Recently, China and Brazil reached an agreement to reduce their dependence on the US dollar and conduct trade in their own currencies. In fact, China already has similar currency deals with Russia, Pakistan, and several other countries. The development shows how the dollar’s role in global markets has declined dramatically over the years.
In 2010, the dollar and euro accounted for 63 percent of total foreign exchange transactions, according to the Bank for International Settlements (BIS). The dollar’s role as the global reserve currency was especially strong at the time.
However, if we look at official FX reserve data for Q4 2021 and Q4 2022, we can see that the dominance of the US dollar has declined significantly. In other words, the U.S. dollar is not as strong as it once was as the world’s primary reserve currency.
Let’s study the diagram below:
Source: International Monetary Fund
Therefore, it is undeniable that confidence in the US dollar seems to be declining. After the Russo-Ukrainian war, sanctions against Russia became the primary issue. Sanctions imposed on the Russian Central Bank have led to reductions in dollar, euro and yen reserves.
according to Van EckSanctions on Russia have reduced demand for currencies such as the dollar, euro and yen as reserve assets, “while increasing demand for currencies that can function as reserve currencies,” said a prominent global investment manager.
In fact, in a 2022 report, VanEck explained where the framework for analyzing Bitcoin’s value would end up if it were to be used as the world’s reserve currency.
The framework assesses:
“Gold is around $31,000 an ounce and Bitcoin has an underlying price of around $1,300,000 per coin. Adjustments to greater pressure on the financial and monetary system create higher prices.”
Not only investment managers, but even some venture capitalists believe that Bitcoin has the potential to become a global reserve currency in the distant future.
Consider this: In a recent podcast with Anthony Pompliano, famed venture capitalist David O. Sacks, has ended:
“Essentially, there are three currencies that grow big enough — one is the dollar empire, then China and the yuan. Finally, bitcoin and the crypto world. Those three are probably big enough to be some sort of world reserve currency.”
Now, the pertinent question here is – can Bitcoin overtake gold in earning the trust of global central banks? To answer this question, we first have to delve into the historical importance of gold.
Is Bitcoin Fit for a Gold Standard?
Remember, JPMorgan Chase said in his congressional testimony in 1912: “Gold is money. Everything else is credit.” linked to gold.
At the end of World War II, the United States held most of the world’s gold because it was paid for in gold by other countries during the war.
At Bretton Woods, two factions decided to peg world currencies to the dollar, which was then pegged to gold. This system existed until 1971, when most currencies switched to the floating exchange rate system that still exists today.
Despite abandoning the gold standard, central banks continued to hold large reserves of gold, accounting for about one-fifth of all mined gold reserves.
Having said that, some people may wonder why gold is considered a store of value. Mainly due to the limited supply of gold which, unlike other metals, is both durable and difficult to produce.
If we look closely, we can see that there are four factors that enhance the value of gold, including: supply, durability, ease of use, and a relevant story.
What about Bitcoin?
In recent years, several major institutions such as Tesla, Square, and MicroStrategy have entered the Bitcoin market one after another. This shows that even traditionally conservative investors are starting to see Bitcoin’s potential as a store of value.
In addition, more and more companies accept bitcoin as a payment method. Major retailers include Microsoft, PayPal, and Overstock, among others. If more businesses follow suit, it could help increase Bitcoin’s legitimacy.
Bitcoin is based on an immutable technology that makes this digital asset inherently sustainable. Also, the ease of using Bitcoin in the financial world is indisputable compared to gold or dollars.
As we all know, the decentralized nature of Bitcoin makes for seamless global transactions. Countries looking to reduce their reliance on the dollar as a reserve currency could seriously consider the “king of currencies” as an alternative.
Now, coming to the story of Bitcoin, it really brought a revolution to the world of finance. Apparently, the cryptocurrency investment acceptance curve is also trending upwards.
For example, according to Crypto.com, more than 10% of global internet users may own some form of cryptocurrency. This just highlights the changing preferences of global investors.
Arguably, however, one of the biggest challenges Bitcoin faces in its quest to become a reserve currency is its volatility. This could make it harder for governments to trust bitcoin as a stable store of value.
On the other hand, a hard cap on bitcoin supply could make it difficult for the “king of currencies” to keep up with the demands of the global economy.
Furthermore, in the wake of crypto-related scandals (remember Luna, FTX ), cryptocurrencies may struggle to win the trust of governments.
In short, the current debate over Bitcoin and its reserve currency status seems rather superficial. In fact, there are no statistics or data sets to prove that the king of the crypto world can surpass the US dollar, other than stories.
All in all, only time will tell if Bitcoin can become a truly global currency and a viable alternative to the US dollar as a reserve currency.
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According to AMBCrypto