Trump said in a post on Truth Social that his January executive order on digital assets would create a stockpile of currencies including bitcoin , ether , XRP , solana and cardano . The names had not previously been announced.

More than an hour later, Trump added: “And, obviously, BTC and ETH, as other valuable Cryptocurrencies, will be at the heart of the Reserve.”

Bitcoin, the world’s largest cryptocurrency by market value, was up more than 11% at $94,164 Sunday afternoon. Ether, the second-largest cryptocurrency, was up about 13% at $2,516.

The total cryptocurrency market has risen about 10%, or more than $300 billion, in the hours since Trump’s announcement, according to CoinGecko, a cryptocurrency data and analysis company.

XRP is cryptocurrency company Ripple Labs’ token. Ripple backed a so-called super PAC to influence congressional elections in November in favor of the crypto industry, Reuters reported.

“This move signals a shift toward active participation in the crypto economy by the U.S. government,” said Federico Brokate, head of U.S. business at 21Shares, a digital assets investment management firm. “It has the potential to accelerate institutional adoption, provide greater regulatory clarity, and strengthen the U.S.’s leadership in digital asset innovation.”

James Butterfill, head of research at asset manager CoinShares, said he was surprised to see digital assets other than bitcoin included in the reserve.

“Unlike bitcoin…these assets are more akin to tech investments,” Butterfill said. “The announcement suggests a more patriotic stance toward the broader crypto technology space, with little regard for the fundamental qualities of these assets.”

Trump won support from the crypto industry in his 2024 election bid, and he has quickly moved to back their policy priorities. He is hosting the first White House Crypto Summit on Friday, and his family has also launched its own coins.

Under his Democratic predecessor, Joe Biden, regulators cracked down on the industry in a bid to protect Americans from fraud and money laundering.

Under Trump, the Securities and Exchange Commission has withdrawn investigations into several crypto companies and dropped a lawsuit against Coinbase (COIN.O), opens new tab, the largest crypto exchange in the U.S.

But in recent weeks cryptocurrency prices are down sharply, with some of the biggest digital currencies erasing nearly all of the gains made after Trump’s election win triggered a wave of excitement across the industry.

Analysts say the market needs a reason to move higher, such as signs that the U.S. Federal Reserve plans to cut interest rates or a clear pro-crypto regulatory framework from the Trump administration.

Reuters has reported that Geoff Kendrick, an analyst at Standard Chartered, is targeting bitcoin to hit $500,000, against a record high of $109,071, before Trump leaves office.

Regulatory filings in the U.S. showed that while hedge funds remain the dominant crypto buyers, banks and sovereign wealth funds are buying too.

Quarterly filings showed that asset managers boosted allocations to U.S. ETFs tied to the price of spot bitcoin in the fourth quarter of 2024.

Analysts and legal experts are divided on whether an act of Congress will be necessary to set up the reserve. Some have argued the reserve could be created via the U.S. Treasury’s Exchange Stabilization Fund, which can be used to purchase or sell foreign currencies.

Trump’s crypto group had planned to look at potentially creating the stockpile with cryptocurrencies seized in law enforcement actions.

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NEW YORK (AP) — Bitcoin is once again having a moment. On Monday, the world’s largest cryptocurrency soared past $41,000 for the first time in over a year and a half — and marking a 150% rise so far this year.

Volatile bitcoin rocketed from just over $5,000 at the start of the pandemic to nearly $68,000 in November 2021, according to FactSet, a period marked by a surge in demand for technology products. Prices fell back to earth during an aggressive series of Federal Reserve rate hikes aimed at taming inflation and then the collapse of FTX, one of the biggest companies in crypto.

When 2023 began, a single bitcoin could be had for less than $17,000 after losing more than 75% of its value. Investors, however, began returning in large numbers as inflation started to cool. And the collapse of prominent tech-focused banks actually led more investors to turn to crypto as they bailed out of positions in Silicon Valley start-ups and other risky bets.

But fueling this latest rally are prospects for the possible approval of spot bitcoin exchange traded funds — a pooled investment security that can be bought and sold like stocks.

