The Governor of the Czech National Bank, Aleš Michl, is planning to propose an investment strategy aimed at allocating billions of euros of the country’s reserves into bitcoin, potentially making it the first central bank in the western world to include cryptocurrency in its assets. In an upcoming meeting, Michl will seek approval from the board to invest possibly up to 5 percent of the CNB’s €140 billion reserves into bitcoin.
Despite recognizing the high volatility and uncertain track record of bitcoin, Michl pointed out a rise in investor interest following the launch of bitcoin exchange-traded funds by BlackRock and other major firms. He noted the influence of cryptocurrency leaders on policy, referring to recent initiatives by the US administration focused on digital assets.
“For diversifying our assets, bitcoin appears to be a suitable option,” Michl stated. He expressed a belief that the market for bitcoin is likely to grow even beyond the influence of current political figures. Federal Reserve Chairman Jay Powell has confirmed that the US central bank currently does not own bitcoin, as its investment options are limited to what Congress permits.
Traditionally, central banks invest their reserves in conservative assets such as US Treasuries and highly-rated bonds, with few venturing into cryptocurrencies. Michl emphasized his differing perspective on bitcoin compared to other central bank leaders, citing his background in investment management and a focus on profitability.
Warnings about the risks associated with cryptocurrencies have been voiced by various central bankers, including Bundesbank Governor Joachim Nagel, who recently likened bitcoin to a speculative bubble. The European Central Bank has previously stated that bitcoin does not hold any fair market value and is unsuitable for use as a currency or investment.
El Salvador has become a notable supporter of cryptocurrency, adopting it as legal tender in 2021, although it has since scaled back its ambitions to secure an agreement with the International Monetary Fund. Furthermore, several central banks are exploring digital currencies as a response to the rise of cryptos.
Michl indicated that more central banks might adopt a similar approach to his within the next five years, noting a trend among various funds and commercial banks to include cryptocurrency in their portfolios. However, he cautioned that investments in bitcoin could also result in significant losses.
He explained that there is a wide range of potential outcomes for bitcoin’s value, ranging from complete devaluation to significant appreciation. “The goal is to diversify,” he asserted, suggesting that if bitcoin proves beneficial for diversification, it should be included in their investment strategy.
If the CNB had allocated 5 percent of its foreign reserves to bitcoin over the past decade, it would have gained an additional 3.5 percentage points in annual returns, but at the cost of increased volatility. Michl also mentioned that a substantial investment in a bitcoin ETF could influence its market price, due to the sizable amount involved.
The Czech Republic’s foreign exchange reserves represent about 45 percent of its GDP, with CNB currently holding a diverse portfolio, including 22 percent in equities. Michl aims to increase the proportion of US shares from 30 percent to 50 percent within the next three years.
While the country has opted out of the Eurozone, the President of the Czech Republic has recently sparked a debate about adopting the euro, suggesting it could enhance economic prosperity. However, Michl downplayed the likelihood of a shift to the euro in the near future, citing a desire for independence in monetary policy.
He also indicated an expectation that the bank will lower interest rates by 25 basis points in the coming week, continuing a trend of rate cuts that began in December 2023.
photo credit: www.ft.com
