Wyoming Republican Senator Cynthia Lummis speaks at the Bitcoin 2024 conference in … [+] Nashville, Tennessee, U.S., on Saturday, July 27, 2024. Former U.S. President Donald Trump said he would fire the chairman of the Securities and Exchange Commission and pick crypto-friendly regulators if he returns to the White House in a bid to woo virtual currency enthusiasts and capitalize on the industry’s growing influence in the political arena. Photographer: Brett Carlsen/Bloomberg

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At a Bitcoin conference last weekend, Senator Cynthia Lummis (R-Wyo.) announced future legislation that would direct the Treasury to purchase 1 million Bitcoin, or roughly 5% of the global supply, 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 his proposal were to pass, because these Bitcoins could be sold by the federal government at a profit after 20 years. Unfortunately, there are mathematical and conceptual problems that prevent such an approach from solving the federal government’s budget problems.

Let’s start with the math: US National Debt Today stands at nearly $28 trillion (or $35 trillion if you include the “intragovernmental debt” that 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 about $2 trillion more than it took in in revenue, which had to be covered by borrowing money that adds to our national debt.

In comparison, the total market capitalization of Bitcoin today (which is the total number of Bitcoins in existence multiplied by their current market price) is only about $1.3 trillion — and that’s with Bitcoin’s current price 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’s no way buying 5% of it could plausibly stem the growth of, let alone pay off, our national debt. For the math to work, Bitcoin’s market cap would have to reach a level that is a multiple of the annual economic output of the entire planet (the International Monetary Fund current estimates the sum of each country’s gross domestic product is less than US$110 trillion).

But beyond the math, there are serious conceptual problems with Lummis’s proposal as a partial solution. When the government acquires an asset, it is typically reallocating rather than creating wealth. As the government buys some of the existing supply of Bitcoin, it would reduce the remaining supply available for others to buy on the market. If private demand for Bitcoin remains constant, the result would be an increase in the price of one Bitcoin. The beneficiaries of this transaction would be the current owners of Bitcoin (one of whom is Senator Lummis herself), because they would be in possession of an asset that can be sold at a higher price than the price at which it was originally purchased.

The increase in Bitcoin’s price, and thus the financial benefit to current holders, is likely to be even greater because, rather than remaining constant, private demand would increase as previously cautious investors view 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 a extremely energy intensive process that relies on advanced graphics processing units (GPUs). If Bitcoin mining increases demand for GPUs, the GPUs themselves will become more expensive, as they did in 2020. In turn, every activity that depends on GPUs — from video editing to gaming — will also become more expensive.

Perhaps most alarmingly, a boom in Bitcoin mining threatens to stifle promising developments in artificial intelligence (AI). As other Forbes contributors point out, he wroteAI 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 relies on advanced GPUs to function, of which there are already there is not enough supply to meet demand. It would be a profound failure of federal policy to make AI advances more costly to achieve by encouraging people to spend the resources needed to generate digital tokens. Furthermore, even if federal government Bitcoin purchases do not 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 delve into them here, I recommend reading this great 2022 article by Josh Barro about the subject.

For these and other reasons, 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 that prices will continue to rise anyway and want to capture some of that value for deficit reduction, there are much better mechanisms for doing so. For example, a capital gains tax increase could aim to capture 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 then many other cryptocurrencies have done.

When it comes to dealing with 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 deals with these tradeoffs to put the federal budget on a path to balance within 20 years. Even adopting half of our recommended savings would allow policymakers to keep 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 to stabilize the debt last week (and notably, none of them proposed spending up to $70 billion of taxpayer funds on Bitcoin).

To Senator Lummis’s credit, she has also supported efforts to promote serious solutions like these in the past. As a member of the U.S. House of Representatives in 2012, Lummis was one of only 38 members who resisted partisan pressure and voted in favor of a congressional budget resolution based on the debt stabilization 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 to stabilize the national debt. It would be a great service to the nation if Senator Lummis would put all her energy into advancing these and other serious efforts to align revenues and spending rather than distracting them with alternative schemes that would merely enrich cryptocurrency investors at the expense of the taxpayer.

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