Industry advocates say this new way of investing in bitcoin at spot prices, instead of futures, could make it easier for anyone to enter the cryptoverse while lowering some of the well-documented risks associated with investing in cryptocurrencies. Regulators have previously rejected bitcoin spot ETF applications, but recent wins for some crypto fund managers have improved odds for a first approval, perhaps as soon as next month.

“The longer-term catalyst (for bitcoin) is a lot of optimism related to the potential approval of a spot ETF,” Kaiko research analyst Riyad Carey said Monday. He noted, however, that a regulatory green light doesn’t promise continued gains.

While analysts expect the potential approval of spot bitcoin ETFs to create a much larger pool of crypto investors, future volumes could go either way, Carey added. That could either boost or undermine bitcoin’s value.

Bitcoin’s current rally also arrives during an incredibly disruptive period for cryptocurrencies. Just last month, the U.S. government slapped Binance, the world’s largest crypto exchange, with a $4 billion fine as its founder Changpeng Zhao pleaded guilty to a felony charge.

But Binance continues to operate and maintain its market share, Carey noted. In some ways, the company’s settlement “propelled the market forward more by removing one of the … more ominous overhangs that was a sort of a big question mark,” he said, noting bitcoin’s gains in the two weeks since the settlement was announced.

Despite the recent excitement around bitcoin, experts still maintain that crypto is a risky bet with wildly unpredictable fluctuations in value. In short, investors can lose money as quickly as they make it.

Last year’s collapse of crypto exchange giant FTX also “left a big scar” on the public’s confidence in the crypto industry and crushed retail investors, Edward Moya, a former senior market analyst at Oanda, previously told The Associated Press — noting that institutional money, like hedge funds, are behind the bulk of current crypto investing.

Carey added that liquidity in cryptocurrency markets has yet to return to where it was before FTX collapsed, and lower liquidity can exacerbate price fluctuations.

“In the past few months, that has normally been the price moving up — but people should always be aware it can go in the reverse and quickly,” he said.

As of around 1:30 p.m. Eastern time Monday, the price of bitcoin stood at $41,709.

The stocks of some other crypto players have also seen rises over recent months, but not with the same speed or heights as bitcoin. Ethereum, for example, stood at $2,223 Monday afternoon, up 85% since the start of 2023. Meanwhile, Binance Coin and Dash are down about 5.25% and 24.37% for the year, respectively, with Monday afternoon prices of roughly $231 and $32.

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Cryptocurrencies have surged so much that their total value has reached nearly $2.5 trillion, rivaling the world’s most valuable company, Apple, and have amassed more than 200 million users. At that size, it’s simply too big for the financial establishment to ignore.

Firms that cater to the world’s wealthiest families are increasingly putting some of their fortunes into crypto. Hedge funds are trading Bitcoin, which has big-name banks starting to offer them services around it. PayPal lets users buy crypto on its app, while Twitter helps people show appreciation for tweets by tipping their creators with Bitcoin.

And in the latest milestone for the industry, an easy-to-trade fund tied to Bitcoin began trading on Tuesday. Investors can buy the exchange-traded fund from ProShares through an old-school brokerage account, without having to learn what a hot or cold wallet is.

It’s all part of a movement across big businesses that see a chance to profit on the fervor around the world of crypto, as a new ecosystem further builds up around it, whether they believe in it or not.

“The one thing you can say for certain is that the advent of the era of the Bitcoin ETF opens up the opportunity for Wall Street to make money on Bitcoin in a way that it hadn’t been able to previously,” said Ben Johnson, director of global ETF research at Morningstar. “The winners in all of this are the exchanges and the asset managers and the custodians. Whether investors win or not is a big, bold question mark.”

Bitcoin has come a long way since someone or a group of someones under the name Satoshi Nakamoto wrote a paper in 2008 about how to harness computing power around the world to create a digital currency that can’t be double-spent. The price has more than doubled this year alone to roughly $62,000. It was at only $635 five years ago.

