The People’s Bank of China may be secretly accumulating large sums of bitcoin. Is Trump smart enough to do the same?

Imagine, for the sake of argument, that those in charge of the People’s Bank of China (PBoC) have come to the conclusion that Bitcoin is likely in the long run to fulfill its promises as a global reserve currency and digital store of value. They have thought it through, they have looked at it from all the angles, and they have decided that the bitcoin bulls have been right all along. If true, then over the next 5–10–20 years, Bitcoin’s market cap is expected to increase from 11 figures (about 15 billion USD) today, to 12 figures, to 13 figures, and perhaps beyond. Assume all of this to be the case. What is the logical course of action for the PBoC to take?

The answer is that they would do exactly what they have in fact (or so I speculate) been doing for several years already: accumulate on the down low. Let me repeat, because this part is crucial: on the down low.

Let’s think this through. Suppose that they have considered all of the other options and discarded them. They have considered co-opting Bitcoin and turning it into something that is controlled by the state, but they realize that the rest of the world would lose its enthusiasm for that and would find a better alternative. They have considered trying to destroy Bitcoin, or at least outlaw Bitcoin within China, but they realize they have little to gain by doing so, they cannot control what happens outside of China, and its underground use within China would be more difficult to stamp out than it might appear at first glance. If they did somehow manage either to co-opt or to destroy Bitcoin outright, then they would simply be faced with a replacement: Litecoin or any one of a large number of alternative permissionless coins. Kill Bitcoin, then kill Litecoin, then kill Dash … they cannot play whack-a-mole forever.

Suppose they have concluded that Bitcoin is not the existential threat to the yuan that some have made it out to be. There is no reason the yuan (or the US Dollar, or any fiat currency for that matter) cannot survive alongside Bitcoin. Payments in Bitcoin will continue to be denominated in every individual country’s local fiat currency, and governments will continue to get their taxes. And the yuan will survive. Especially as long as the PBoC can prop up its value by buying yuan with its reserves, currently about 3 trillion US Dollars. Unfortunately, that amount has been dwindling lately. Wouldn’t it be nice if the PBoC could buy something today that is projected to be worth 100x or even 1000x in the future, something highly liquid, something which could be used in place of or in conjunction with the USD in propping up the yuan’s value? Hmmm…

In this light, Bitcoin is not a threat to the yuan. It could become its savior.

From this perspective, powerless to stop the eventual and inevitable rise of Bitcoin or one of its many not-state-controlled alternatives, the logical strategy is for the PBoC to buy up as much Bitcoin as it can now, while the price is still low. Importantly, once they decide that Bitcoin is the horse they want to back, they should do everything in their power to ensure that Bitcoin remains king of the hill in the long run. How much should they get? As much as they can, of course, without scaring the rest of the world into abandoning Bitcoin in favor of some other altcoin. How about 5–10% of the world’s eventual total supply? How does one or two million bitcoin sound? Sounds like a good start.

Great. So now, suppose you are in charge of the PBoC, and have been charged with obtaining 1 million BTC, or more if possible. How do you do it? (For the sake of this article, I am going to avoid conspiracy theories that Satoshi Nakamoto was state-sponsored all along, and that his 1 million bitcoin already belong to someone’s central bank.)

At today’s prices, 1 million BTC is about 1 billion USD. No problem; PBoC has 3 trillion USD, not to mention an unlimited supply of yuan. (Ahh, that great perq of being a central bank … money creation ex nihilo!)

But there is a problem: as soon as they start buying, the price will skyrocket. This will happen for two reasons: first, the act of buying itself, especially in such large quantities, will drive up the price. Second, and perhaps more importantly: what news could possibly be more bullish than the announcement that one of the largest central banks in the world wishes to purchase as much bitcoin as they can get their hands on? The announcement itself would send the price into the stratosphere, before the PBoC has purchased even a single bitcoin. And the media would surely be abuzz with speculation that if one central bank is doing it now, then others will likely be following suit, or perhaps already have, whether we know it or not.

All right then: clearly, the PBoC needs to do this slowly, and they need to do it in secret. No announcement. Just set up a few accounts (not in the PBoC name, of course) at a few exchanges and start buying in small amounts, and plan on doing this over several years rather than all at once. Problem solved. Or is it? One million bitcoin is quite a lot to purchase, even spread out over several years, and would surely drive the price sky high. Plus, there is a risk that news of the PBoC ownership of these accounts might leak out, driving price even higher.

So what other strategies can the PBoC do to maximize their bitcoin accumulation? If I put myself in their shoes, there are several strategies I can think of that I might follow. Keep in mind that whatever strategy they pursue, they would want to make sure that in the long run, Bitcoin succeeds. If Bitcoin dies and is replaced by an alt (Litecoin, Dash, Monero, whatever), then they have to start all over again accumulating a new coin, and all of their efforts are for naught. In the end, whatever strategy they follow, the PBoC will want the rest of the world to be comfortable in the long term with China’s relationship to Bitcoin. If not comfortable, then at least tolerant. Indeed, this consideration probably places an upper limit on how much the PBoC should aim to accumulate: if they own 90% of it, for example, the rest of the world might abandon Bitcoin in favor of another coin, and then what’s the point of owning 90% of it? This is an important point to consider in the speculation that follows.

