• Hong Kong considers Bitcoin in reserves to help reduce its significant fiscal deficit.
• Bitcoin’s volatility and smaller market size present challenges for government adoption.
• Bitcoin’s low transaction costs could make it a better alternative to gold for diversification.

Hong Kong legislator Johnny Ng has a new idea to help address the region’s financial deficit: include Bitcoin in the city’s foreign exchange (FX) reserves, citing sources from local media.

As the chairman of the Subcommittee on Issues Relating to the Development of Web3 and Virtual Assets, Ng stated that the current fiscal deficit, which surpasses 100 billion yuan ($13.7 billion), could be eased with a substantial amount of Bitcoin. 

He added that holding a Bitcoin reserve could help preserve value, but only a larger allocation would lead to fiscal benefits.

Global Trends and Bitcoin as a Reserve Asset

Ng’s suggestion aligns with broader global trends. Smaller nations have already embraced Bitcoin as a reserve asset, using it as legal tender. Financial analyst Wu Jiezhuang pointed out that several U.S. states have legalized allocating some of their reserves to Bitcoin, helping to diversify asset allocation.

Wu noted that Bitcoin’s overall market capitalization, approximately $2 trillion, is smaller than the combined worth of gold reserves, which totals $20 trillion. Despite Bitcoin’s increased popularity, the market remains limited, and its price fluctuations pose a challenge for any government considering it an economic reserve.

Read also: Hong Kong Solidifies Crypto Hub Status with Bitcoin ETF Growth

Potential Risks of Bitcoin as a Reserve Asset

However, Wu also warned about the potential risks associated with Bitcoin’s security. Despite the cryptocurrency’s resilience against hacking attempts, the chance of its value declining remains. The open nature of blockchain could lead to sudden market shifts driven by speculative trading.

As such, Wu recommended that governments allocate only a small portion of their financial assets to Bitcoin. He prioritized larger, well-established digital currencies with high transaction volumes.

Bitcoin’s Impact on Silver and Gold

Bitcoin’s rise in value and its use as a store of value has raised concerns about the future of gold and silver. Wu predicted that Bitcoin could replace gold and silver as a top asset for investment in economic reserves, citing Bitcoin’s low transaction and storage costs.

However, he acknowledged that Bitcoin still lacks practical applications beyond its store-of-value role. This limits its ability to replace traditional assets entirely in some contexts.