Supporters of cryptocurrencies say they offer an ultra-important benefit for any investor: something whose price moves independently of the economy, rather than tracking it like so many other investments do. More high-minded fans say digital assets are simply the future of finance, allowing transactions to sidestep middlemen and fees with a currency that’s not beholden to any government.

Critics, meanwhile, question whether crypto is just a fad, say it uses too much energy and point to all the stiff regulatory scrutiny shining on it. China last month declared Bitcoin transactions illegal, for example. The chair of the U.S. Securities and Exchange Commission, Gary Gensler, said in August that the world of crypto doesn’t have enough investor protection and “it’s more like the Wild West.”

That hasn’t been enough to halt the immense momentum for crypto, as it’s gone from an online curiosity to a bigger part of the cultural and corporate landscape.

U.S. Bank earlier this month said it has begun offering a cryptocurrency custody service for big investment managers. That means it essentially holds their Bitcoin in safekeeping for them, and it expects to offer support for other coins soon.

Other name-brand banks have also announced intentions to offer custodial services for crypto.

“It’s not just in the fringes and dark corners of the Web that it’s happening,” said Kashif Ahmed, president of American Private Wealth in Bedford, Massachusetts.

Ahmed doesn’t recommend his clients invest in crypto. Before then, he said he’ll need to be able to “go to my local supermarket and buy things for my family and offer crypto and not be laughed out of the store.” But others are more willing to try it.

In a survey by Citi Private Bank of family offices around the world that manage money for wealthy people, roughly 23% said they have made some investments in crypto. Another 25% said they are researching it. The growing acceptance of crypto on Wall Street has created a new crop of darlings that help people buy it. Crypto trading platform Coinbase has a market value of roughly $64 billion, for example, putting it on par with such established companies as Colgate-Palmolive, FedEx and Ford Motor.

At Robinhood Markets, meanwhile, the company that became famous for getting a new generation of investors into the stock market is increasingly becoming a place for crypto trading. This spring was the first time when new Robinhood customers were more likely to make their first trade in cryptocurrencies rather than in stocks. In the end, what many on Wall Street see lasting may not be as much Bitcoin and other cryptocurrencies as the technology that underlies them.

Called the blockchain, it allows for a public ledger that everyone can check and trust, and many expect it to lead to a wealth of innovations. It’s akin to today’s Netflix, Facebook and other services that sprung out of the infrastructure built during the boom and bust of the dot-com bubble. “The applications built on this new software architecture appear to be growing more quickly than past technologies,” Bank of America strategists Alkesh Shah and Andrew Moss wrote in a recent research report positing digital assets are only in their first inning of growth. “New companies are likely to emerge and poorly positioned companies will exit, creating significant upside potential for some and downside for others.”

JPMorgan Chase, for example, is already using blockchain technology to improve fund transfers between global banks. That’s the same JPMorgan Chase run by CEO Jamie Dimon, who said in an interview with Axios this month that bitcoin has “got no intrinsic value.”

STAN CHOE | AP News

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NEW YORK (AP) — Love cryptocurrencies or hate the very idea of them, they’re becoming more mainstream by the day.

Cryptocurrencies have surged so much that their total value has reached nearly $2.5 trillion, rivaling the world’s most valuable company, Apple, and have amassed more than 200 million users. At that size, it’s simply too big for the financial establishment to ignore.

Firms that cater to the world’s wealthiest families are increasingly putting some of their fortunes into crypto. Hedge funds are trading Bitcoin, which has big-name banks starting to offer them services around it. PayPal lets users buy crypto on its app, while Twitter helps people show appreciation for tweets by tipping their creators with Bitcoin.

And in the latest milestone for the industry, an easy-to-trade fund tied to Bitcoin began trading on Tuesday. Investors can buy the exchange-traded fund from ProShares through an old-school brokerage account, without having to learn what a hot or cold wallet is.

It’s all part of a movement across big businesses that see a chance to profit on the fervor around the world of crypto, as a new ecosystem further builds up around it, whether they believe in it or not.

