The newest reserve currency.

By Jeff John Roberts
May 26, 2017
May 26, 2017

What a crazy week for bitcoin. The digital currency is famous for its volatility, but in the last few days, it soared from $2,000 to nearly $2,800. And after a $400 plunge on Thursday, it is sitting around $2,450. Oh, and if you’re keeping track, bitcoin is up about 100% since the start of the month.

There are various explanations for the price surge, which include: a flood of new investors from Japan and Korea; blockchain technology (which drives bitcoin) going mainstream; and, of course, speculative mania.

But the most intriguing theory about the bitcoin boom involves national governments. Specifically, are central banks acquiring bitcoin to hold as reserves alongside gold and foreign currencies?

Vinny Lingham, a well-known entrepreneur and digital currency enthusiast, predicted last year that a price surge could lead governments to take a strategic interest in bitcoin as an asset.

“If Bitcoin started to surge globally, and as a result of strategic interests from any one government, if other governments decided to own a piece of the limited 21m coins in issue, I believe this would trigger something akin to a digital commodity race. Imagine if China started buying up large amounts of Bitcoin — would the rest of the world governments stand idly by and watch?” he wrote in a blog post.

Lingham made the point again on Twitter this week, citing a possible rivalry between Asian countries:

It’s not clear if Lingham is being entirely serious. (A subsequent tweet hinted the Japan comment might have been in jest.) But the idea of central banks acquiring bitcoin is hardly far-fetched. The Central Bank of Barbados, for instance, published a research paper on whether the country should buy digital currency.

And other CEOs have made the same suggestion:

From a theoretical standpoint, bitcoin possesses many of the same attributes of gold, which makes it an attractive store of value for central banks. Specifically: There’s a limited supply of bitcoin, it’s easy to trade, and its price is not dependent on governments or regular financial markets.

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As to whether Asian governments are actually acquiring bitcoin, there is so far no hard proof. But bitcoin investors have long looked nervously at the extensive mining operations in China, which are effectively under control of the government.

The prospect of Chinese control, along with the incredible surge in bitcoin’s value, is something that could spur the governments of Japan and Korea—where bitcoin is trading higher than anywhere else—to acquire the cryptic currency.

Finally, some fear bitcoin is still vulnerable to a so-called 51% attack—an existential threat in which more than half of the world’s bitcoin miners join forces, allowing them to manipulate the blockchain records on which all bitcoin transactions are stored. Today, such an attack is considered too big for anyone to pull off—except, perhaps, a nation state.

National governments jostling for control of bitcoin could also trigger new forms of crime or economic aggression on the Internet. (If that sounds far-fetched, consider how North Korean attackers robbed the central bank of Bangladesh through the SWIFT banking system).

For now, all of this is just speculation. It’s entirely possible that what we’re seeing is yet another instance of a speculation-fueled bitcoin bubble that will be followed by a crash. But if national governments are in the mix, it’s a whole new ballgame.

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