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In a groundbreaking report by the Bitcoin Policy Institute (BPI), highlighted by Forbes, the evolving discourse around Bitcoin as a potential reserve asset for central banks is explored in depth. Authored by Dr. Matthew Ferranti, a distinguished Harvard-trained economist and former member of the White House Council of Economic Advisers, this report presents a series of persuasive arguments advocating for the inclusion of Bitcoin in central bank portfolios.
Bitcoin as a Modern Reserve Asset
Dr. Ferranti opens the discussion by observing a notable trend: central banks are increasingly augmenting their gold reserves. This trend sets the stage for Bitcoin to emerge as a modern counterpart in the realm of reserve assets. Currently, the Central Bank of El Salvador is the only central bank that has publicly declared its Bitcoin holdings. Notably, Bitcoin comprises just under 10% of El Salvador’s reserves. Dr. Ferranti suggests that a more balanced allocation for Bitcoin, between 2% and 5%, could provide diversification benefits while minimizing risk.
Bitcoin’s Performance in Economic Crises
A significant aspect of the report is Bitcoin’s historical performance during economic downturns. Dr. Ferranti emphasizes that a vital characteristic of any reserve asset is its ability to yield returns when traditional assets are underperforming. The report draws attention to instances such as the financial instability following the collapse of Silicon Valley Bank in 2023 and the US sanctions imposed on Russia after its 2022 invasion of Ukraine, both of which coincided with notable surges in Bitcoin’s value.
Long-Term Potential Amid Short-Term Volatility
Despite Bitcoin’s inherent short-term volatility, Dr. Ferranti argues that its potential to outperform traditional assets over the long haul is significant. This potential is largely attributed to Bitcoin’s Halving cycle, a mechanism that reduces the rate of new Bitcoin production, often leading to price escalations. Moreover, the economist points out that both Bitcoin and gold tend to perform well during inflationary periods, with rising Bitcoin prices possibly signaling impending inflation.
No Default Risk and Immunity to Financial Sanctions
The report also integrates findings from the Federal Reserve Bank of New York, which indicate that Bitcoin’s price remains largely unaffected by macroeconomic news, with the exception of inflation-related information. This attribute, according to Dr. Ferranti, renders Bitcoin a highly effective diversifier within a portfolio, especially given its low correlation with traditional reserve assets like gold and foreign currencies.
Why Bitcoin is Devoid of Default Risk
Dr. Ferranti delineates three core reasons why Bitcoin is devoid of default risk. Firstly, Bitcoin does not represent a claim on future cash flows, distinguishing it from stocks and bonds. Secondly, the security of the Bitcoin network is upheld through a robust mining process. Lastly, Bitcoin is resilient to financial sanctions—a critical consideration for central banks—as it cannot be “frozen” in the manner that traditional assets can be.
Liquidity and Market Viability
While acknowledging that Bitcoin does not yet match the liquidity of the US Treasury market, Dr. Ferranti highlights its substantial improvements in liquidity, with a current market capitalization exceeding $1.3 trillion. He concludes that this level of liquidity is sufficient to accommodate substantial transactions, thereby enhancing Bitcoin’s appeal to central banks worldwide compared to previous years.
At the time of writing, the largest cryptocurrency on the market is trading at $67,500, reflecting a 1.5% decline within a 24-hour period.