“The one thing you can say for certain is that the advent of the era of the Bitcoin ETF opens up the opportunity for Wall Street to make money on Bitcoin in a way that it hadn’t been able to previously,” said Ben Johnson, director of global ETF research at Morningstar. “The winners in all of this are the exchanges and the asset managers and the custodians. Whether investors win or not is a big, bold question mark.”

Bitcoin has come a long way since someone or a group of someones under the name Satoshi Nakamoto wrote a paper in 2008 about how to harness computing power around the world to create a digital currency that can’t be double-spent. The price has more than doubled this year alone to roughly $62,000. It was at only $635 five years ago.

Supporters of cryptocurrencies say they offer an ultra-important benefit for any investor: something whose price moves independently of the economy, rather than tracking it like so many other investments do. More high-minded fans say digital assets are simply the future of finance, allowing transactions to sidestep middlemen and fees with a currency that’s not beholden to any government.

Critics, meanwhile, question whether crypto is just a fad, say it uses too much energy and point to all the stiff regulatory scrutiny shining on it. China last month declared Bitcoin transactions illegal, for example. The chair of the U.S. Securities and Exchange Commission, Gary Gensler, said in August that the world of crypto doesn’t have enough investor protection and “it’s more like the Wild West.”

That hasn’t been enough to halt the immense momentum for crypto, as it’s gone from an online curiosity to a bigger part of the cultural and corporate landscape.

U.S. Bank earlier this month said it has begun offering a cryptocurrency custody service for big investment managers. That means it essentially holds their Bitcoin in safekeeping for them, and it expects to offer support for other coins soon.

Other name-brand banks have also announced intentions to offer custodial services for crypto.

“It’s not just in the fringes and dark corners of the Web that it’s happening,” said Kashif Ahmed, president of American Private Wealth in Bedford, Massachusetts.

Ahmed doesn’t recommend his clients invest in crypto. Before then, he said he’ll need to be able to “go to my local supermarket and buy things for my family and offer crypto and not be laughed out of the store.”

But others are more willing to try it.

In a survey by Citi Private Bank of family offices around the world that manage money for wealthy people, roughly 23% said they have made some investments in crypto. Another 25% said they are researching it.

The growing acceptance of crypto on Wall Street has created a new crop of darlings that help people buy it. Crypto trading platform Coinbase has a market value of roughly $64 billion, for example, putting it on par with such established companies as Colgate-Palmolive, FedEx and Ford Motor.

At Robinhood Markets, meanwhile, the company that became famous for getting a new generation of investors into the stock market is increasingly becoming a place for crypto trading. This spring was the first time when new Robinhood customers were more likely to make their first trade in cryptocurrencies rather than in stocks.

In the end, what many on Wall Street see lasting may not be as much Bitcoin and other cryptocurrencies as the technology that underlies them.

Called the blockchain, it allows for a public ledger that everyone can check and trust, and many expect it to lead to a wealth of innovations. It’s akin to today’s Netflix, Facebook and other services that sprung out of the infrastructure built during the boom and bust of the dot-com bubble.

“The applications built on this new software architecture appear to be growing more quickly than past technologies,” Bank of America strategists Alkesh Shah and Andrew Moss wrote in a recent research report positing digital assets are only in their first inning of growth. “New companies are likely to emerge and poorly positioned companies will exit, creating significant upside potential for some and downside for others.”

JPMorgan Chase, for example, is already using blockchain technology to improve fund transfers between global banks. That’s the same JPMorgan Chase run by CEO Jamie Dimon, who said in an interview with Axios this month that bitcoin has “got no intrinsic value.”

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Wall Street racked up more losses Wednesday as the stock market pulled back for the third straight day. The broad sell-off went beyond stocks, with the price of Bitcoin and other cryptocurrencies falling sharply.

The S&P 500 index dropped 0.3% after recovering from a 1.6% slide earlier in the day. The benchmark index is on track for its second weekly loss in a row.

Bank stocks were among the biggest decliners. Goldman Sachs fell 1.7% and Wells Fargo lost 1.5%. A range of retailers and other companies that rely directly on consumer spending also pulled the market lower. Home Depot slid 0.7%, Gap fell 3% and L Brands dropped 3.1%.

