Bitcoin and Its Role in National Reserves: Opportunities and Limitations

In recent years, Bitcoin has solidified its position as a strategic asset for reserve managers and some countries. However, contrary to the view that this cryptocurrency could become a global reserve currency, there are still many barriers that prevent Bitcoin from replacing the USD or gold in the near future. Why Do Countries Hold Reserves and the Role of USD Global foreign exchange reserves currently amount to about 12 trillion USD, a significant increase from the 2 trillion USD level in 2000. Of this, approximately 58% of reserves are held in USD, 20% in euro, and an increasing number of countries are returning to purchasing gold as a "safe reserve". The main purpose of reserves is not only to manage exchange rates but also to serve as a tool for mitigating risks related to capital flows and currency fluctuations. Historical examples such as the Tequila Crisis in Mexico, Black Wednesday in the UK, and the defaults of Russia, China, Turkey, and Argentina demonstrate that a lack of reserves can severely harm the economy. Countries can intervene in the foreign exchange market by selling reserves to stabilize the exchange rate. Additionally, the accumulation of reserves is often a natural consequence of trade surplus economies, such as China, where exports exceed imports, leading to large accumulated foreign exchange reserves. In general, national reserves are primarily managed to maintain external stability, support monetary and fiscal policy during turbulent times. Therefore, not all types of assets qualify to become reserve assets. An ideal reserve asset needs to be safe, highly liquid, widely trusted, and have low volatility, so that it can be quickly used when needed. Why Bitcoin Has Not Yet Become a Global Reserve Currency With the above standards, Bitcoin is still not qualified to replace USD or gold. Some main reasons: Lack of backing from a stable economy: Bitcoin is not issued by a country with a large and stable economy. Little used in international transactions: Bitcoin is not popular in global payment and trade invoicing. Limited liquidity and market depth: The Bitcoin market is still small compared to the government bond market, for example, the US Treasury bond market has a trading volume 70 times greater and a market capitalization 25 times larger than Bitcoin. High price volatility: Bitcoin's annual volatility often ranges from 50-100%, even exceeding 150% during periods of stress, compared to 5-8% for 10-year US Treasuries. Weak market structure: Wide bid-ask spreads, thin order books, fragmented markets, and little institutional participation – all of which make Bitcoin less attractive to reserve managers. Illustrative example: In 2022, Japan spent about 60 billion USD to defend the yen, and by 2024 this figure is nearly 100 billion USD. If a similar intervention were made using Bitcoin, the market could be significantly affected and cause instability. Meanwhile, U.S. Treasury bonds allow for effective intervention without disturbing the market. However, Bitcoin still has a logical position in reserves. Although it cannot become the primary reserve currency, Bitcoin can play a supplementary role for traditional assets thanks to the following advantages: Diversification in a chaotic geopolitical context: As trade barriers increase, capital controls and international sanctions become common, Bitcoin emerges as an asset not subject to specific government risk. Compared to gold: Bitcoin and gold are both scarce assets, inherently non-yielding, and primarily used as stores of value. Bitcoin also has advantages in terms of transport, storage, divisibility, and counterfeiting protection, whereas gold requires physical verification and complex preservation. Supported by the crypto ecosystem: The acceptance of institutions, from BlackRock, Fidelity to investment funds, along with the development of a global legal framework, strengthens Bitcoin's position as a standard asset in the cryptocurrency ecosystem. Bold Yet Feasible History shows that disruptive innovations have often faced opposition: from transferring data to the cloud, electronic transactions, to diversifying reserves away from gold after World War II. Bitcoin will not immediately replace traditional reserve assets, but it can diversify and modernize the reserve portfolio, providing a strategic option for national managers in a rapidly changing world.