Central Banks and Sovereign Funds Adapt to Crypto Surge
The capital markets have witnessed a significant increase in digital currency valuations over recent months, amplified by the US election results and President-elect Donald Trump’s pro-crypto stance. Bitcoin (BTC), the leading alternative cryptocurrency, saw a 150% rise in 2024. This trend is prompting sovereign investors to reevaluate their asset allocation strategies and risk management approaches.
Many sovereign funds and central banks are increasing their exposure to digital currencies to capitalize on the growing market. Norway’s sovereign fund has emerged as a cryptocurrency market leader by investing in crypto-related businesses. By the end of the first half of 2024, the fund indirectly owned 2,446 BTC, representing an increase of 938 BTC from the end of 2023.
The US government currently holds over 200,000 BTC, valued at more than $20 billion, primarily seized from criminal investigations. According to a recent report by crypto exchange River, the US is among 13 nations holding bitcoin. The UK and El Salvador, pioneers in digital currencies, also maintain significant bitcoin reserves, with the UK holding approximately 61,200 BTC.
As governments grapple with inflation and limited money supply, bitcoin holdings can serve as a hedge against inflation, similar to gold’s traditional role as a strategic asset in a portfolio. Bitcoin’s value is not correlated with other asset classes like bonds and equities, making it a valuable tool for risk management strategies. Additionally, central banks often engage in financial arrangements with other central banks, creating counterparty risk during political instability. Bitcoin and other cryptocurrencies do not rely on central banks to increase their circulation, helping to reduce third-party risk for central banks that own digital currencies.
Sovereign investors are increasingly recognizing the potential benefits of including cryptocurrencies in their portfolios, driven by their unique characteristics and the current market dynamics.
