The United States government, along with various states across the country, is currently exploring a Bitcoin Strategic Reserve (SBR).

On March 11, Senator Cynthia Lummis reintroduced legislation to create a SBR.

The bill, first introduced last year, proposes purchasing 1 million Bitcoin (BTC) over five years.

This would mean that the US government would officially recognize Bitcoin as a strategic holding, similar to that of gold or oil.

Nineteen US states also have pending cryptocurrency reserve legislation.

What A National SBR May Look Like

While it’s notable that both the US government and a handful of states are considering an SBR, these reserves will differ.

Ben Weiss, co-founder and CEO of digital currency platform CoinFlip, told Cryptonews that a National Strategic Bitcoin Reserve will act as a country’s safety net and power play rolled into one.

“The US SBR will be managed by the federal government and aims to protect the nation’s economy; help hedge against inflation and even strengthen its position in global trade,” Weiss said.

He added that the goal for a national SBR is to act as a digital gold vault for the entire country, helping to give it financial independence and a backup plan if traditional systems potentially fail.

US Strategic Reserves Today

The US currently holds substantial reserves in gold and oil. As of the third quarter of 2024, the US holds approximately 8,133.46 metric tons of gold.

In the case of oil, the US maintains a Strategic Petroleum Reserve (SPR). As of August 2024, this reserve holds around 372 million barrels.

The SPR was established in the 1970s in response to the oil crisis and is valued at approximately $28 billion at current market prices.

However, the US Bitcoin holdings are comparatively small when compared to gold and oil. This will likely change once a SBR is officially introduced.

While most of the Bitcoin currently held by the US government has been seized through confiscations and illicit activities, Congressman Nick Begich (R-AK) recently introduced companion legislation to Senator Cynthia Lummis’ BITCOIN Act.

If passed, the bill would establish a program to purchase 1 million Bitcoin units, representing 5% of the total Bitcoin supply.

Texas SBR At A Glance

While a handful of US states are exploring a SBR, Texas appears to be leading the way.

On March 6, the Texas Senate voted to approve Senate Bill 21 to create a Texas SBR. The measure moves on to the House after a 25-5 vote.

On March 11, Texas lawmakers introduced House Bill 4258, as the state’s second Bitcoin reserve bill. The bill proposes a $250 million allocation from the state’s Economic Stabilization Fund for investments in Bitcoin and other cryptocurrencies.

Lee Bratcher, President of The Texas Blockchain Council, told Cryptonews that Texas has a budget surplus. This means the Lone Star State has the funds to invest in Bitcoin without having to incur debt.

“Texas has a balanced budget and a budget surplus, so any funds spent will be funds invested on behalf of the state similar to the ‘Rainy Day Fund’ otherwise known as the Economic Stabilization Fund,” Bratcher said.

“Those funds would then be used to re-invest in Texas in case of emergencies. Texas already invests in many assets like stocks and real estate, so this isn’t a departure from the norm,” he added.

Bratcher added that the Texas Comptroller will use the same prudent investor standards to make a small allocation to Bitcoin to be held with a qualified custodian.

“With Texas’ significant budget surplus, the Texas Strategic Bitcoin Reserve offers a forward-thinking investment opportunity,” Bratcher remarked. “Bitcoin’s long-term potential as a store of value aligns with our state’s history of making smart, diversified investments in emerging assets.”

A State Versus National SBR

Weiss pointed out that a State SBR is localized, which can potentially boost its economy, attract tech innovation, and help create a financial cushion for its residents.

“Both a national and state SBR are about preparing for a world where Bitcoin plays a bigger role, but one’s a national strategy, and the other’s a state strategy,” he said. “They are both important to advancing crypto, our economy, and our country’s position as a leader in the world’s digital economy.”

This appears to be the case. Terrence Yang, strategic advisor at Swan Bitcoin, told Cryptonews that a federal SBR can help pay down the $36.22 trillion in federal debt.

“Long term, Bitcoin should continue to outperform other liquid risk assets and gold,” Yang said. “Bitcoin is a $1.7 trillion asset, while gold is an $18 trillion asset.”

Yang also believes that it is a matter of national security for the United States to own both gold and Bitcoin.

“Doing so protects against dollar debasement and could help mitigate frontrunning at scale by other countries like China, Germany, and Russia,” he stated.

While Texas’ SB-21 SBR bill passed the Texas Senate 25-5, Yang noted that unlike Trump’s SBR executive order, it makes no mention of keeping Bitcoin confiscated from asset forfeitures, etc. The Texas SBR is also capped at just $250 million.

“And sadly, Utah’s SBR section was removed before its Bitcoin bill was passed, and Wyoming’s SBR bill died,” Yang added. “Texas seems the furthest along of any state, as SB-21 passed the Senate 25-5, and it is now up to the Texas House to act.”

Challenges That May Impact a SBR

While the excitement around a national and state-level SBR grows, there are challenges to consider.

For instance, Eli Cohen, general counsel at real-world asset platform Centrifuge, told Cryptonews that the main challenge for all the proposals revolves around the price of Bitcoin.

“The price of BTC is plummeting, making this look like a bad investment,” Cohen said. “The new money proposals are especially challenged because there is already huge cost-cutting going on, particularly at the federal government.”

Price aside, Yang believes that both a national and state SBR appear like an initiative proposed solely by President Trump.

“The challenges associated with the national SBR and a state SBR are that the SBR appears too much like a ‘Trump thing’ and not enough of a pro-America or pro-Texas initiative,” he said.

Yang further believes that Trump’s SBR executive order suffered from bad timing because risk assets like stocks and Bitcoin itself generally sold off substantially around the time he signed the order.

“I believe this will give legislators at both the federal and state levels – such as in Texas – pause before moving forward with an SBR,” Yang remarked.

