More than 8% of Bitcoin is held by governments and institutions: a new darling of wealth or a hidden danger?

As of May, competition for liquidity has clearly intensified. The surge in Bitcoin holdings by institutional investors over the past year has caused liquidity to dry up.

The latest data shows that more than 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 a fierce debate: does this legitimize Bitcoin as a strategic reserve asset, or does it portend a centralization risk that threatens the core ideals of crypto?

Strategic hedging in a turbulent world

For many governments and institutions, accumulating Bitcoin reflects a rational strategy in the face of macroeconomic uncertainty. As fiat currencies face inflationary pressures and geopolitical instability persists, Bitcoin is increasingly seen as an alternative to digital gold.

Reserve diversification: Some central banks and sovereign wealth funds have begun to reallocate part of their portfolios from fiat currencies and gold to digital assets. Bitcoin's fixed supply of 21 million coins provides 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 reserve diversification tool.

Institutional Legitimization: When pension funds, hedge funds, and public companies allocate a small portion of their portfolios to Bitcoin, this conveys confidence to other market participants. High-profile allocations by institutions like BlackRock, Fidelity, and sovereign wealth funds have had a legitimizing effect on the Bitcoin asset class. Bitcoin is no longer just the domain of speculative retail traders; it has found a home in boardrooms and government coffers.

Strategic autonomy and anti-sanctions: In an increasingly fragmented global financial order, Bitcoin provides countries with a means to bypass traditional payment channels dominated by the US dollar and the SWIFT system. For countries under sanctions or those looking to reduce their reliance on Western-dominated financial infrastructure, holding Bitcoin provides a form of financial sovereignty.

Actual inflation hedge: Countries experiencing high inflation now consider Bitcoin as a functional hedge. For example, Nigeria and Venezuela’s growing Bitcoin reserves are often driven by the need to preserve value amid depreciating fiat currencies. These practical uses further solidify Bitcoin’s narrative as “digital gold.”

Risks of crossing the threshold: Concentration concerns

While institutional and government adoption brings legitimacy and liquidity, the concentration of more than 8% of Bitcoin’s total supply in the hands of a few large holders raises concerns about the long-term health of the network.

Erosion of decentralization: Bitcoin’s founding ideals were built on decentralization and the democratization of finance. The concentration of holdings by a few large players (whether governments or corporations) threatens this ideal. If a few entities control a large portion of the supply, there is a risk of collusion, market manipulation, or coordinated selling that could lead to market instability.

Liquidity impact: Large holders often store their Bitcoin in cold wallets or long-term custody arrangements, which means that these coins are actually removed from the circulating supply. As more BTC is used for strategic purposes rather than regular transactions, the available liquid supply shrinks. This can lead to increased price volatility, as small-scale buying and selling pressure in the remaining circulation can significantly affect the price.

Market distortions and moral hazard: Government purchases and holdings of Bitcoin could inadvertently influence market sentiment and pricing. If a major government suddenly announced a sale or policy change, it could trigger market panic. Furthermore, this power could be used as a policy lever, contradicting Bitcoin's promise of independence from political manipulation.

Custodial risks and governance impacts: When institutions hold Bitcoin through custodians, the decentralized nature of the network is partially weakened. These custodians may be subject to political pressure, legal obligations, or even central banks. This can lead to pseudo-centralization, where control of Bitcoin is not on-chain but concentrated in a few centralized institutions.

The Specter of Sovereign Confiscation: History shows that states can and do seize assets. The more Bitcoin a government holds, the more regulatory frameworks may lean toward tightly controlling or even forcing custody transfers, especially during financial crises. The 1933 U.S. gold confiscation case provides a historical precedent that cannot be ignored.

Balancing legality and network integrity

To ensure Bitcoin’s continued resilience 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 influence of large retailers. Educational efforts and easier-to-use tools are critical.

Transparency of holdings: Public disclosure of BTC holdings by institutions and governments could help increase 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-sig, distributed custody).

Policy safeguards: Policymakers who embrace Bitcoin should also support regulatory frameworks that maintain decentralization and financial autonomy.

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 are still the dominant force. This means that despite the large amount of BTC locked up in ETFs or corporate vaults, the decentralized nature of the market has not been fundamentally shaken. Some people worry that with so many Bitcoins "dormant" or in custody, the reference value of on-chain data may be weakening. This concern is not unfounded, but it is not a new problem either.

Looking back, the main trading activities of Bitcoin have always been concentrated off-chain, especially on centralized platforms such as Coinbase, BN, and early FTX. These transactions are difficult to detect on the 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 sophisticated. ETF fund flows and changes in company and country holdings are generally subject to 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 vaults to national reserves, the total amount of Bitcoin held by institutions has exceeded 2.2 million BTC and continues to grow . Undoubtedly, this inflow of funds has injected significant stability into the market during the bear market. However, there are hidden concerns under the stability: 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's independence.

in conclusion

More than 8% of all Bitcoin is now in the hands of governments and institutions, which is a double-edged sword. On the one hand, it marks a historic legitimization of cryptocurrency as an asset worth storing. On the other hand, it introduces centralization pressures that could undermine Bitcoin’s fundamental principles.