The Zhitong Finance App learned that after US President-elect Trump reaffirmed plans to establish a US Bitcoin strategic reserve, Bitcoin hit a record high of more than $107,000 on Monday, inspiring the enthusiasm of cryptocurrency bulls.

So how does the plan actually work?

What are strategic reserves?

A strategic reserve is an inventory of critical resources that can be released in the event of a crisis or supply interruption. The most famous example is the US Strategic Petroleum Reserve, the world's largest emergency supply of crude oil. It was created by the US Congress in 1975 after the 1973-74 Arab oil embargo stifled the US economy. The President of the United States used reserves to stabilize the oil market during wars or when hurricanes hit America's oil infrastructure along the Gulf Coast.

Canada has the world's only strategic reserve of maple syrup, while China has strategic reserves of metals, grains, and even pork products.

How will America's strategic Bitcoin reserves work?

Analysts and legal experts disagree on whether Trump can use his executive powers to build reserves, or whether a bill from Congress is needed. Some believe Trump could create reserves through an executive order directing the US Treasury's Exchange Stabilization Fund, which can be used to buy or sell foreign currency, as well as hold bitcoins.

This reserve may include bitcoins seized by the government from criminals. According to bitcoinreasuries.net, this is approximately 0.2 million tokens, worth about 21 billion dollars at current prices. In his speech announcing the Bitcoin reserve plan in July, Trump said that this reserve may be the starting point, although it is currently unclear what the legal process is to transfer it from the US Department of Justice.

Trump did not say whether the administration would increase this reserve by buying more bitcoins on the open market. To do this, the government may have to issue bonds, although some supporters of Bitcoin reserves say the US can sell part of its gold reserves and use the proceeds to buy Bitcoin.

Currently, the most specific Bitcoin reserve proposal circulating in Washington comes from pro-cryptocurrency Republican Senator Cynthia Lummis, who said last month that she personally holds 5 bitcoins. In July, she proposed an unsupported bill that would establish a reserve operated and managed by the US Treasury.

The bill envisages that the US Treasury will develop a plan to buy 0.2 million bitcoins per year for five years until the inventory reaches 1 million. This would account for about 5% of the total global supply of Bitcoin of 21 million. The US Treasury will use profits from the Federal Reserve's bank deposits and gold reserves to fund the purchase.

Bitcoin reserves will then be maintained for at least 20 years.

What are the benefits of Bitcoin reserves?

In his July speech, Trump said that in the face of increasing competition from other countries, Bitcoin reserves will help the US dominate the global Bitcoin market.

Other supporters believe that Bitcoin may continue to appreciate in the long term, and by holding Bitcoin reserves, the US can reduce its deficit without increasing taxes, thereby strengthening the dollar.

Last November, Lummis said her plan would allow the US to cut its debt in half within 20 years. “This helps us withstand the effects of inflation and protect the dollar's position on the world stage,” she said.

Supporters say that a strong dollar will in turn give the US more influence over foreign rivals such as Russia.

What are the risks?

Cryptocurrency sceptics say that unlike most other commodities, Bitcoin has no intrinsic use and is not critical to the operation of the US economy.

They also believe that Bitcoin was created in 2008 and is still too young, too volatile to assume that its value will continue to rise in the long term, and that cryptocurrency wallets are still very vulnerable to cyber attacks. Given Bitcoin's volatility, any government purchase or sale could have a huge impact on Bitcoin's price.