All things considered, Yang mentioned that if a national and state SBR are viewed as bipartisan, these offerings will further legitimize Bitcoin as an asset meant to be held long-term by federal and state governments.

The post US Strategic Bitcoin Reserve: Comparison of a National Versus State Offering appeared first on Cryptonews.

Leveraged tokens and perpetual futures represent two distinct approaches to achieving leveraged exposure. At the heart of leveraged tokens’ unique behavior lies their rebalancing mechanism, designed to maintain leverage within a targeted range. This contrasts with perpetual futures, where the leverage factor fluctuates in tandem with the price movements of the underlying asset.

But beyond the mechanics, how do these instruments fare in the real world? Which scenarios favor the performance of one over the other? And importantly, how can one use this knowledge to select the most appropriate instrument for their needs?

This article delves into these questions by examining various historical price scenarios and directly comparing the outcomes. The goal is to illuminate the nuances of each option, helping users to make informed decisions in the evolving landscape of leveraged DeFi products.

Scenario one: Trending markets

Trending markets, characterized by clear and consistent upward or downward price movements, provide an excellent example of the distinct behavior between leveraged tokens and perpetual futures. Recent instances of such trends include the Solana rally, where its value surged from $20 to $200, and the Bitcoin rally, with its price increasing from $27,000 to $73,000, both of which unfolded between October 2023 and March 2024.

In Figure 1, the performance comparison between the leveraged token (pink line) and the perpetual future (grey line) demonstrates a clear advantage for the leveraged token. The underlying mechanism responsible for this outperformance is the rebalancing process, marked by blue vertical lines. Rebalancing automatically adjusts the position’s notional value – essentially the total size of the leveraged exposure – whenever the leverage factor hits a specific threshold. This adjustment leads to increased exposure, which in turn amplifies returns as the price continues to rise.

In this particular example, the perpetual future’s leverage factor had decreased from 2x to 1.06x with a notional of $18,399 by March 18th. The leveraged token’s leverage factor, on the other hand, remained around 2.02x with a notional of $96,144, showcasing the potential benefits of leveraged tokens under these market conditions.

Scenario two: Price movements that trigger liquidations

In contrast to the behavior of leveraged tokens in scenario one, their performance during adverse price movements reveals a different advantage. In such scenarios, the rebalancing mechanism decreases the notional value, leading to reduced leveraged exposure. This significantly mitigates the risk of liquidation by decreasing exposure during downturns.

Perpetual futures, however, do not share this rebalancing feature. They exhibit a fluctuating leverage factor until the market reaches a liquidation price.

Figure 2 illustrates such a scenario. The decrease of the $LINK price during the first week of January 2024 led to the liquidation of the perpetual future shortly after the position was opened.

In contrast, the leveraged token, although experiencing a margin decrease similar to that of the perpetual future, underwent multiple rebalancings throughout the downturn. These rebalancing actions effectively reduced the amount of borrowed funds, thereby decreasing leveraged exposure and preventing liquidation. This mechanism allowed the leveraged token to maintain its position throughout the period of declining prices, showcasing the risk management capabilities inherent in the structure of leveraged tokens.

Scenario three: Flat and volatile price movements

The first two scenarios provided insights into market conditions where leveraged tokens tend to outperform perpetual futures. However, rebalancing also introduces a potential downside in certain market environments. Specifically, in markets characterized by flat or volatile price movements, where the need for frequent rebalancing – both uplevering and downlevering – can result in what is known as volatility decay. The mathematical foundation underlying this process is explained in the official Synthetix Documentation under the section “Volatility decay”.

Perpetual futures do not face this issue and usually outperform leveraged tokens under these market conditions, given they don’t get liquidated.

Figure 3 depicts a scenario of continuous sideways movement and high volatility in the $LINK price. It clearly demonstrates the depreciating margin of the leveraged token over time, leading to underperformance compared to the perpetual futures contract. The impact of volatility decay on the leveraged token would be further intensified by higher leverage factors, highlighting the challenges leveraged tokens face in volatile, directionless markets.

Scenario four: Continuous adverse price development

In scenarios with continuous adverse price movement, rebalancing can mitigate but not prevent the impact on the margin. Should the price of an underlying asset persistently move against a position, the margin of a leveraged token will inevitably decay over time. This highlights the limitation of rebalancing in safeguarding a position against prolonged unfavorable market trends.

Figure 4 showcases the dynamics of a short position during the price appreciation of $ETH from February to mid-March 2024. The perpetual future faced liquidation at the beginning of March. In contrast, by March 15th, the leveraged token had still preserved 30% of its margin. However, should this upward trend continue, the margin of the leveraged token would decay almost entirely, illustrating the gradual impact of adverse price movements on leveraged token positions.

Conclusion

Leveraged tokens and perpetual futures each shine under different market conditions. Leveraged tokens outperform in trending markets thanks to their rebalancing mechanism and offer protection against liquidation in adverse movements. However, this same feature leads to volatility decay in flat or volatile markets, where perpetual futures tend to excel, assuming they avoid liquidation. While leveraged tokens can mitigate losses in downturns, prolonged adverse trends can still erode their margin. Users must consider these dynamics, balancing the potential for amplified returns against the risks of volatility decay and market movements, to choose the right instrument for their strategy.

Disclaimer

This article is for informational purposes only and is not intended as financial or investment advice. All content reflects the author’s views and should not be seen as specific investment recommendations. Investors should do their own due diligence or consult a professional advisor before making investment decisions. The author bears no responsibility for any financial losses resulting from investment choices based on this article.

The model used for generating the charts excludes funding rates and fees for both leveraged tokens and perpetual futures. This exclusion shouldn’t notably affect the performance comparison.