The Czech National Bank (ČNB) is considering investing a portion of its foreign exchange reserves in Bitcoin. Governor Aleš Michl revealed in an interview with the Financial Times that he plans to present a proposal to the bank’s board to explore Bitcoin as a tool for diversifying the ČNB’s €140 billion reserve portfolio.
Central banks traditionally invest in conservative assets such as US Treasuries and highly rated bonds, with only a few venturing into equities. However, Michl is taking a different approach. He believes Bitcoin’s growing popularity among institutional investors, evidenced by the launch of Bitcoin exchange-traded funds (ETFs) by firms like BlackRock, makes it a viable option for diversification.
“For the diversification of our assets, Bitcoin seems a good choice,” Michl said. He acknowledged the cryptocurrency’s extreme volatility but pointed to its potential as an alternative investment. “It’s possible to have a wide range of outcomes—Bitcoin could be worth nothing or an absolutely fantastic amount,” he added, emphasising his readiness for the risks involved.
Michl’s proposal places him at odds with many other central bankers. Bundesbank Governor Joachim Nagel recently compared Bitcoin to “digital tulips,” referencing the 17th-century tulip mania bubble. Additionally, European Central Bank officials have dismissed Bitcoin’s value, calling it “unsuitable as a means of payment or as an investment.” Despite these criticisms, Michl remains undeterred, arguing that central banks may follow his lead within the next five years as cryptocurrencies gain broader acceptance.
The ČNB’s potential investment could have a significant impact on the Bitcoin market. Michl noted that even a 5% allocation of the bank’s reserves would represent a substantial sum in the cryptocurrency space.
The Czech Republic’s foreign exchange reserves currently stand at €140 billion, equivalent to about 45% of the country’s GDP. The ČNB already holds 22% of its portfolio in equities, with plans to increase its allocation to US stocks to 50% over the next three years. Michl described the current US stock market as “the highest in history,” prompting the bank to proceed with its investments.
While the ČNB’s potential Bitcoin investment would be groundbreaking, it is not without risks. Michl acknowledged the possibility of Bitcoin’s value collapsing to zero, citing historical examples of failed investments such as Enron and Wirecard stocks. However, he remains committed to the idea of diversification, stating, “If Bitcoin is good for that, then let’s have it.”
The ČNB’s analysis suggests that a 5% allocation to Bitcoin over the past decade would have increased annual returns by 3.5 percentage points, albeit with doubled volatility. The bank’s board approving the proposal remains to be seen, but Michl’s willingness to explore new boundaries in central banking could set a precedent for others to follow.
You can read the full interview with Czech National Bank Governor Aleš Michl in the Financial Times (29.01.2025) here: ČNB
