While a lot of people doubt the existence of cryptocurrencies because of their disastrous development in 2022, Ph.D. candidate Matthew Ferranti at Harvard suggests otherwise. He pointed out that Bitcoin (BTC) might be the right solution for central banks as a hedging asset. However, the idea of the world’s central banks investing in Bitcoin in large quantities may sound somewhat crazy and outlandish, considering Bitcoin was created to evade them. Let’s see what he has to say.
A bold suggestion for central banks – invest in Bitcoin
According to the published paper named “Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves,” central banks could use Bitcoin as an alternative hedging asset to tackle potential sanctions. Ferranti claimed that even under usual circumstances, it makes sense for central banks to hold a small amount of Bitcoin.
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The researcher noted that it makes sense to invest in Bitcoin alongside gold reserves when there is a risk of sanctions. While gold has been used as a reserve by central banks for decades, they haven’t touched cryptocurrencies yet. Instead, they are planning to launch their own Central Bank Digital Currencies (CBDCs).
Ferranti also noted in the report that nations that faced the possibility of US sanctions had increased the percentage of their gold reserves far more than nations that faced a lower risk of sanctions. He further stated that Bitcoin reserves are the ideal option if these central banks are unable to accumulate enough gold to mitigate the risks of sanctions.
In addition, Ferranti thinks that the possibility of sanctions may eventually encourage central banks to diversify their holdings, raising the value of cryptocurrencies and gold. He came to the conclusion that diversifying reserves and allocating some to both Bitcoin and gold have considerable advantages.
Digital gold’s test
Bitcoin has been called the digital gold many times before. If central banks adopt the idea of Ferranti, it would only prove that Bitcoin is, in fact, digital gold. However, as Bitcoin’s price declined by almost 80% so far this year, it may be difficult for central banks to even think about the idea as reserves should be held in a stable asset.
Gold is much less volatile than other commodities or assets. That is why it’s very useful as a hedge in challenging times. Although gold doesn’t rise as sharply as Bitcoin, in the long run, it also doesn’t crash as hard. While Bitcoin is down 80% from its peak, gold has only declined by 16%.
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Although they aren’t always related, possessing both provide diversification benefits. The main advantage of Bitcoin for central banks would be its underlying technology and quick access. Countries that don’t have the right infrastructure to store enough gold might just buy bitcoins and store them in a hardware wallet.
Nations like China, which have enormous reserves, may also find it hard to buy a large amount of gold at once quickly. They won’t just purchase hundreds of billions of gold fast. It’s a complicated process. Hence the solution of an easily accessible digital gold, which can be acquired within minutes.
Possible impact on cryptocurrencies
It may seem like science fiction for central banks to buy Bitcoin right now. But if it was actually about to happen, it could seriously impact crypto prices. Bitcoin currently has a little over $310 billion market cap, so if billions of dollars started flowing into the crypto market, we could see the price predictions from late 2021 claiming Bitcoin is going to $100,000, become a reality in a few years.
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