Strategy #1: Intermittently depress the price of bitcoin with FUD (fear, uncertainty and doubt), allowing them to accumulate over the years at a lower price.

Evidence for Strategy #1: Evidence of FUD from China is in no small measure. It is conventional wisdom that the bear market following the 2013 peak was due in large part to negative statements at the time by the Chinese government towards bitcoin. More recently, just this month, the one-third drop in price has been attributed to a supposed crackdown by the Chinese government on the Chinese exchanges.

Strategy #2: Accumulate mining power. In all likelihood, if the PBoC were to start setting up their own mining farms, the word would get out. Easier it would be to let private Chinese companies build the miners, and set up a secret partnership with them. This could take the form of secret agreements to buy the mined bitcoins at an attractive price directly from the miners. This could even be done via intermediaries, so the miners would not necessarily even know they were indirectly selling to the PBoC. This would work well for a number of reasons: first, the attractive premiums would incentivize more miners to set up shop in China; second, the miners would be incentivized (by the attractive pricing) to keep this arrangement secret. In fact, it might be best if the miners suspect but do not know it is the PBoC they are selling to; or maybe they know, but lack proof. That way, they will toe whatever line they are asked, while minimizing the risk of word leaking out.

If need be, China could always nationalize the mining companies, in a year or 5 years or 10 years or whenever they found reason to do so. But there would be a number of reasons to avoid doing so. For one thing, it would cause havoc in the bitcoin market, which would be of no benefit to China, or to anyone else for that matter. Second, the fact of the Chinese government being in direct possession of a majority of bitcoin hashing power would alarm the rest of the world. It simply would not be tolerated. A fork would occur, or an alt would rise to take Bitcoin’s place, and the point of accumulating all that bitcoin in the first place would be lost.

Evidence for Strategy #2: The majority of hashing power resides in China. Why exactly is that the case? Is it because electricity is cheap in China? Perhaps. Then again … it is exactly what we would expect of the PBoC strategy, as outlined above.

Strategy #3: Take bitcoins from the Chinese bitcoin exchanges. I do not mean simply purchasing some of their bitcoins from the exchanges. I mean take them. Steal them. Confiscate them. But describe it using different words and do it slowly. Explain why it’s for the greater good, and get the bitcoin community to applaud your actions.

Evidence for Strategy #3: Just this month, the PBoC has initiated steps to exert greater control over the various Chinese exchanges. Supposedly, they wish to regulate the exchanges, decreasing volatility by reducing the amount of leveraged trading happening in these exchanges. Should we take them at their word? Perhaps we should. But this is exactly the kind of news I would expect to hear: a closer relationship between the government and the exchanges, with the PBoC exerting greater control in one form or another. Indeed, a recent report states that “Chinese authorities are mulling whether to introduce third-party custodian services” for the bitcoin market. Third-party custodian services … say what? So the Chinese government will be the “custodian” of other people’s bitcoins? They will (presumably, as custodian) hold the private keys? And all of this in the name of market stability? Alrighty then. How thoughtful of them. Sounds like exactly what I outlined in the preceding paragraph.

Let us not forget that governments have a tendency from time to time to confiscate gold. Do you think they might someday confiscate Bitcoin, and for the same reasons? Maybe or maybe not, but setting yourself up a few years ahead of time as the People’s “custodian” of Bitcoin (that’s PCoB for short) sure would make the process easier, dontcha think?

I am sure there are other possible strategies they could pursue, and I will be interested to read about them in the comments. Obviously, I have no proof that the PBoC is accumulating bitcoin. Everything in this article is speculation. Nevertheless, it seems to me to be quite plausible as far as speculation goes. Indeed, it seems to me plausible that other central banks might also get in on the act, especially once they figure out what China is up to. Russia? Japan? How about the US Federal Reserve? For all we know, they’re already in on the act. It is worth noting that Trump is surrounding himself with a number of bitcoin friendly advisors, including Mick Mulvaney, picked as Trump’s Budget Director; Paypal founder and BitPay investor Peter Thiel, member of the Trump Presidential Transition Team who is expected to tap additional bitcoiners to the Trump administration; and bitcoin startup 21 Inc CEO Balaji S. Srinivasan, one of two contenders to lead the Food and Drug Administration (FDA). Can you imagine Trump directing the Fed to scoop up bitcoin, in secret, now while it’s still cheap, lest China beat them to the punch? Indeed, an arms race of sorts could ensue. But do not forget that if any one central bank cornered the market on bitcoin, then the rest of the world would likely turn to an alternative. Cornering the market would be self-defeating.

Consider, though, the ramifications of a smaller, economically challenged country like Argentina getting into this game before the others. Could make a big difference to their economy for many years to come.

IF the bitcoin bulls are right, IF Bitcoin is destined to become the world’s reserve currency, IF Bitcoin becomes a store of value, IF its market cap is one day measured in the trillions, then the actions today of every country’s central banks around the world could very well play a significant role in the balance of power, many decades in the future.

Food for thought.