Energy sector stocks, the biggest gainers so far this year, bore the heaviest losses as the price of U.S. crude oil skidded 3.5%.

Digital currencies fell sharply after China’s banking association issued a warning over the risks associated with digital currencies. A statement posted on the industry association’s website said all members should “resolutely refrain from conducting or participating in any business activities related to virtual currencies.”

“Stocks and cryptocurrencies have been showing signs of froth over the past few months and were due for a pullback,” said Richard Saperstein, chief investment officer of Treasury Partners.

The S&P 500 lost 12.15 points to 4,115.68. The Dow Jones Industrial Average fell 164.62 points, or 0.5%, to 33,896.04. The blue-chip index had been down 586 points. The Nasdaq fared better than the rest of the market, shedding only 3.90 points, or less than 0.1%, to 13,299.74.

Smaller company stocks also lost ground. The Russell 2000 index gave up 17.24 points, or 0.8%, to 2,193.64.

Bitcoin’s price was down 10.8% to $38,723, well below its all-time high of over $64,800 reached a month ago, according to the crypto news site Coindesk. It swung in a huge range of as low as $30,202 and as high as $43,621 over the course of the day.

That the headline out of China rattled crypto investors suggests the market was already weak, said Willie Delwiche, investment strategist at All Star Charts.

“If Bitcoin had been holding up better, a headline like that would be dismissed more readily, but it comes at a time when Bitcoin was already well off its highs,” he said. “It gave people who were looking for a reason to sell cover.”

The Bitcoin skid comes after longtime Bitcoin advocate Tesla recently recently said it would no longer accept Bitcoin as payment for its cars, reversing its earlier position.

The selling was so intense that the web site of Coinbase, an online brokerage for digital currencies, was temporarily down in the morning. Coinbase’s stock dropped 5.9%, ending about 34% below the peak it reached on April 16, just two days after its IPO.

Investors continue to be focused on whether rising inflation will be temporary or whether it will endure. Prices are rising for everything from gasoline to food as the economy recovers from its more than year-long malaise.

The Federal Reserve expects that rising inflation will be temporary and related to the recovering economy, but investors are still uncertain and have been more cautious.

“That’s one of the things people are struggling with,” said J.J. Kinahan, chief strategist with TD Ameritrade. “They go to get gas and get in line at a grocery store and they see higher prices; there’s this mixed message for the average investor.”

The fear is that the Federal Reserve will have to dial back its extensive support if inflation persists. That includes record-low interest rates and the monthly purchase of $120 billion in bonds meant to goose the job market and economy.

The minutes from the central bank’s April meeting of policymakers, which were released Wednesday afternoon, reaffirmed the view that the Fed’s decision to keep its benchmark interest rate ultra-low remains the best policy approach, though some officials cautioned that some factors pushing inflation higher may not be resolved quickly.

For all the worries about inflation, however, many professional investors are echoing the Federal Reserve in saying that they expect rising prices to be “transitory.”

Higher interest rates drag on most of the stock market, but they are particularly painful for stocks, especially technology shares, considered the most expensive and those bid up for profits expected far into the future.

Treasury yields mostly rose. The yield on the 10-year Treasury note rose to 1.67% from 1.64% late Tuesday.

Target gained 6.1% after reporting strong results as consumers, some flush with U.S. stimulus payments, were eager to spend as the pandemic eases.

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SILVER SPRING, Md. (AP) — The seemingly unstoppable rise of Bitcoin continued Tuesday with the cost of a single unit of the digital currency rising above $50,000 for the first time.

The price of Bitcoin has risen almost 200% in the last three months and its volatility was on display Tuesday. After rising above $50,600, it fell back to $48,674 at 2:15 p.m. ET. At that price, with about 18.6 million Bitcoins in circulation, Bitcoin has a market value of nearly $907 billion.

Bitcoin is rallying as more companies signal the digital currency could eventually gain widespread acceptance as a means of payment. The vast majority of those who have acquired Bitcoin have treated it as a commodity, like gold, with few places accepting it in exchange for goods or services.

