In a paper for the Bitcoin Policy Institute titled ‘The Case for Bitcoin as a Reserve Asset’, Dr Matthew Ferranti declares: ‘The Bitcoin network is positioned well to be included in central banks’ reserve assets, and continued economic resilience as well as exposure to economic benefits in inflationary/crisis periods could further cement Bitcoin’s case.’ Ferranti cites the similarity between bitcoin and gold in many respects: ‘Data on Bitcoin’s performance in times of banking failure (including Silicon Valley Bank) and sanctions on Russia indicate that it tends to increase in value when traditional assets fail. This suggests Bitcoin is a valuable economic shock absorber as well as a portfolio diversifier.’
Dr Ferranti addresses concerns about bitcoin’s volatility and liquidity, both of which are supportive in the long run – bitcoin is volatile in the short term but, thanks to its halving cycle, it’s been a much better asset to hold long term. As for liquidity, he notes that a billion-dollar transaction can now be conducted in bitcoin and, although that sounds like a small number compared with gold, whose market cap is upwards of $100 trillion, gold’s liquidity is vastly greater than bitcoin’s. Finally, bitcoin’s architecture means that it doesn’t even have default risk: unlike a bond, it is not tied to any legal entity with the power to default on its obligations and it is invulnerable to selective default – financial sanctions being a good example of this.
While arguments in favour of bitcoin as a reserve asset are compelling, central banks appear reluctant to embrace it. A few countries mine bitcoin, suggesting they may begin accumulating it as a reserve. It is possible that once a central bank, such as El Salvador’s, adopts bitcoin, others will quickly follow, and the world may see a crystallisation of official economic plans regarding decentralised cryptocurrencies.
Source: Forbes
