Bitcoin, The Alternative Hedging Asset for Central Banks

A new research paper from Harvard’s Department of Economics has examined the use of Bitcoin as an alternative hedging asset for central banks to fight off potential sanctions. Their conclusion? Buy bitcoin!

Matthew Ferranti argues in, “Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves,” that central banks should hold Bitcoin. Under normal circumstances this provides a diversification benefit for their reserves. He argues that if there exists a modest risk of sanctions then central banks should significantly increase their allocations.

While he spoke highly of Bitcoin it appears he found that gold would often be a better hedge. This is due to Bitcoin’s current volatility. Despite the volatility he noted countries that cannot acquire enough gold that Bitcoin reserves were an optimal alternative option. Overall the conclusion is that sanctions risk may diminish the appeal of US Treasuries. This should propel broader diversification bolstering the long-run fundamental value of Bitcoin.

Ferranti is a fifth year Ph.D. Candidate at Harvard’s Department of Economics where he’s reportedly an advisee of Ken Rogoff who formerly served as an economist for the Board of Governors of the Federal Reserve System as well as the former Chief Economist at the International Monetary Fund. Ferranti’s paper has yet to be per-reviewed after being published on November 17, 2022.

Ferranti’s research appears to be backed by real world events over the past year. After Russia’s invasion of Ukraine, the United States issued a number of sanctions on the country and it’s residents. This limited them from accessing their own reserves. As the Russian government sought to find alternative solutions they have continued their exploration of using Bitcoin. It seems nearly certain this trend will continue as world power splinters and sanctions continue.

El Salvador is the only known country to keep reserves of Bitcoin as an alternative hedging asset. It is speculated that other nations may have already made the leap but none have made any formal announcements. While El Salvador’s move has been mocked in the past we will see if sanctions are another issue that helps nations continue adopting Bitcoin.