Suddenly, Louisiana has found a cutting edge technology gear with policy changes that landed a pair of data centers in the state and cryptocurrency use . But it shouldn’t take the step that some states and the incipient Republican Pres. Donald Trump Administration have under consideration, establishing a cryptocurrency, specifically bitcoin, reserve.
Trump in his campaign talked this up, and GOP Sen. Cindy Lummis followed through recently by introducing a bill to do the same. The idea is for government to buy bitcoin tokens (the federal government already has a couple of hundred thousand or so bitcoins seized from law enforcement actions) in order to provide some financial backstopping as well as use these as investment vehicles that could take a bite out of the huge $36 trillion debt.
Bitcoin is “mined” by solving complicated computational problems, open to anybody. Thus, wealth is created in two ways: by mining bitcoins or portions thereof which become recognized as a unit of account, or by a marketplace bidding up the value of a bitcoin in other currencies.
The rationale behind a reserve focuses on the fact that, as bitcoin is not a stable coin (not intentionally tied to a currency) its value historically has gyrated and wildly at that, it has progressed since its dissemination in 2009 in price higher over time, recently hitting $100,000 a bitcoin, Further fueling this sentiment is that bitcoin is designed to issue only 21 million bitcoins, ever; thus, when the full complement comes into existence, presumably it becomes a limited quantity where greater demand for needing it for some use sends its price higher.
This thinking has spread to other states as well, with proposed legislation in a handful to create bitcoin reserves. Louisiana hasn’t been mentioned as one of them, but state government does accept bitcoin as a payment method, which Republican Treas. John Fleming spearheaded earlier this year. Also, it potentially has an interesting connection to bitcoin in that increasingly excess methane has become an energy tool to run mining rigs and the state is one of the largest producers of methane that often ends up released or flared into the atmosphere, much to the consternation of catastrophic anthropogenic global warning acolytes who see methane as perhaps the worst offender to bring on doom.
As natural gas production ramps up to supply power to the data centers, more methane potentially becomes vented. What Louisiana could do is declare methane that otherwise would be stranded that becomes diverted to another use – such as to a bitcoin mining operation set up adjacently to those wells – lowers the severance tax on those wells. This would encourage producers to start mining bitcoin and pay their (reduced, but not zero since gas isn’t flared or released) taxes that way and even make climate alarmists happy. And, it may reduce the orphan well inventory by giving wells nearing the end of productive life a profitable outlet.
But as far as setting up a reserve, rather than continuing to convert all payments into dollars and keeping proceeds paid in bitcoin, Louisiana probably is better off not doing so. Essentially, a reserve means redirecting revenues that could pay for more urgent things than an investment cache. The federal government reserve plan likely would involve issuing debt to snap up bitcoin – the Lummis plan being to acquire as many as 4 million or nearly a fifth of the final proportion, which if done at today’s prices would cost $400 billion – and then, almost as if margin on a brokerage account, hope the rising value of the investment offsets the interest and then some to pay off that and even more of the debt. Yet states like Louisiana don’t issue debt for continuing operations that could afford this, as compared to the opportunity costs of paying for continuing operations and/or capital projects through debt issuance.
As well, Louisiana doesn’t issue currency as does the U.S. government. Thus, holding cryptocurrency as a reserve to back a unit of exchange is moot, and increases forgone opportunity costs.
Recent moves towards encouraging bitcoin use can help Louisiana economically and ecologically, but these should stop short of building a reserve of it.
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