Diversifying Central Bank Reserves with Bitcoin

Today I want to talk about a strange combination: a central bank and Bitcoin. Most people do not put these two things together. I do. In monetary policy, a central bank must be conservative, but it must think ahead.

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When I became governor of the Czech National Bank in mid-2022, inflation in my country was close to 20%. It was a serious moment. When I took office, I said we would bring inflation back to 2% within two years, and we did it. Thank you.

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Not with magic, with discipline. I said this clearly even before Covid: money was too cheap for too long. For too long, the system promoted borrowing. For too long, our currency was weakened. We changed that. We kept policy tighter for longer. We supported saving, and our currency, the Czech koruna, became strong. That, for me, is conservative monetary policy. A simple rule: stay hawkish forever.

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We also manage very large foreign exchange reserves. Very large. We manage about 180 billion USD in reserves. That is about 44% of Czech GDP. Relative to the size of our economy, our reserves are among the largest in the world, so we have to build the right portfolio for the future.

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Here you can see long-term risk and return, all in Czech koruna, where our books are kept. Bonds are on the low end, which means low risk and low return. Stocks and gold can offer a higher return, but they also bring higher risk.

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The next point is the Czech National Bank’s portfolio. Over the past four years, we increased the share of equities from 15% to 26%. We also increased the share of gold from almost 0% to 6%. So we built a diversified portfolio with higher expected return than before, lower risk than an all-stock portfolio, and even lower risk than an all-bond portfolio.

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But then came the next question: can we do more? Can we build an even stronger portfolio for the future? And now comes Bitcoin.

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The first time I used Bitcoin, I bought a coffee in Prague, the capital city of the Czech Republic, about ten years ago. Today that coffee comes to about 350 US dollars, so it was the most expensive coffee of my life.

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You know that Bitcoin had very high returns, but it looks risky. Its volatility is much higher than other assets. One day its price may be much higher, or it could go to zero. Yes, zero. And that is true for other assets too. A stock can go to zero. Even a bond can fail. So for me, that is why it is not wise to bet just on one asset.

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We have to think about the whole portfolio. The next point on this chart is what we found in our new working paper. This is our model portfolio with 1% in Bitcoin. And here comes the interesting part: with 1% in Bitcoin, expected return goes up and overall risk stays about the same in our Czech currency. This is what our new study shows.

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Why? Because Bitcoin has low long-term correlation with many traditional assets. It does not move in the same way, and that matters. So when you add an asset like this, the whole portfolio can work better. Return can go up and risk stays about the same.

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That is diversification. Over the long term, Bitcoin can provide returns that are not closely linked to other assets. In some ways, it is similar for me to venture capital, but it is much more liquid. So in the Czech National Bank, we started a separate test portfolio with Bitcoin.

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A test portfolio. Not a revolution, not a political statement, a test. We will run it for two years. Then we will publish the results. Then we will decide what comes next. So to sum up: be conservative in monetary policy, but be innovative in how we work. This is the future. Thank you.