Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
The dominance of the US dollar cannot last forever, and for some economists, the fate of the world's de facto reserve currency is fast coming to a close. But if the greenback's hegemony does collapse, what will take its place? For many, the answer to that is bitcoin. Here's why.
For over 75 years, the dollar has acted as a global reserve currency. In 1944 the Bretton Woods agreement marked the beginning of a dollar-driven global supplantation of the gold standard. The deal saw hundreds of delegates from central banks all over the world assenting to maintain fixed exchange rates between their currencies and the dollar. Meanwhile, the dollar was still fastened to gold. That was until 1971 when president Nixon cut the greenbacks ties to gold—solidifying the dollar's hegemony.
A Global Currency Reset
Without ties to the circulating supply of a stable asset, the US has been able to print dollars indiscriminately. Coincidence or not, in the years since 1971, consumer prices have risen exponentially.
So, too, have global instances of banking crises.
Meanwhile, the dollar has continued to depreciate.
Much macroeconomic academic research has been dedicated to understanding what exactly went awry since 1971. For many, the answer lies in the significant reordering of the global financial system.
Arguably, in hindsight, the gold standard system functioned well. It did so for several centuries before its abolition in 1971. Consequently, over the years, several economists and analysts have proposed a return to a gold standard—or at least some variation of it.
Jim Reid, Global Head of Thematic Research at DeutscheBank, is one such analyst. As part of a 2019 paper authorized by DeutscheBank, Reid proposes that fiat currencies are on their way out, soon to be replaced by something else. Not only does the paper cite the innate inflationary issues with a lack of a standard system, but the tendency for governments to create excess money from thin air as well—something that is particularly prescient given current economic turmoil.
The paper reads:
"The forces that have held the current fiat system together now look fragile and they could unravel in the 2020s. If so, that will start to lead to a backlash against fiat money and demand for alternative currencies, such as gold or crypto could soar."
The Bitcoin Standard
Rather than a return to a gold standard, the rise of bitcoin in the last decade has prompted a new school of thought: a global currency reset with bitcoin at the helm.
One prominent piece of research into bitcoin as a global reserve currency comes from the late analyst and bitcoin bull, Tyler Jenks.
Jenks boldly proposes that bitcoin could provide the world with a stable global reserve currency incapable of inflation or deflation.
While a presumptuous claim to make, Jenks isn't alone.
The analyst draws on the seminal work of economist Saifedean Ammous—namely his book The Bitcoin Standard. Within the book, Ammous defines bitcoin's role in supplanting gold's historical position.
Ammous takes an antithetical stance to Keynesian economics—a theory advocating for increased governmental intervention in the financial system. Instead, Ammous suggests that the absence of central government interference within bitcoin makes it the perfect fit as a dominant reserve currency.
This disconnection from any national government agenda bolsters bitcoin as a global reserve currency because it means the assets can overcome the Triffin Dilemma. The dilemma refers to the conflicting interests between the national and global consequences of monetary policy in the country where the reserve currency originates. Speaking during a Q&A session, David Andolfatto, senior vice-president of the Federal Reserve Bank of St. Louis, noted the potential for a cryptocurrency like bitcoin to solve this predicament:
"If a private cryptocurrency were to replace a given world reserve currency, this would eliminate the dilemma for that currency."
Bitcoin: A Global Reserve Currency?
While there's no application form to become a reserve asset, there is one prevailing criterion: hard currency.
A hard currency is any widely traded asset that acts as a stable store of value. While bitcoin hasn't traditionally been seen as stable, research reveals that its volatility has shown a significant decline over its lifetime.
Moreover, a 2019 report from Bayern LB, one of Germany's premier banks, observed that due to its "stock-to-flow" model, Bitcoin represents "ultra-hard money."
The report leverages prior research from Ammous' book, The Bitcoin Standard, as well as pseudonymous bitcoin analyst PlanB and his work on bitcoin's "stock-to-flow" model.
The stock-to-flow approach is an analytical method generally used within commodities such as gold and silver. The "stock" represents the circulating supply of assets, and the "flow" denotes annual production. Combined, these metrics provide a ratio to quantify the "hardness" or scarcity of an asset.
When applied to Bitcoin, the model presents a strong correlation between the rising market value of Bitcoin and its SF ratio.
The report submits that due to its quadrennial halvings and the supply shocks the event brings, bitcoin's SF ratio—and thus its perceived hardness—is only set to increase. The bank concluded that bitcoin was created to be an "even harder asset than gold":
"Nobody really knows what repercussions such a monetary standard would have. Only one thing is clear: if bitcoin is indeed to become the money of the 21st century it will be because of its properties (above all its high degree of hardness)."