A Central Bank of Barbados Working Paper suggests that a small portion of bitcoin may be healthy for its foreign currency reserves.
The report was authored by two economists from the University of the West Indies, Winston Moore and Jeremy Stephen. It expresses some optimism over Bitcoin’s development as a currency, noting its significant appreciation in value since inception and how the number of transactions performed over its network has grown. Thus, “it is possible that digital currency could become a key currency for settling transactions.”
It also points out that because the country maintains a peg against the US dollar, the Central Bank must diversify its foreign reserves sufficiently to protect against “speculative attacks”.
Taking these points into account, the authors assert that a small proportion of bitcoin (0.01%) in its foreign reserve portfolio may be beneficial. The volatility of the country’s reserve basket would likely not be adversely affected, and, assuming bitcoin rises in value, its addition would generate “a significant return for the Bank.”
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Bitcoin proportions of 0.1%, 1% and 5% were also examined. While higher allocations of bitcoin in the reserve basket would increase returns, they also would bring volatility to unacceptable levels.
The authors employ two empirical tools to conduct their analysis: a counterfactual exercise using the historical performance of reserve currencies plus bitcoin, and Monte Carlo forecasts of international reserves over the next few years.
The underlying assumption is that bitcoin stands a good chance of increasing in value over the long term. A very similar study last year by the Financial Planning Association was also based on this premise. Such an assertion, however, is far from certain, and many mainstream financial figures believe that bitcoin’s value will decline.
Recently, a survey of leading Bitcoin companies indicated that they believe bitcoin will be the 6th largest reserve currency in the world by 2030.
The latest study comes around the same time as the International Monetary Fund (IMF) recognizing the Chinese yuan as a reserve currency. It joins the US dollar, pound, euro and yen.