The China International Monetary Institute (IMI), an official state-supported think tank, recently shared a report titled "Reasons for Bitcoin as a Reserve Asset", stating on their WeChat official account that the US dollar is losing attractiveness due to deficit, inflation, and declining real interest rates, gold faces new challenges, and BTC is gradually transitioning from a "speculative asset" to a "strategic reserve asset", with its position in the global reserve system worthy of continued attention.
Although the article is not an official IMI policy statement, its attitude could be seen as a hint of a policy shift towards BTC, given that the institution is affiliated with the School of Finance at Renmin University of China, with committee and advisory members primarily from senior officials and researchers of institutions like the People's Bank of China, Ministry of Finance, National Development and Reform Commission, and Ministry of Foreign Affairs.
IMI frequently publishes on sensitive topics like RMB internationalization, digital currency (e-CNY), and financial sanction responses, with its perspectives often viewed as a harbinger of official policy. Despite China's comprehensive ban on cryptocurrency trading and mining, the official think tank's focus on BTC highlights its potential strategic role in countering US dollar hegemony and monetary risks.
The report, written by former White House economist Matthew Ferranti (released late last year), argues that BTC can serve as a hedging tool for central banks in developing countries, particularly suitable for nations affected by US dollar weaponization. Here are the report details:
01 Introduction
As of the first quarter of 2024, central banks collectively hold approximately $12.3 trillion in foreign exchange reserves and about $2.2 trillion in gold reserves. Many countries, especially emerging markets, use foreign exchange reserves to pay import costs, stabilize their national currency, ensure timely foreign currency debt repayment, and mitigate economic shocks.
Recently, central banks have continued to increase their gold reserves. Including undisclosed purchases, global official gold reserves in the third quarter of 2023 exceeded the historical high point of 1965. Some research suggests that certain countries might underreport their gold holdings to avoid criticism during gold price declines.
Currently, only El Salvador's central bank has publicly stated incorporating BTC into sovereign reserves. As of August 2024, El Salvador holds 867 BTC, valued at approximately $315 million, alongside $3.1 billion in foreign exchange and gold reserves. Portfolio optimization models indicate that the most suitable allocation of BTC in sovereign reserves is 2% to 5%. It's not ruled out that other countries have quietly incorporated BTC into sovereign wealth funds, which have far lower disclosure requirements than central bank reserves.
The following sections will reference the World Gold Council's 2024 survey of central banks, explaining the primary reasons for gold holdings and exploring whether these reasons also apply to BTC as a reserve asset. The article argues that BTC is similar to gold in certain aspects and has the potential to become a central bank reserve asset. The focus is on BTC's role as a "value storage mechanism", without discussing its other monetary characteristics.
02 Historical Position
Satoshi Nakamoto published the BTC white paper in 2008, but BTC's birth can be traced back to the Industrial Revolution. The emergence of electricity fundamentally transformed economic production methods and became an indispensable part of the modern economy. Some scholars even use nighttime light intensity as a proxy for economic activity.
Traditional hard currencies like gold require substantial physical labor and time for extraction, refinement, verification, and circulation. Its divisibility and chemical stability have long made it a value storage tool.
The Industrial Revolution opened another possibility: generating and "verifying" currency through electricity rather than labor. In a modern society powered by electricity, producing a value storage medium by consuming electricity is a logical evolution, with BTC being this innovation: miners extract new coins by consuming computational power.
Moreover, BTC solves the counterfeiting problem that has long plagued gold. BTC is verifiable, with every transaction and generation transparently recorded on the blockchain.
While other "proof of work" cryptocurrencies share similar characteristics, BTC's status as the pioneer grants it unique position and legitimacy. This is similar to how gold became a reserve asset due to its historical status, rather than equally rare and stable metals like platinum.
03 Performance During Crisis
The core characteristic of reserve assets is the ability to provide "insurance benefits" during market turbulence, generating positive returns when other assets decline. For example, the US dollar often appreciates due to hedging demand.
