Bitcoin (BTC +0.34%) has traditionally been viewed as a hedge against central banks. However, one Harvard Ph.D. candidate believes it's these central banks that could spark Bitcoin's next leg up and possibly give it the momentum to return to previous all-time highs.
Matthew Ferranti is in pursuit of his doctorate in economics, and his most recent working paper covers a topic most economic studies tend to avoid. His work attempts to prove that now, more than ever, the likelihood of a central bank or government adding Bitcoin to its reserves is at an all-time high.
Politics and Bitcoin
When Russia invaded Ukraine in February 2022, global powers such as the U.S. and the European Union coordinated an all-out financial attack on Russia by placing sanctions on its economy. They froze the assets of specific individuals, placed bans on the import of Russian oil, and even targeted Russian banks, effectively excluding them from the world's financial system.
These sanctions were a first in terms of scope and breadth, but sanctions aren't new, and the number of countries or individuals receiving sanctions from the U.S. continues to grow. The U.S. Department of Treasury lists all of the active sanctions programs it is currently engaged in, which includes more than 22 countries.
Ferranti believes that the criteria for what deserves new sanctions are loosening, and as this list grows, there is a greater precedent for these ostracized countries to search for alternatives. Traditionally, gold has been viewed as a way to skirt sanctions, and Ferranti proves that gold is still a valuable hedge against sanctions, but he suggests that in today's digital world, an asset like Bitcoin could become even more sought-after for many reasons.
First, Bitcoin tends to remain uncorrelated to gold. Owning Bitcoin could provide diversification on a central bank's balance sheet outside of just gold or U.S. dollars. In addition, due to Bitcoin's digital nature, it's more flexible for a range of needs. Ferranti suggests that Bitcoin could be advantageous as opposed to gold for countries that have very poor infrastructure and don't have the capability to store large amounts of gold.
Or perhaps infrastructure is there, but the country has a huge amount of reserves. Ferranti said that countries such as Singapore or China wouldn't be able to buy enough gold to adequately hedge against possible sanctions. As he put it, "you can't just turn around and buy $100 billion of gold," but you could buy $100 billion worth of Bitcoin and store it on any computer.
CRYPTO: BTC
Key Data Points
Bitcoin is already on the world stage
Bitcoin enthusiasts might point out that countries such as El Salvador and the Central African Republic have both made Bitcoin a form of official currency in recent years. El Salvador took it a step further by purchasing the cryptocurrency and now owns somewhere around 2,381 bitcoins as of July 2022.
While two countries have already pioneered this new strategy of a Bitcoin-inclusive economy, that news fell on deaf ears for the most part. El Salvador and the Central African Republic lay at the periphery of the world economic stage. Should a country such as Russia, with the world's 11th-largest economy, or a Middle Eastern oil-producing country that plays an integral role in the world economy pursue a Bitcoin-centric model, then it could lead to a series of dominoes falling around the globe.
It seems ironic that Bitcoin could be embraced by central banks and governments, considering that it was invented to circumnavigate these same entities. But should this strategy come to fruition, it would be revolutionary and potentially provide the fuel for Bitcoin to not only return to its all-time high but possibly become an established worldwide asset.
