Report: Bitcoin Offers Reserve Asset Potential Amid Inflation and Geopolitical Risks

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Ruholamin Haqshanas

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Ruholamin Haqshanas

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Ruholamin Haqshanas is a contributing crypto writer for CryptoNews. He is a crypto and finance journalist with over four years of experience. Ruholamin has been featured in several high-profile crypto...

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October 27, 2024

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A recent report by the Bitcoin Policy Institute suggests that central banks consider Bitcoin as a hedge against economic and political uncertainties.

The paper, titled The Case for Bitcoin as a Reserve Asset, argues that Bitcoin could act as a reserve asset to protect against inflation, geopolitical tensions, capital controls, sovereign defaults, banking crises, and international sanctions.

Authored by economist Matthew Ferranti, it highlights Bitcoin’s limited correlation with traditional financial assets, describing it as an “effective portfolio diversifier.”

This distinct lack of correlation, he claims, gives Bitcoin unique value as a reserve asset, particularly for countries looking to reduce dependency on the U.S. dollar.

Bitcoin’s Decentralized Nature Makes it Appealing to Countries

In addition, Bitcoin’s decentralized nature and absence of counterparty risk make it appealing to countries at risk of financial sanctions, such as Venezuela and Russia, which Ferranti terms as experiencing a form of “selective default.”

While acknowledging that Bitcoin may not be universally suitable for all central banks, Ferranti notes its potential as a store of value, likening it to gold in its ability to guard against currency depreciation.

The perspective aligns with growing interest in Bitcoin as a strategic asset among some U.S. policymakers.

Calls for a U.S. Bitcoin strategic reserve have gained traction, especially following former President Donald Trump’s speech at the Bitcoin 2024 conference in Nashville, Tennessee.

In response, Wyoming Senator Cynthia Lummis introduced the Bitcoin Strategic Reserve Bill, aiming to gradually acquire 5% of Bitcoin’s total supply for the U.S. Treasury.

Trump, in a recent interview with Fox News, even floated the idea of using Bitcoin to reduce the national debt, underscoring the potential of the asset’s fixed supply to counter inflation.

Bitcoin proponent and MicroStrategy CEO Michael Saylor likened this strategic reserve initiative to the Louisiana Purchase, describing it as a pivotal economic opportunity.

However, some, including Cardano founder Charles Hoskinson, caution that a national Bitcoin reserve could allow governments to exert influence over the Bitcoin network, potentially affecting its decentralized nature.

Fed Paper Advocates Taxation or Prohibition of Bitcoin

The new paper comes shortly after a research paper from the Federal Reserve Bank of Minneapolis raised concerns about Bitcoin’s impact on government fiscal policies, suggesting that the cryptocurrency may need to be taxed or banned to help governments manage deficits.

The paper argued that Bitcoin complicates efforts to maintain permanent government deficits, especially in an economy reliant on nominal debt.

According to the Minneapolis Fed, Bitcoin creates what it calls a “balanced budget trap,” which forces governments to balance their budgets.

Likewise, earlier this month, the ECB called for regulating or banning Bitcoin, citing concerns over wealth redistribution.

ECB Senior Management Adviser Jürgen Schaaf reiterated this view, advocating for policies to curb Bitcoin’s growth.

Critics of the ECB’s stance argue that the paper fails to address the broader context of monetary inflation.

For example, public sector debt in the UK reached nearly 98% of GDP in 2023-2024, the highest level since the 1960s.

In the U.S., the national debt has ballooned to $35 trillion, driven in part by a 41% increase in the M2 money supply since 2020.