Plenty of plebs and companies have squandered their Bitcoin wealth, countries will do the same, money will flow where its treated best, central points of failure will be breached and exposed, this is the nature of the game.

I'm still trying to think through why a government would need Bitcoin, wouldn't it just be better to let private markets handle a lot of things instead and get out of their way?

You don't need that much reserves because theres no need for you to manage currency pairs like you do with fiat, thats already handled by the market

A government would likley spend their bitcoin on unprofitable projects and reduce their holdings over time because they don't have a profit motive, so even at the best of times I see them reducing positions over time, and in the worst of times sure, civil war, coup d'etat, regime change could see your stack sold off