As it stands today the United States dollars is the world’s reserve currency. When someone in Russia, China, Argentina, Zimbabwe or Thailand wants to store their money safely, they convert their local currency into the dollar. Why? The dollar has attained this lucky status for several reasons. One, it is backed by the power of the United States military. The largest air force in the world is the US air force. The second largest air force in the world is the US navy. That military secures trade routes, threatens countries into cooperation and generally creates faith in the dollar. He who has the biggest stick…
The second reason for the dollar’s dominance is prudent management. Some countries inflate their currencies so horribly that you end up with excesses like the hundred-trillion-dollar bill or tote bags filled up with worthless banknotes. Those are extreme examples but in less drastic ways plenty of countries have abused their presses, printed too much money. The result is that their currency inflates faster than it should. For the most part, at least so far, the United States has avoided this trap. While the Federal Reserve is well-known for its somewhat indiscriminate quantitative easing (QE), they have been careful enough to manage the printing of the dollar so that it maintains its value in the long term.
A strong military plus responsible fiscal policy has been enough to guarantee a United States dollar hegemony for more than half a century. The question we must now ask though is: can that hegemony be broken? Specifically, could it be broken by the bitcoin exchange?
Why Does the World Want it Broken?
One of the primary reasons why the world is ready for a new reserve currency is that the dollar hegemony primarily benefits America. Thanks to its widespread adoption the Federal Reserve isn’t just setting fiscal policy for the USA, they’re (to some extent) setting policy for the world. Rate cuts, rate hikes, QE and so forth all have a direct effect on the global economy. The Fed, naturally, can take advantage of that to shape policies that benefit America. Also, there is the thorny issue of the $23,000,000,000,000 in outstanding debt that the USA owes the world.
J. Paul Getty has a famous quote alluding to the difference between owing the bank a small amount of money and owing tens of millions of dollars to it. Taking inspiration from that quote we could say, “If you owe the world $23 billion you have a problem. If you owe them $23 trillion they have a problem.”
The threat of a default on US government debt, however unlikely, cannot be ruled out. With so much money owed to its creditors, the United States is actually in a strong position to dictate the terms on which that debt will be serviced. So, why do foreign countries keep buying up American debt? They do it because it’s still seen as the safest asset to own. However, if there was another currency that was even safer, dozens of countries would begin to invest in this alternative option.
The second problem with a dollar hegemony is that it allows the United States to weaponize the dollar. Given the interconnected state of the global economy getting cut out can be devastating. Sanctions can cripple an economy, restrict its access to goods and services and generally make it difficult for a country to compete in the global market. That’s why it can be so detrimental to an economy when the United States levies sanctions. North Korea, Iran, Cuba, etc. All cut off from the financial system. That means they cannot invest in foreign derivatives, transfer money abroad or keep their reserves in foreign accounts. Determining whether these sanctions are justified or not is beyond the scope of this article, however, the naked truth is that the USA can and does use the dollar to bully other countries. Those countries being bullied are sick of it and would gladly welcome any alternative currency which could break the US dollar hegemony.
How Could Bitcoin Break the Hegemony?
More so than any other cryptocurrency, Bitcoin could become the asset that dethrones the United States dollar. It’s the most adopted of all cryptocurrencies and with its huge mining network, it’s the most secure. It also has the longest track record. Bitcoin has been around for more than a decade and it’s still going strong. But how could it break the dollar? Slowly, then quickly.
The first thing that must happen is that individuals, institutions, and governments continue to invest in Bitcoin. It must reach a critical mass for the network effect. It’s estimated that currently, only 1% of people on the planet own any Bitcoin. However, that number must grow. The next step, which is the one that many people say is inevitable, is that a government must switch to a Bitcoin backed currency.
In the 1900’s we had the gold standard, going forward there should be the Bitcoin standard. The first country to switch will most likely be a minor economy with a weak currency, possibly a currency that’s already pegged to the dollar so that the switch to Bitcoin is an intuitive next step. From there other countries must begin to adopt the Bitcoin standard. As this happens the demand for Bitcoin, which will now truly be seen as digital gold, will skyrocket.
At some time in the future, the tipping point will be reached, Bitcoin will begin to become accepted as a national currency and if it’s possible that the demand would be great enough to outstrip the demand for the United States dollar. This would not be a fast process, it could easily take a decade or two if it happens at all. However, it could happen… And that’s an exciting prospect to consider. With Bitcoin, people can put their trust in math over bankers, code over voodoo economics. Bitcoin will probably never replace all national currencies as some maximalists claim. Therefore, the question is could it become the world’s next reserve currency? A lot would have to go right for that to happen but the answer, fortunately, is yes.