Companies have been leery because of Bitcoin’s volatility and its use by parties who want to avoid the traditional banking system for a myriad of reasons.

Last week, however, the electric car company Tesla sent a tremor through the digital currency markets, saying that it was buying $1.5 billion in Bitcoin as part of a new investment strategy, and that it would soon be accepting Bitcoin as payment for its cars.

BNY Mellon, the oldest bank in the U.S., followed a day later, saying it would include digital currencies in the services it provides to clients. Mastercard said it would start supporting “select crypto currencies” on its network. And Blue Ridge Bank of Charlottesville, Virginia, said it would allow cardholders to purchase and redeem Bitcoin at 19 of its ATMs.

As its price keeps rising, here’s a brief look at the bitcoin frenzy:

HOW BITCOINS WORK

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with U.S. dollars and other currencies. Some businesses also accept bitcoin, but its popularity has stalled out in recent years.

AM I ABLE TO USE BITCOIN TO BUY STUFF?

The digital currency has become popular enough that more than 300,000 transactions typically occur in an average day, according to bitcoin wallet site blockchain.info. Still, its popularity is low compared with cash and credit cards.

Besides Tesla, few companies have said they’ll accept Bitcoin as payment. Overstock.com appears to accept Bitcoin for most listings on its website, including cameras, vacuums and clothes. PayPal allows its accountholders to buy, sell and hold four cryptocurrencies, including Bitcoin — but you can’t use it to pay people, at least not yet. The payment company Square bought $50 million worth of Bitcoin in October at about $10,600 each, and allows users of its cash app to buy Bitcoin from their mobile devices.

Lee Reiners, who teaches fintech and cryptocurrency courses at Duke University School of Law, believes many companies will remain hesitant to accept Bitcoin as payment for products and services because of the volatile price.

“If you were a merchant, why would you accept payment in an asset that could be worth 20% less a day after you receive it?,” Reiners said in an email.

But Richard Lyons, a finance professor at the University of California at Berkeley, predicts Bitcoin and other digital currencies “will become transactional currencies increasingly over the next five years. It’s not going to happen overnight,” he said.

WILL MORE COMPANIES INVEST IN BITCOIN?

Assuming Tesla bought Bitcoin at the volume weighted average price of $34,445 in January, the company is sitting on a gain of about 38% with its investment. But in the regulatory announcement unveiling its Bitcoin purchase, Tesla warned it could suffer the loss of part or all of its investment “and our financial condition and operating results may be harmed.”

“Tesla is going to have to be very careful and comprehensive in accounting for its Bitcoin investment on its books,” said Anthony Michael Sabino, a professor of law, at St. John’s University. “Like any other financial asset other than actual cash, it might fluctuate.”

Mary Barra, CEO of General Motors, a Tesla rival, said GM has no immediate plans to invest in Bitcoin but would continue to “monitor and evaluate” potential use of digital currency.

IS BITCOIN A BUBBLE?

Reiners says that Bitcoin could potentially be a bubble, if you define one as people buying an asset for no reason other than the expectation that it will go up so they can sell at a profit. On the other hand, he said, there is consensus that Bitcoin has value as a hedge against inflation and the broader stock market.

“All that said, I do think the Bitcoin bubble has plenty of room to inflate. Institutional money is just starting to get into the space and that’s going to push the price higher. When this bubble bursts and at what price Bitcoin settles at is anyone’s guess,” Reiners said.

HOW BITCOIN CAME TO BE

It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn’t matter: The currency obeys its own internal logic.

In 2016, An Australian entrepreneur stepped forward and claimed to be the founder of bitcoin, only to say days later that he did not “have the courage” to publish proof that he is. No one has claimed credit for the currency since.

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SILVER SPRING, Md. (AP) — Tesla has invested around $1.5 billion in Bitcoin and said it plans to begin accepting the digital currency as payment for its high-end vehicles soon. The price of Bitcoin soared 15% to above $43,000 Monday.

The California-based electric car maker headed by Elon Musk revealed the new strategy in a filing with the U.S. Securities and Exchange Commission, saying its investment in digital currency and other “alternative reserve assets” may grow.

