Capital markets have seen a dramatic rise in the valuation of digital currencies over the past few months. The US election results amplified this push, with President-elect Donald Trump consistently expressing pro-crypto policies and lax views on the regulatory framework. Bitcoin (BTC), for example, the world’s leading alternative cryptocurrency, is up approximately 150% in 2024.
The new trend is forcing sovereign investors to re-evaluate their asset allocation strategy and risk management. Many sovereign wealth funds and central banks have increased their exposure to digital currencies to capitalize on the growing market and its value. For example, the Norwegian sovereign wealth fund has become a leader in the cryptocurrency market by investing in cryptocurrency-related companies.
The fund indirectly held 2,446 BTC at the end of the first half of 2024, an increase of 938 BTC since the end of 2023. The US government currently holds over 200,000 BTC, valued at over $20 billion, most of which has been seized as part of criminal investigations. . The United States is
one of 13 countries holding bitcoin, according to a recent report from crypto exchange River. The United Kingdom and El Salvador, pioneers in the digital currency market, also hold large bitcoin reserves. The UK has around 61,200 BTC, according to the report’s authors.
As more governments grapple with inflation and a limited money supply, bitcoin holdings can protect against inflation, similar to gold’s traditional role as a strategic asset in a wallet. Additionally, bitcoin’s value is uncorrelated to other asset classes, such as bonds and stocks, meaning it could serve as a tool for the bank’s risk management strategy . Additionally, central banks often have financial agreements with other central banks, which creates counterparty risk in the event of political instability and non-performance. Bitcoin, like other cryptocurrencies, does not rely on central banks to increase its amount in circulation. This reality helps central banks that own digital currencies, particularly bitcoin, reduce this third-party risk.
