Government Institutions Hold 8% of Bitcoin, Legalization and Centralization Risks Coexist.
(Background: Arizona Governor Signs Cryptocurrency Reserve Law, Second State in the U.S. to Implement, Key Points of “HB 2749”)
(Background Supplement: First in the U.S.! New Hampshire Governor Signs “Bitcoin Reserve Bill,” Allowing 5% of Public Funds to Invest in BTC)
As of May, liquidity competition has significantly intensified. The surge in Bitcoin holdings by institutional investors over the past year has led to liquidity exhaustion. Recent data indicates that over 8% of the total circulating supply of Bitcoin is now held by governments and institutional investors. This unprecedented level of sovereign and institutional participation in decentralized assets has sparked intense debate: is this the legitimization of Bitcoin as a strategic reserve asset, or does it signify a centralization risk that threatens the core ideals of cryptocurrency?
Strategic Hedging in a Turbulent World
For many governments and institutions, accumulating Bitcoin reflects a rational strategy in the face of macroeconomic uncertainties. As fiat currencies face inflationary pressures and geopolitical instability persists, Bitcoin is increasingly viewed as an alternative to digital gold.
Diversification of Reserves: Some central banks and sovereign wealth funds have begun reallocating a portion of their portfolios from fiat currencies and gold into digital assets. Bitcoin’s fixed supply of 21 million coins offers an inflation hedge that fiat assets cannot provide. Countries with weak currencies or fragile monetary policies, such as Argentina or Turkey, have shown particular interest in BTC as a tool for reserve diversification.
Institutional Legitimization: When pension funds, hedge funds, and publicly listed companies allocate a small portion of their portfolios to Bitcoin, it conveys confidence to other market participants. High-profile allocations by institutions like BlackRock, Fidelity, and sovereign wealth funds have led to a legitimization effect for Bitcoin as an asset class. Bitcoin is no longer solely the domain of speculative retail traders; it has found its place in boardrooms and government treasuries.
Strategic Autonomy and Sanctions Resistance: In an increasingly fragmented global financial order, Bitcoin provides countries with a means to bypass traditional payment channels dominated by the dollar and the SWIFT system. For sanctioned countries or those looking to reduce dependence on Western-dominated financial infrastructure, holding Bitcoin offers a form of financial sovereignty.
Practical Inflation Hedge: Countries experiencing high inflation are now considering Bitcoin as a functional hedge. For example, Nigeria and Venezuela’s growing Bitcoin reserves often stem from the need to preserve value amid fiat currency devaluation. These practical uses further solidify Bitcoin’s narrative as “digital gold.”
Risks Beyond the Threshold: Concerns of Centralization
While institutional and governmental adoption brings legitimacy and liquidity, the concentration of over 8% of the total Bitcoin supply in the hands of a few large holders raises concerns about the long-term health of the network.
Erosion of Decentralization: The founding ideals of Bitcoin are based on decentralization and financial democratization. The accumulation of holdings by a few major players (whether governments or corporations) threatens this ideology. If a few entities control the majority of the supply, there is a risk of collusion, market manipulation, or coordinated sell-offs that could lead to market instability.
Liquidity Impact: Large holders typically store their Bitcoin in cold wallets or long-term custodial arrangements, meaning these coins are effectively removed from the circulating supply. As more BTC is used for strategic purposes rather than regular trading, the available liquid supply diminishes. This could lead to increased price volatility, as small buy-sell pressures in the remaining circulating supply could significantly affect prices.
Market Distortion and Moral Hazard: Government purchases and holdings of Bitcoin may inadvertently influence market sentiment and pricing. If a major government suddenly announces a sale or policy change, it could trigger market panic. Moreover, this power may be used as a policy lever, contradicting Bitcoin’s promise of independence from political manipulation.
Custodial Risks and Governance Implications: When institutions hold Bitcoin through custodians, the decentralized nature of the network is partially undermined. These custodians may be subject to political pressure, legal obligations, or even central bank influence. This could lead to pseudo-centralization, where control of Bitcoin, although not on-chain, is concentrated in a few centralized entities.
Ghost of Sovereign Seizure: History shows that nations can and do seize assets. The more Bitcoin a government holds, the more likely the regulatory framework may lean towards strict control or even forced custodial transfers, especially during financial crises. The 1933 U.S. gold confiscation case provides a significant historical precedent that cannot be ignored.
Balancing Legitimacy and Network Integrity
To ensure the continued resilience of Bitcoin as a decentralized asset, the community must remain vigilant. Here are some mitigation strategies and future directions:
Encouraging Retail Participation: Broader retail adoption can balance the influence of large holders. Educational efforts and more user-friendly tools are essential.
Holding Transparency: Public disclosure of BTC holdings by institutions and governments may help enhance accountability and reduce manipulation concerns.
Strengthening Non-Custodial Infrastructure: The community should invest in technologies that allow large holders to protect their assets in a decentralized manner (e.g., multi-signature, decentralized custody).
Policy Safeguards: Decision-makers embracing Bitcoin should also support regulatory frameworks that maintain decentralization and financial autonomy.
Reflections on This
Despite the accelerating institutionalization of Bitcoin, it is worth noting that over 85% of Bitcoin supply is still held by non-institutional investors, with retail investors remaining the dominant force. This means that, despite ETFs or corporate treasuries locking up significant amounts of BTC, the decentralized nature of the market has not fundamentally shaken. Some worry that with so much Bitcoin ‘dormant’ or custodially held, the reference value of on-chain data may be diminishing. This concern is not unfounded, but it is also not a new issue.
Looking back, Bitcoin’s main trading activities have always concentrated off-chain, especially on centralized platforms like Coinbase, Binance, and early FTX. These trades are difficult to detect on-chain but have had a significant impact on market prices and structure. The situation we face today is similar, but the analytical tools we rely on have become more complex. ETF fund flows and the changes in corporate and national holdings often require compliance with information disclosure obligations, which in turn provides market analysts with more traceable and transparent data than traditional trading platforms.
Overall, institutional interest in Bitcoin has reached unprecedented levels. From ETFs and corporate treasuries to national reserves, the total amount of Bitcoin held by institutions has exceeded 2.2 million BTC and continues to grow. Undoubtedly, this influx of funds has injected significant stability into the market during the bear phase. However, beneath this stability lies concerns: Bitcoin is gradually financializing, and its price volatility is increasingly influenced by macroeconomic sentiment and correlations with traditional financial assets. This linkage is reshaping the original myth of Bitcoin’s independence.
Conclusion
With over 8% of Bitcoin now held by governments and institutions, this is a double-edged sword. On one hand, it marks a historic legitimization of cryptocurrency as a valuable reserve asset. On the other hand, it introduces centralization pressures that could undermine the fundamental principles of Bitcoin.