Bitcoin rose to $43,863 and briefly hit a new all-time high. Shares of Tesla moved higher as well.

In its fourth-quarter earnings report last month Tesla said it had cash and cash equivalents of $19.4 billion.

Dan Ives of Wedbush Securities said the move gives Tesla “more flexibility to further diversify and maximize returns on its cash.”

Similar to Tesla, Virginia-based MicroStrategy Inc. announced in August that it would use some of the excess cash on its balance sheet to invest in alternative assets such as bitcoin. The move has paid off so far. As of Feb. 2, the business analytics company said it held 71,079 bitcoins that it purchased for an aggregate price of $1.15 billion since last summer. Using the current value of $43,000, those bitcoins are worth $3.06 billion.

MicroStrategy shares have risen 660% since the August announcement, but the shares are susceptible to swings in the price of bitcoin. They were up 16% in midday trading Monday after the Tesla announcement.

Palo Alto-based Tesla reported its first annual net profit in 2020, and its stock soared to make it the world’s most valuable automaker. Tesla joined the S&P 500 late last year and is currently valued at more than $820 billion.

It’s been a wild ride for Bitcoin since it made its Wall Street debut in December 2017. Major futures exchanges rolled out bitcoin futures, pushing it to roughly $19,300, a then-unheard of price for the currency. It evaporated quickly in 2018, and by December of that year Bitcoin was worth less than $4,000 a coin.

More recently bitcoin rallied from below $11,000 in October and crossed $40,000 for the first time in its history.

While in the last two years companies have embraced the technology that underlies digital currencies like Bitcoin, a concept known as the blockchain, the actual uses for Bitcoin have not really changed since its rally three years ago. It’s still largely used by those distrustful of the banking system, criminals seeking to launder money, and for the most part, as a store of value.

But the dominoes could be falling if major companies follow Tesla’s lead and begin accepting the digital currency as payment.

Ives said “this move could put more momentum into shares of Tesla as more investors start to value the company’s bitcoin/crypto exposure as part of the overall valuation.

Telsa shares rose nearly 2% to $867.87 in midday trading.

Critics say Tesla’s sales and profits are puny compared with established automakers such as Toyota and General Motors, and its huge valuation is not justified by financial fundamentals.

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Policy & regulation

There’s a widespread belief that the exorbitant quantity of money the Federal Reserve is pouring into the U.S. economy must eventually mean the return of high inflation. After all, if there’s lots more money but no more stuff to buy, prices must rise, mustn’t they? So the prospect of Judy Shelton – known for her support of the gold standard – joining the Fed’s Board of Governors is raising the hopes of those who want the Fed to be stripped of its money creation powers.

But the Fed’s mandate is price stability. And, as I shall explain, if the Fed can’t vary the quantity of money in circulation in response to economic circumstances, it can’t stabilize the price of a dollar.

What is the “price” of a dollar? Some people like to express the dollar’s price in terms of gold – though as the dollar hasn’t been backed by gold since 1971, this is perhaps a bad attack of nostalgia. For them, the dollar’s price is anything but stable and the Fed is fatally undermining it.

Goldbugs think the rise in the dollar price of gold over the last century means the dollar is worthless (despite me arguing about it with them for hours). I have had similar arguments with people who think that massive rises in the stock market/bond market/real estate/bitcoin mean the dollar is hyperinflating. But as the dollar is not backed by assets, the rising price of assets tells us absolutely nothing about the price of a dollar.

For ordinary U.S. people and businesses, the price of a dollar is its purchasing power. The dollar’s domestic purchasing power is the quantity of U.S. goods and services U.S. residents can purchase with their own currency. The rate at which the dollar’s purchasing power changes is known as the “inflation rate.”

If people reject a currency in favor of gold or another currency, its purchasing power falls to zero. This is known as “hyperinflation.” It has never happened to the U.S. dollar.

