It's not a good idea to thoughtlessly follow in the footsteps of a big player when it announces that it's going to be buying, selling, or holding an asset, especially when it comes to cryptocurrencies like Bitcoin (BTC 1.43%). But there is one player in particular that's so large that it's simply not advisable to ignore when it commits to something.
On March 6, President Donald Trump issued an executive order directing the establishment of a Strategic Bitcoin Reserve and saying that "Government BTC deposited into the Strategic Bitcoin Reserve shall not be sold..."
Executive orders can be reversed -- by this president or a future one -- but I consider this a major move in favor of Bitcoin. Here's why it supports the idea of investing in Bitcoin and holding forever.
CRYPTO: BTC
Key Data Points
This coin's narrative just got even meatier
The investment thesis for buying and holding Bitcoin indefinitely is fairly simple. There can only ever be a total of 21 million Bitcoins due to the self-imposed constraints of its protocol. Over time, the difficulty of mining Bitcoins increases and the reward in coins granted to miners and network validators for the same amount of computational work is cut in half.
The increasing difficulty and the halvings guarantee that the supply of new coins will become a smaller and smaller trickle over time, thereby making it harder for investors to procure coins at the same (or lower) price as before. If demand keeps rising, this works with decreasing supply to drive the price up.
The key part of this process is that even if additional investors don't arrive to demand more Bitcoin, the price should still go up as existing Bitcoin holders remain committed to buying more. And, assuming those holders are oriented toward holding their coins forever or nearly forever, when they buy the available supply, it's roughly equivalent to taking some of the supply off of the market, at least for quite a while. It makes sense for buyers of Bitcoin to commit to holding it for a long time to help constrict supply and pressure the price up.
Enter the U.S. government, one of the largest and richest organizations in the world. According to an executive order issued on March 6, the government plans to no longer sell any Bitcoin that it gains via civil or criminal asset forfeitures.
Instead, via the Strategic Bitcoin Reserve, it will be storing those coins, targeting an indefinite and perhaps even infinite holding period. Assuming the country's Bitcoin reserve is actually implemented (and it still might not be), it could be a big catalyst for higher prices.
Before this executive order was issued, the government had sold a total of $17 billion in Bitcoin over the years -- just a smidgen of the coin's outstanding supply, which is worth $1.7 trillion. So it is reasonable to say that a major holder of the coin has now fundamentally changed its disposition to be accumulative rather than distributive.
In other words, the U.S. government might not be slamming out buy orders, but, as long as this remains the president's priority, it's no longer going to be slamming out sell orders, which can make a significant difference over time. If things proceed as crypto bulls hope, the U.S. government will likely continue to accumulate more and more Bitcoin, making the supply even scarcer. And that's an attractive reason to buy the asset and hold it indefinitely.
Make sure your other financial bases are covered first
Many states are also considering whether to form digital asset stockpiles like the federal government aims to. There is no guarantee that those states, or the federal government, will actually follow through on it.
But that doesn't mean you shouldn't buy Bitcoin. It means you should not have it be the only asset you are buying right now, or ever. Be sure to diversify your portfolio before allocating your money to the cryptocurrency. Safer assets have priority over buying crypto since even a relatively safe token can be very volatile.
And make sure to commit to holding your coins, even if the going gets tough. There's not much point to investing a lot of money in it over time if you're not willing to let the drivers of its value play out and create higher prices for you to enjoy.
