More than 8% of Bitcoin is held by governments and institutions: Are new favors for wealth or hidden dangers?

As of May, liquidity competition has intensified significantly. The surge in Bitcoin holdings of institutional investors over the past year has led to liquidity exhaustion.

The latest data shows that more than 8% of the total Bitcoin supply is now held by government and institutional investors. This unprecedented sovereignty and the degree to which institutions participate in decentralized assets sparked heated debate: is this legalization of Bitcoin as a strategic reserve asset, or is it a risk of centralization threatening the core concept of encryption?

Strategic hedging in a turbulent world

For many governments and institutions, accumulating Bitcoin reflects rational strategies in the face of macroeconomic uncertainty. As fiat currencies face inflationary pressures and geopolitical instability continues, Bitcoin is increasingly seen as a replacement for digital gold.

Reserve Diversification: Some central banks and sovereign wealth funds have begun redistribution of portions of their portfolios from fiat currencies and gold to digital assets. The fixed supply of 21 million Bitcoins provides inflation hedging that legal assets cannot provide. Countries with weak monetary or fragile monetary policies, such as Argentina or Türkiye, have shown special interest in BTC as a tool for diversification of reserves.

Institutional Legalization: This conveys confidence to other market participants when pension funds, hedge funds and public companies allocate a small portion of their portfolio to Bitcoin. High-profile allocations of institutions such as BlackRock, Fidelity and sovereign wealth funds have had a legalization effect on the Bitcoin asset class. Bitcoin is no longer just the realm of speculative retail traders; it has found its home in the board of directors and government vaults.

Strategic autonomy and sanctions: In an increasingly fragmented global financial order, Bitcoin provides countries with means to bypass traditional payment channels dominated by the US dollar and SWIFT systems. Holding Bitcoin provides a form of financial sovereignty for countries under sanctions or those who want to reduce their dependence on Western dominant financial infrastructure.

Real inflation hedging: Countries experiencing high inflation are now considering Bitcoin as a functional hedging. For example, Nigeria and Venezuela's growing Bitcoin reserves are often out of the need to preserve their value in the depreciation of fiat currencies. These practical uses further cement the narrative of Bitcoin as “digital gold.”

Risks exceeding the threshold: Concentration concerns

While institutional and government adoption brings legitimacy and liquidity, more than 8% of the total Bitcoin supply is concentrated in the hands of a few large investors, raising concerns about the long-term health of the network.

Decentralization Erosion: Bitcoin’s founding philosophy is based on decentralization and financial democratization. The gathering of holdings of a few big players (whether government or corporate) threatens this concept. If a few entities control most of the supply, there is a conspiracy risk, market manipulation or coordinated sell-offs that can lead to market instability.

Liquidity impact: Big investors usually store their bitcoins in cold wallets or long-term custody arrangements, which means that the coins are actually removed from the circulating supply. As more BTC is used for strategic purposes rather than regular trading, the available liquid supply shrinks. This may lead to intensifying price volatility, as small-scale trading pressures in residual circulation can significantly affect prices.

Market distortion and moral hazard: Government purchases and holdings of Bitcoin may inadvertently affect market sentiment and pricing. If a major government suddenly announces a sale or policy change, it may trigger market panic. Furthermore, such power may be used as policy leverage, contradicting Bitcoin’s commitment to independence from political manipulation.

Custody Risk and Governance Impact: When institutions hold Bitcoin through custodians, the decentralized nature of the network is partially weakened. These trustees may be subject to political pressure, legal obligations, and even central banks. This may lead to pseudocentralization, i.e., control of Bitcoin, although not on the chain, is concentrated in a few centralized institutions.

The Ghost of Sovereign Confiscation: History shows that states can and do confiscate assets. The more Bitcoin the government holds, the more likely the regulatory framework is to tend to tightly control or even force custody transfers, especially during financial crisis. The 1933 US gold confiscation case provides historical precedents that cannot be ignored.

Balance of legitimacy and network integrity

To ensure the sustained resilience of Bitcoin as a decentralized asset, the community must remain vigilant. Here are some mitigation strategies and future directions:

Encourage retail participation: wider retail adoption can balance the impact of big players. Educational efforts and easier-to-use tools are crucial.

Position transparency: Public disclosure of BTC positions by institutions and governments may help increase accountability and reduce manipulation concerns.

Strengthening non-custodial infrastructure: The community should invest in technologies that allow large players to protect their assets in a decentralized manner (such as multi-signature, distributed custody).

Policy Assurance: Policymakers embracing Bitcoin should also support maintaining a decentralized and financially autonomous regulatory framework.

Thoughts on this

Although the institutionalization of Bitcoin is accelerating, it is worth noting that more than 85% of the Bitcoin supply is still held by non-institutional investors, and retail investors remain the dominant force. This means that despite the ETF or corporate vault locking in large amounts of BTC, the decentralized nature of the market has not fundamentally shaken. Some worry that with so many bitcoins “hibernate” or being escrowed, the reference value of on-chain data may be weakening. This concern is not unfounded, but it is not a new problem.

Looking back, Bitcoin’s main trading activities have always been concentrated off-chain, especially on centralized platforms such as Coinbase, BN and early FTX. These transactions are difficult to detect on-chain, but have 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 capital flows and changes in corporate and national positions often require compliance with information disclosure obligations, which in turn provides market analysts with more traceable and transparent data than traditional trading platforms.

Overall, institutions' interest in Bitcoin has reached unprecedented levels. From ETFs and corporate vaults to national reserves, the total amount of Bitcoin held by institutions has exceeded 2.2 million BTC and is still growing . Undoubtedly, this capital inflow injected significant stability into the market during the bear market. However, under stability, there are hidden worries: Bitcoin is gradually becoming financialized, and its price fluctuations are increasingly affected by macroeconomic sentiment and correlation with traditional financial assets. This connection is reshaping the original myth of Bitcoin independence.

in conclusion

More than 8% of Bitcoin is now in the hands of governments and institutions, which is a double-edged sword. On the one hand, it marks the historic legalization of cryptocurrencies as assets worth reserves. On the other hand, it introduces centralized pressures that could undermine the fundamental principles of Bitcoin.