For foreigners, the price of a dollar is its exchange rate versus their own currency. The exchange rate is the quantity of another currency that one dollar can purchase. This in turn determines not only the quantity of externally produced goods and services that U.S. residents can purchase with dollars, but also the quantity of U.S.-produced goods and services that foreigners can purchase with their own currencies. We can therefore regard the exchange rate as measuring the dollar’s purchasing power outside the U.S.

A fall in the exchange rate means one dollar purchases fewer foreign-made goods and services. The rate at which the exchange rate falls is thus the external equivalent of the domestic inflation rate.

Exchange rate collapse destroys the external purchasing power of the currency, just as hyperinflation destroys its domestic purchasing power. Indeed, the two are often seen together. If the country has large amounts of debt denominated in foreign currencies, exchange rate collapse can mean it becomes unable to service these debts.

Furthermore, if the country is dependent on imports, a sudden exchange rate fall can mean it can’t pay for imports. All too often, the government’s response to these disasters is to print enormous amounts of its own currency in the hope of exchanging it for the foreign currency it needs. This fuels the exchange rate collapse and triggers domestic hyperinflation.

In the past, central banks and governments regarded the exchange rate as the most important price. They thought countries must “earn their way” in the world by exporting goods and services to other countries, and they knew controlling the exchange rate would help them to export. They also feared that if a country allowed its exchange rate to float against other currencies it would collapse, resulting in hyperinflation. So they pegged their currencies to gold or other assets, or even to each other.

“Fear of floating” determined monetary policy long after the end of the gold standard. Indeed, for many developing countries it still does. As recently as the 1980s, the Fed was actively managing the dollar’s exchange rate, aided by other central banks.

But after the failure of the Louvre Accord in 1989, the Fed switched to managing the dollar’s domestic purchasing power instead of the exchange rate. Along with most major central banks, it set a target of 2% per annum consumer price inflation and allowed the exchange rate to float.

Since then, the Fed has managed inflation by adjusting the interest rate it charges banks to borrow dollars. Bank lending creates purchasing power. Increasing banks’ borrowing costs encourages them to charge more for loans to individuals and businesses, which damps demand for loans and thus reduces bank lending. When bank lending falls, the rate at which purchasing power increases also falls. In other words, less bank lending means lower consumer price inflation.

Of course, U.S. banks create dollars when they lend. But the Fed doesn’t directly control the quantity of dollars they create. And it doesn’t restrict its own money creation either. It creates reserves in response to demand from banks, and provides liquidity to financial markets in response to signals from market participants. Contrary to popular opinion, this is intended not to allow inflation to run out of control but to maintain it at around the Fed’s 2% inflation target.

To understand why the Fed can’t meet its price stability mandate by directly controlling the quantity of dollars in circulation, it’s helpful to look at bitcoin’s behavior. Bitcoin’s algorithms control its quantity, not its price. The quantity of bitcoin in circulation increases at a constant rate and is ultimately limited to 21 million (even though this won’t be reached in the lifetime of anyone alive today).

The result of controlling the quantity of bitcoin rather than its price is price instability. Bitcoin’s price is subject to wild swings as demand for it fluctuates, while its quantity does not. This roller-coaster ride doesn’t really matter for bitcoin, because almost no one is buying their weekly shopping with it or hodling their life savings in it. But for the millions of people whose livelihoods depend on the dollar, price swings of the kind all too often seen on the bitcoin charts would be disastrous.

As we saw in September last year and March this year, international demand for dollars heads for the moon at times of crisis. So if the Fed wants the price of dollars to remain stable, it has no choice but to accommodate that demand by creating lots more dollars. This would still be true if it were targeting the exchange rate, by the way. International dollar shortages cause the dollar’s exchange rate to rise.

If the Fed adopted some kind of algorithm that kept the rate of money creation constant, or linked the dollar to gold or some other asset, the result would be renewed instability both in the dollar’s external value and its domestic purchasing power, not on the upside (exchange rate collapse and hyperinflation really are not a serious risk) but on the downside. We know from the 1930s that when the Fed is prevented by a rule or a gold standard from creating enough money to ease a crisis, the result is debt deflation and severe economic depression.

Let’s not go there again.

-Frances Coppola

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