The initial market reaction was quite volatile. There are two key reasons for this volatility, which has surely made traders nervous.
Trump’s announcement coincided with the introduction of tariffs on Mexico, Canada, and China. Trade war fears triggered a sell-off in traditional markets. The appetite for risk declined, which led to short-term sell-offs in crypto.
The proposed composition of the strategic crypto reserve served as the second key catalyst for the recent volatility in crypto markets. Originally, traders expected a creation of the strategic Bitcoin reserve. Many investors, including those from traditional markets, believed that this idea had merit. The U.S. already has a reserve in gold, so it may also create a reserve in digital gold, BTC.
The inclusion of ETH, XRP, SOL, and ADA into the planned strategic reserves raised concerns about the impact of lobbying efforts of certain market players.
Surely, analysts will debate why those coins were included in the plan while others missed this historical chance to boost their market cap. Meanwhile, the inclusion of altcoins could lead to multiple practical difficulties during the creation of the strategic reserve.
Most likely, Trump’s political opponents will investigate the reasons why altcoins were included in the reserve plan and file lawsuits accusing him of wrongdoing. If Trump and his advisors chose BTC as the only asset in the proposed reserve, it would have been much harder to attack the idea. The investment of taxpayer money into private cryptocurrencies will surely lead to opposition from Democratic politicians and various NGOs.
The reserve’s impact on the pricing of private cryptocurrencies is another key catalyst to discuss. The U.S. government is a huge player even for BTC, which has a market cap of over $1.7 trillion.
For Cardano, the U.S. strategic crypto reserve will become a de-facto market maker in case of active purchases. It is not clear how the creators of the strategic reserve plan to solve this problem, given the fact that speculative traders and funds will do their best to front-run the U.S. government.
The above-mentioned factors raised doubt about the feasibility of the crypto reserve in the form that was presented by Donald Trump. As a result, the potential creation of the reserve is not priced in by Bitcoin or altcoin markets. It looks that more details about the reserve will be revealed on March 7, during the Crypto Summit in the White House, so traders should expect big moves this week.
At this point, the market has two key questions on the strategic reserve. The first one is obvious — how will the U.S. form the reserve? There are two options: the U.S. may use confiscated assets (it is believed that the U.S. holds about 200,000 BTC seized from criminals) or buy coins at the open market. The second question is how the purchases (in case the U.S. plans to buy coins) will be funded. Crypto will likely rally if the U.S. plans to buy coins at the open market and has the source of funding. In the opposite case, a correction may follow.