Thread by @oscpacey

Short thread on use of Bitcoin by central banks - compared to gold. A UK Case Study.

Gordon Brown, the head of the UK Treasury, in 1999 decided to sell off more than half of the UK's gold reserves. Over a couple of years he sold off around 400 tonnes leaving around 300 tonnes.

The UK still has about this same amount in reserve. The motivation was to reduce the volatility of the UK's reserve portfolio, and since gold hadn't been performing well nor capable of paying any dividends it should be dropped for foreign currencies, mainly the EUR.

Unfortunately gold was at its lowest price in decades and was about to start a multi decade bull market. This is the 100 year price history of gold:

...and this is where the sales took place:

Terrible market timing! Gold of course outperformed the assets the UK had swapped it for. All traders can be unlucky and suffer from poor judgement, but I find the motivation behind this act most surprising.

Gold doesn't pay dividends... okay, but swapping into EUR won't help!

Is bringing the reserve asset portfolios volatility down a good motive? Personal and institutional asset management aims to reduce volatility of returns in long term savings plans, i.e. pensions. Diversification of investments aims to expose a portfolio to a wider economy...

...and reduce exposure to any quirks and bumps within an economy (eg services boom vs industrial collapse). It assumes a growing economy. A central banks's reserve assets should be a bit like a pension plan, but expose the state to a diversified proxy of the global economy.

Gordon Brown therefore thought owning EUR sensible as Europe was our closest major economic bloc.

The problem with fiat currencies however, as we all know, is that they are designed to inflate over time, and not in a fully controlled way.

Currencies therefore as long term holdings give a portfolio downwards performance, no income, and still have a volatile profile on the global currency stage.

Gold is the archetypal reserve asset for well known reasons.

Volatility isn't a great concern for long term holdings for something like gold which is inherently exposed to global markets already and is used across history and the world as a safe haven.

Would Mr. Brown have had the same worries if Bitcoin were the global safe haven?

Hypothetically imagine that central bank treasury reserves are mainly in bitcoin and its market cap is equivalent to tens of trillions of dollars. By nature of being that scale the volatility will naturally tend to be significantly lower than bitcoins is now...

...but will it still be too high for state level long term savings?

For hard, scarce, valuable, global assets like gold and bitcoin I don't think volatility is too important, but that aside, bitcoin is capable of being a modern currency in ways that gold isn't.

Bitcoin is accessible to individuals and central banks the same way. They have the same security, portability, and importantly, price premium. Small amounts of gold are hugely expensive compared to bullion, where are 100 satoshi have the same premium as full bitcoins.

Bitcoin can become a global reserve currency, used for settling international trade finance, remittance, IMF loans, etc in a way that gold can't. Gold logistics are painful, expensive and prone to 3rd party risk. Bitcoin solve this.

In this parallel universe Gordon Brown doesn't have to choose between hard, volatile, unproductive reserve assets like gold and the more liquid, day-to-day practical and market lubricating assets like EUR, because, in bitcoin they are the same thing.

Thanks for reading!