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Four Reasons Why National Governments Should Hold Bitcoin in their National Reserves
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The dawn of cryptos ushered in what we can term as the next step in the evolution of money. Unlike the tradition of fiat currencies, they offer a financial world that lacks a central authority that controls the money-making process. In addition, transaction costs are comparatively cheaper thanks to its peer-to-peer network system.
While the positives are in the open for all to see, cryptos’ uptake by governments has been, at best, disheartening. This is because they prefer to stick to the traditional currencies as opposed to cryptos like Bitcoin. But can a case be made for them to adopt Bitcoin as part of its reserves? Read on to find out!
A Brief on Government Reactions So Far
As a precursor to the reasons as to why Bitcoin adoption as a reserve could be a sound strategy, it would be wise to know government reactions to cryptos. Their approach has not been a clear-cut response set in stone. Different governments have unique receptions.
On the very top of the positives has been El Salvador. The Latin American nation made headlines by being the first government to accept Bitcoin as legal tender.
China is on the other end of the scale, which announced an outright sweeping ban on all cryptos. Reasons include allegations that it is an avenue for money laundering, a view shared by most national governments worldwide.
Why Countries Ought to Have Bitcoin as Forex Reserves
Many can argue that governments worldwide are missing a massive opportunity in the form of making Bitcoin a reserve currency. The current preference is Fiat currencies, almost always the US dollar, Euro, Japanese Yen, British Pounds, and Chinese Yuan in lesser quantities. Gold is another asset utilized as a forex reserve, although not as much as Fiat money. Senator Rand Paul said that cryptocurrency, particularly Bitcoin, could reach world reserve status in a recent interview.
Here are the arguments as to why Bitcoin would make a fantastic reserve currency.
An Increasing Value of Reserves Per Unit is to be Expected
When countries hold fiat currencies as forex reserves, they face one key challenge. The value of the currency unit used is constantly dropping, thanks to currency depreciation. For instance, $1 back in 2010 is worth $1.26 currently at the time of writing.
The mechanism behind the gradual depreciation isn’t so straightforward. The US is a net importing nation, meaning it imports more than it exports. Since it spends more money than it earns, the Federal government needs to take a loan to cover its imports and plug budget deficits.
Therefore, the US government borrows by issuing federal bonds, also referred to as IOUs. The problem is that most of the borrowed money is printed out of thin air. Even worse is that it finds speculative sectors of the economy such as real estate and stocks rather than productive ones like manufacturing. The result is that with more dollars chasing too few goods, inflation will always creep in.
Bitcoin, on the other hand, experiences the exact opposite. With a supply cap at 21million coins and the Bitcoin halving event, the value of 1 BTC will always be higher every other year. So if a government had repurchased bitcoins worth $1million in 2009 when it was worth $1, it would be having reserves worth $64billion at the time of writing. And the price keeps getting higher.
Nations Would Enjoy More Financial Autonomy
Having another nation’s currency as a reserve unit risks losing financial autonomy to a government. The nation’s monetary policies are always intertwined with those of the country that prints the reserve currency. A change in economic policies in the latter affects the value of the local currency in the former.
The reason is that most nations operate a complete peg or crawling peg to reserve currencies such as the US dollar. For example, consider the situation of a country that has the dollar as a reserve currency. If the US federal government decides to implement a policy like quantitative easing to boost its economy, the value of the US dollar will depreciate.
Back to the other nation, the value of its reserves will be worthless, implying a lower export cover in Foreign reserves due to US policies. Therefore, it will have to implement monetary policies. This should reduce the value of its currency to improve exports and earn more dollars. That is a loss of financial autonomy.
Bitcoin has no central authority. Forces of demand and supply determine its price. If governments adopt bitcoin, they won’t have to adjust the value of their local currency to sustain the value of their foreign reserves. The decision to strengthen or devalue their money would be purely socio-economic rather than reacting to other nations’ monetary policies.
A Real Value Backing Rather Than Goodwill
A key concern with the current financial system is that currencies have no real value. The note all people choose to purchase their daily products or pay bills is worth as much as the issuing government decrees.
The term floating a currency arose as a result of US government action in the 1940s. All coins were initially tied to the US dollar, which is pegged to the gold price. However, the US unilaterally decided to end this system, also referred to as the gold standard. Such a decision is what has caused endless money printing by governments. They no longer have to maintain an equal value in gold to sustain the currency’s value. As a result, many economic crises, such as the 2008 financial crisis, became a norm for several countries.
The difficulty level of its mining determines the value of BTC and the price of ASICs used to mine it. So, money won’t just be minted out of thin air, taming the exposure to financial crises by nations holding it as a reserve.
Less Exposure to Speculative Attacks
Since all countries hold Fiat currency as forex reserves, they are all exposed to speculative attacks. It is severe for developing nations.
Here’s how such an attack occurs. For a country to control the depreciation of its currency, it always has to have reasonable reserves in dollars. When the local currency depreciates, it can pump some of the dollars into the economy. It maintains the ratio of local currencies to dollars, resulting in no depreciation.
Poor developing countries that mainly export raw materials while importing finished goods tend to be net importers. Therefore, to maintain a good Forex cover, they have to attract foreign direct investments in US dollars.
A speculator attack occurs when economic analysts give gloomy economic predictions regarding the nation. It may or may not be factual, but its authenticity won’t matter significantly when credit rating firms downgrade. The foreign investors will suddenly pull out a significant portion of their investments, usually in US dollars. Such an action results in a depletion in reserves in the form of dollars, which leads to rapid currency depreciation. The depreciation will cause more investors to pull out their investment money, repeating the entire process.
With Bitcoin as the reserve currency, such an attack is brutal to execute by other nations. To convert their investments into BTC to withdraw from a country, they’ll have to contact a crypto exchange platform. Such platforms are global, which means the BTC won’t be from that country and will not affect its currency value or cause inflation.
Take Away
Governments have been unwilling to replace their ability to control local economic actions via the adoption of Bitcoin.
When they remain the sole authority governing how a currency is locally made and distributed, they get immense economic and political power.
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It, however, makes more sense if they backed their currencies with Bitcoin. Such a step would have their currencies backed by real value and continuously increasing value without adding more units. They would also get to enjoy more financial autonomy while also being less exposed to speculative attacks. It is an angle that is worth exploring by governments around the world.
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