivity of our workforce in countless ways that would increase real wealth for Americans of all socioeconomic backgrounds. But AI also depends on advanced GPUs to function, of which there are already not enough supply to meet demand. It would be a profound failure of federal policy to make AI advancements more costly to achieve by encouraging people to use the necessary resources for generating digital tokens instead. Moreover, even if the federal government’s Bitcoin purchases don’t lead to an increase in Bitcoin mining, there are still other ways in which rising Bitcoin prices would displace productive economic investment — but rather than get deep into those here, I recommend reading this great 2022 article from Josh Barro on the subject.
For these reasons and more, the federal government should not take any action to push the price of Bitcoin — or any other cryptocurrency, for that matter — above the level set by the free market. If policymakers believe prices will continue to rise nonetheless and want to capture some of that value for deficit reduction, there are far better mechanisms for doing so. For example, an increase in capital gains taxes could aim to collect 5% of the gain on 100% of Bitcoin rather than capturing 100% of the gain on 5% of Bitcoin, as the Lummis proposal would seek to do. In addition to avoiding the market-distorting effects of the Lummis proposal, this approach has the added benefit of not leaving taxpayers holding the bag if the value of Bitcoin plummets, as so many other cryptocurrencies have done.
When it comes to tackling our national debt, there is no substitute for cutting spending and/or raising taxes. There are no quick fixes here — policymakers must accept tradeoffs and make hard choices about how to allocate limited resources. Fortunately, my team at the Progressive Policy Institute recently published a serious package of proposals that grapples with these trade-offs to put the federal budget on a path to balance within 20 years. Even adopting half of our recommended savings would allow policymakers to prevent the debt from growing faster than our economy, which is what most economists consider to be the measure of fiscal sustainability. And ours is just one framework: six other think tanks published their own plans for stabilizing the debt last week (and notably, none of them proposed spending up to $70 billion of taxpayer funds on Bitcoin).
To the credit of Sen. Lummis, she has also supported efforts to advance serious solutions like these in the past. As a member of the U.S. House of Representatives in 2012, Lummis was one of just 38 members who bucked partisan pressure and voted in favor of a congressional budget resolution based on the debt-stabilizing recommendations of the bipartisan Simpson-Bowles fiscal commission. More recently, Lummis was one of nine senators to cosponsor a bill that would establish another bipartisan fiscal commission to generate an updated package of recommendations for stabilizing the national debt. It would be a great service to the nation if Sen. Lummis put all her energy into advancing these and other serious efforts to bring revenues and spending into alignment instead of distracting from them with alternative schemes that would merely enrich cryptocurrency investors at taxpayer expense.
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