Recently, China and Brazil struck a deal to abandon the U.S. dollar and trade in their own currencies. In fact, China already has similar currency deals with Russia, Pakistan, and several other countries. This development gives us a context to talk about how the U.S. dollar’s dominance globally has come down by a significant margin over the years.
According to the Bank for International Settlements (BIS) in 2010, the U.S. dollar and the Euro accounted for 63% of all foreign exchange trading. The USD’s role as a global reserve currency was particularly strong at the time.
However, if we examine the official foreign exchange reserve figures for the fourth quarter of 2021 and 2022, we can see that the dollar’s dominance has fallen significantly. In other words, the USD’s position as the primary global reserve currency is no longer as strong as it once was.
Consider this chart for instance –
Therefore, it goes without saying that countries’ faith in the U.S. dollar seems to be dwindling slightly. In the wake of the Russia-Ukraine war, sanctions on Putin’s nation took a front seat. The imposition of sanctions on Russia’s central bank resulted in the elimination of its reserves denominated in USD, EUR, and JPY.
As per VanEck, the renowned global investment manager, sanctions on Russia reduced demand for USD, EUR, and JPY currencies as reserve assets, “while increasing demand for currencies that can perform the functions of reserve currencies.”
In fact, in a 2022 report, VanEck explained a framework that analyzed where the value of Bitcoin would end up if it were to be adopted as the world’s reserve currency.
The framework evaluated,
“Gold prices of around $31,000 per ounce and potential Bitcoin prices of around $1,300,000 per coin. Adjusting for greater strains on financial and monetary systems generates even higher prices.”
Not just investment managers, but even some venture capitalists believe that Bitcoin potentially becoming a global reserve currency in the distant future can’t simply be ruled out.
Consider this – Popular venture capitalist David O. Sacks, in a recent podcast with Anthony Pompliano, asserted,
“Basically there are three currencies that have scaled- one is the USD American empire then there is China, the renminbi. And there is Bitcoin and the crypto world. There are these three currencies that can get to sufficient scale to be some sort of world reserve currency.”
Now, the pertinent question here is – Can Bitcoin outcompete gold to win central banks’ confidence across the globe? To answer that, we will have to first dive deep into the historical importance of gold.
Does Bitcoin match the gold standard?
Remember, J.P. Morgan stated in his testimony before Congress in 1912, “Gold is money. Everything else is credit.” Undeniably, back in the day, it was true when gold was stored safely in vaults and paper currency was issued based on the gold peg.
Well, towards the end of World War II, the U.S. held most of the world’s gold due to being paid in gold by other countries during the wars.
At the Bretton Woods conference, it was mutually decided to peg the world’s currencies to the U.S. dollar, which was in turn pegged to gold. This system lasted until 1971 when most currencies transitioned to a floating exchange rate system that remains in place today.
Despite the move away from the gold standard, central banks continue to hold significant reserves of gold, with approximately one-fifth of all gold ever mined held by them.
It’s here you might wonder, why gold is considered to have a store of value. Primarily, it’s because of the limited supply of gold which is both durable and very difficult to produce, unlike other metals.
If you carefully notice, there are four factors on which gold’s value is inherently based – Supply, durability, the convenience of use, and the narrative surrounding it.
What about Bitcoin then?
In recent years, several large institutions, including Tesla, Square, and MicroStrategy, have gotten involved with Bitcoin. This suggests that even traditionally conservative investors are beginning to see the potential of Bitcoin as a store of value.
Furthermore, there are a growing number of businesses that accept Bitcoin as a form of payment. This includes major retailers like Microsoft, PayPal, and Overstock, among others. If more businesses follow suit, it could help increase Bitcoin’s legitimacy.
Bitcoin is based on a technology that is immutable, which makes the digital asset durable in nature. Furthermore, the convenience of Bitcoin’s use in the financial world as opposed to gold or the U.S. dollar is undebatable.
As we know, Bitcoin’s decentralized nature makes seamlessness possible in global trades. Countries that are looking to reduce their reliance on the U.S. dollar as a reserve currency might consider the king coin as a serious option.
Now, talking about the narrative, the king coin has brought about a revolution in the world of finance. Evidently, the cryptocurrency investment adoption curve is on an uptrend too.
For instance, according to Crypto.com, over 10% of global Internet users likely own some form of cryptocurrency. This simply highlights the change in the preferences of investors across the globe.
However, that being said, one of the biggest challenges facing Bitcoin in its quest to become a reserve currency is its volatility. Something that can make it difficult for governments to rely on BTC as a stable store of value.
On the other hand, the hard cap on Bitcoin’s supply can make it challenging for the king coin to meet the demands of the global economy.
Moreover, thanks to crypto-related debacles (recall LUNA, FTX), cryptocurrencies might find it hard to be in the government’s good books.
Simply put, the conversation around Bitcoin and its status as reserve currency looks pretty superficial at the moment. In reality, except for narratives, there are no stats or data sets to prove that the king of the crypto world can overtake the dollar.
In conclusion, only time will tell whether Bitcoin can ever become a truly global currency and a viable alternative to the dollar as a reserve currency.