The Y2K bug never melted the global grid, yet the panic-buying of flashlights and canned beans in the last months of 1999 was very real. Today, central bank digital currencies (CBDCs) could be playing a similar role in a different fear cycle.

CBDCs are digital currencies issued and controlled by a central bank, combining the convenience of digital money with the potential for state oversight of transactions. Talk of state-issued, fully traceable (and controllable) digital money has some investors looking for a lifeboat, and the main beneficiary this time could be Bitcoin (BTC -0.89%).

If you think a large and fearful capital flight to Bitcoin driven by CBDCs is improbable in the near term, you aren't wrong. Nonetheless, it's undeniable that a centralized and government-controlled digital currency could threaten financial privacy in a way that encourages certain investors to hold their funds in another form. There's already some evidence that at least a few people are buying Bitcoin for this reason. Let's dig in and understand this trend a bit more so that you'll be prepared if it continues to take off.

China's CBDC push may be driving investors out

China's recent push to expand its digital yuan pilot projects is both a technical experiment and a catalyst for Chinese investors seeking to safeguard their financial privacy by seeking alternative currencies like Bitcoin. It's also a good example of how capital can behave in a way that's beneficial to Bitcoin when central bankers start to posture regarding implementing CBDCs.

On April 23, the People's Bank of China urged state-owned enterprises to prioritize using the yuan for cross-border payments; the digital yuan is likely going to be promoted next. That move sent a clear message: The Chinese government is accelerating control over money and its flows, thereby spurring underground over-the-counter (OTC) purchasing of Bitcoin in cities like Shenzhen and Shanghai as investors scrambled to move capital offshore.

The dynamic echoes early 2023, when the start of one of China's digital yuan pilot programs coincided with a 72% surge in Bitcoin's price from January to April, reflecting a classic flight to a perceived safe asset. With around 94% of central banks now exploring CBDCs, according to data from the Bank of International Settlements, the same impulse that's driving Chinese investors to Bitcoin could very easily spread internationally.

Image source: Getty Images.

Will the dollar go digital?

In the U.S., CBDC conversations are a mix of cautious exploration and staunch political resistance.

The Federal Reserve's research into a digital dollar is ongoing. Yet on Capitol Hill, resistance is mounting. A bill reintroduced in late February seeks to bar the Fed from issuing a CBDC.

Furthermore, President Donald Trump's executive order on Jan. 28 bans a "digital dollar" outright, but that could actually spur CBDCs in other countries, as they'll be free to establish any norms they prefer for the currency category. So, U.S. investors aren't exactly afraid of a new CBDC threatening their privacy or control over their funds. However, they could still capture the upside from investors in other countries buying Bitcoin to evade their nations' CBDCs.

How far can the CBDC hedge push Bitcoin?

At the moment, capital flight into Bitcoin as a result of CBDCs is a trend that's just starting to pick up. Still, it's important to keep expectations in check here. Bitcoin probably can't ever replace fiat currencies completely, whether they're digitized or not.

Bitcoin's supply is famously capped at 21 million coins. That scarcity can support price strength until the cows come home. But there are many technical hurdles to using Bitcoin as an actual currency rather than merely as a store of value. Everyday transactions are far too slow or too costly to be competitive with cash, even on throughput-specialized side chains like the Lightning network.

So while the CBDC debate may push Bitcoin higher to the extent it persists and intensifies, don't expect a one-way rocket ride. Investors can count on a tailwind here as long as privacy fears persist. Still, there's no wholly new reason to invest in Bitcoin any more than you're already doing, unless you want to avoid using a CBDC in the future.