In May last year, a crackdown on organised crime by Bulgarian law enforcement resulted in the seizure of more than 200,000 Bitcoins. The arrests of 23 Bulgarian criminals led to the authorities confiscating the surprisingly large stash of Bitcoins. This raid on illegal activity in Bulgaria was momentous because, unlike the FBI and US Marshals who seized the Bitcoin held by the infamous Silk Road black market, the Bulgarian authorities did not sell the confiscated Bitcoins.
At the time of the crackdown, the BTC seized by the authorities were worth around $2,300 each or approximately $460 million in total. However, with the steep increase in the price of Bitcoin in December, the dollar amount of Bitcoin confiscated had ballooned to over $4 billion. This huge number equated to around 25 percent of Bulgaria’s entire national debt!
Since then, Bitcoin prices have fallen substantially, and it’s unclear whether the Bulgarian authorities still have access to the private keys. But this seizure of Bitcoin was a significant event because it demonstrated the ability of an entire country to improve their balance sheet simply by holding Bitcoin.
As President Trump’s trade wars continue to gather steam, the super powers of Russia, China and the US are in battle for global economic dominance. In recent years, both China and Russia have sold a significant portion of their US Treasury holdings, with Russia dumping a whopping 84 percent of their US debt in recent times. What’s interesting is that for several years both these nations have been undertaking an economic policy which involves the steady purchase and accumulation of physical gold. The largest holder of gold is still the US Treasury, but China and Russia now also own significant gold reserves. It appears the world’s superpowers don’t trust each other’s currencies or debt, but they all trust the value of gold.
In the same way that gold is a form of money without borders, Bitcoin is also a borderless store of value. Many of the same properties such as scarcity and the non-existence of counterparty risk which attract central banks to gold are also present in Bitcoin. Therefore, it isn’t a stretch to assume that in the future, Bitcoin will also be hoarded along with gold as a form of central bank reserve.
Before the majority of central banks consider holding Bitcoin as a diversification asset, they will most likely attempt to create their own national cryptocurrencies in competition with Bitcoin. But these national cryptos probably won’t be attractive to foreign governments, as they will not be open distributed blockchains. Instead, national cryptocurrencies will almost certainly be controlled by the issuing country, making it a centralised, digital coin which brings with it counterparty risk. Centralised cryptocurrencies with little or no mining can be hacked and 51 percent attacked, and perhaps only after this realisation by governments will they truly understand the decentralised nature of Bitcoin.
Central bank involvement
The Bulgarian seizure has shown that Bitcoin can be used as a means of diversification and store of value. In the future, it may not be uncommon to see central banks allocate a small portion of their portfolio into Bitcoin as a hedge against currency and counterparty risk. Developing countries can use the Bulgarian example as a case study for how a country can potentially reduce or clear their national debt altogether by simply diversifying into Bitcoin as a long term play. It would certainly be interesting to see a smaller developing country rise to global prominence on the foresight of their leaders to allocate a small portion of their reserves into Bitcoin.
Japan, the world’s third largest economy, has not taken any gold purchasing action. In fact, they’re the largest foreign holder of US government debt. This is most likely because the country has been heavily occupied by US forces since the end of the second world war. There is, however, a rumour circulating which suggests that the Bank of Japan may be purchasing large amounts of Bitcoin in secret as a way to hedge their US Treasury holdings. Bitcoin and precious metals are perhaps the only two counterparty-free assets in the world, so it would make sense that a major central bank such as the BOJ would consider secretly hoarding Bitcoin as a way to quietly diversify out of the US Dollar. It is a just a rumour, but one that certainly makes sense.
In 1971, President Richard Nixon closed the gold window, the direct convertibility of foreign US Dollar holdings into gold, on the grounds of national security.
In the future, the realisation by governments on the power of Bitcoin as a counterparty free asset could lead to a digital arms race, where in the interest of national security, countries allocate a portion of their energy to the mining of Bitcoin.