BTC's short-term volatility is higher than all other reserve assets, especially during the early stages of the COVID-19 pandemic in March 2020, when BTC prices plummeted nearly 45% within 10 days.
However, no asset can respond to all types of crises. US Treasury bonds struggle against inflation, but BTC performs excellently in two scenarios: US bank failure crises and geopolitical conflicts caused by massive US sanctions. In these scenarios, BTC provides alternative insurance benefits.
04 Long-term Value Storage / Anti-Inflation Tool
Whether BTC can resist inflation long-term remains controversial. Even gold has experienced decades of low periods. For example, gold prices adjusted for inflation dropped 86% between 1980 and 2001.
Gold's value storage role is built on centuries of historical foundation, such as the gold salary value being similar between Roman centurions and modern US Army captains.
BTC has a limited supply, halving every four years, theoretically capable of combating inflation. Research indicates a certain correlation between BTC prices and expected inflation, especially aligning with online price index increases.
05 Effective Portfolio Diversification Tool
For BTC to be an effective risk-diversifying asset, its returns should be unrelated to other reserve assets' driving factors. New York Federal Reserve research suggests BTC prices almost only react to inflation news, with no significant correlation to interest rates, GDP, employment, and other news.
In contrast, gold prices respond to various news types. Therefore, in a portfolio including gold, BTC can provide additional diversification.
Before the COVID-19 pandemic, BTC had almost no correlation with stocks; during the pandemic, this correlation significantly increased, possibly due to simultaneous operations by institutions or retail investors. However, by 2023, this correlation had fallen back.
06 No Default Risk
Unlike bonds or stocks, BTC does not represent any cash flow rights, thus having no default risk. BTC's security comes from its cryptographic algorithm and decentralized miner network.
Financial sanctions can be viewed as a selective default, but the BTC network is naturally resistant to sanctions. As long as miners are willing to process transactions (even in non-sanctioned countries), blockades can be bypassed.
However, sanctions can affect third-party participation willingness. After Tornado Cash was sanctioned by the US, although it could still operate, users withdrew due to legal risks. Conversely, after the Russian exchange Garantex was sanctioned, fund inflows actually increased.
Another default risk comes from the asset's "custodian". For example, the Venezuelan Central Bank's gold was frozen by the Bank of England. BTC offers self-custody options, reducing third-party risks, but also requires higher cybersecurity capabilities.
07 High Liquidity Asset
Although BTC lacks the deep market of US Treasury bonds, its liquidity can accommodate transactions of billions of dollars, comparable to gold, and even superior to some capital-controlled currencies.
Research suggests BTC can help emerging markets bypass capital controls. The Argentine case shows that cryptocurrency usage significantly increased under intensified foreign exchange restrictions.
08 Geopolitical Diversification Factor
The International Monetary Fund (IMF) indicates that geopolitical tensions might lead to global financial system fragmentation, thereby threatening financial stability, capital flows, and trade.
Although Federal Reserve economists found capital flows remained stable in 2022, academic research suggests that countries closely involved in arms trade with China and Russia experienced faster gold reserve growth. In 2022, central bank gold purchases reached a historical high, with buyers including China, Turkey, India, and Middle Eastern countries.
Research also found that BTC prices and volatility are significantly correlated with geopolitical risk indices, being the only cryptocurrency with this characteristic, further strengthening its position as a geopolitical risk hedge tool.
09 Conclusion
BTC and gold are not the best choice for all central banks, and this article does not intend to provide specific investment advice. Central banks consider numerous variables when allocating reserves, such as import-export structure, foreign debt currency, exchange rate system, etc.
However, BTC indeed possesses uniqueness and can help combat diverse risks including inflation, geopolitical risks, capital controls, sovereign defaults, banking crises, and sanctions. In some aspects, it is similar to gold, with potential as a reserve asset.
