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A Bitcoin World Reserve Currency. Is It Really Possible?

By November 7, 2018 No Comments

A Bitcoin World Reserve Currency is More Realistic Than You Might Think

It sounds unbelievable. Implausible. Even ludicrous. But is a Bitcoin world reserve currency really that fantastical? Or does the whole idea have a solid ground in reality? Many people truly believe there’s a strong possibility for the cryptocurrency to emerge as a U.S. dollar competitor.

This isn’t a conspiracy theory…

I think we need to clear up that this post is not talking about a one-world currency implemented by a tyrannical one-world government. We are genuinely evaluating the possibility for a Bitcoin world reserve currency to replace the U.S. dollar as the reserve currency.

Not in the mood for reading? Here’s our video version:

What is a ‘World Reserve Currency’?

Before we get into the likelihood of a Bitcoin world reserve currency, let’s take a look at what this really means. A world reserve currency represents a particular country’s domestic money that is widely held by other countries. However, a ‘reserve currency’ and a ‘world reserve currency’ are two slightly different things.

Wikipedia tells us a reserve currency is one that is held in large amounts by a government or institution. The money is held by these entities for their foreign exchange reserves. Essentially, this would be a central bank or other authority holding the cash to pay their debts.

Conversely, a world reserve currency is money that is held in large amounts by many different entities – both countries and institutions. Right now, the U.S. dollar is the #1 world reserve currency with the Euro at #2. These are the only major world reserve currencies at this time, but the Chinese Yuan is hot on their heels.

Image of top world currencies is it pertains to a bitcoin world reserve currencyA Quick History Lesson

Reserve currencies go back as far as the 17th century. The Dutch guilder was the reserve currency throughout Europe during the 17th and 18th centuries. Interestingly, this was shortly after the period of tulip mania.

Tulips in the Netherlands became so popular that prices skyrocketed, leading to an unregulated futures market that eventually crashed. Jamie Dimon, CEO of JP Morgan, referred to Bitcoin as ‘tulip mania’ back in 2017.

During the 19th century and the first half of the 20th century, the pound sterling was the world reserve currency. Within a 20-year period. global reserves of the sterling fell from 55% down to 20% following the emergence of the United States as a global superpower.

How Is a World Reserve Currency Defined?

For a currency to meet ‘world reserve’ status, it has to meet several criteria:

  • It should be stable.
  • The currency must have liquidity.
  • It must be used globally.

Following these criteria, it is logical to recognise the U.S. dollar as a world reserve currency, and it’s been this way for a long time. Currently, the United States is the world’s largest economy, having a GDP higher than that of the entire European Union.

Image depicting the largest GDP's by country as it pertains to Bitcoin World Reserve Currency

USD is the most commonly held currency in reserves today. In fact, two-thirds of the total foreign exchange reserves have been in U.S. dollars. The dollar is also used as the main currency for international commodities markets, such as oil and gold. Even the term, ‘petrodollar,‘ is often used to refer to how much a country is spending on petroleum exports.

The Dollar and the Gold Standard

The gold standard was formed under the ‘Bretton Woods Agreement‘. Sprung into life in 1944, this agreement ensured that the price of the U.S. dollar stayed fixed to the price of gold. What this meant was that the U.S. dollar note essentially was a guarantee for gold, and an equity-based asset. Other countries subsequently pegged the value of their currencies to the U.S. dollar.

Gold is valuable and is also physical, and has been used as a store of value and medium of exchange for over 5000 years.

This gold standard remained during the decades prior to the first World War. Trade between countries was conducted with physical gold used for settlement purposes. Each country conducting trade had an actual stockpile of gold. Naturally, this stockpile would rise or fall depending on the strength of their economies.

On August 15th, 1971, the gold standard ended after then-President Richard Nixon announced the Federal Reserve could no longer redeem dollars with gold. Later in 1976, the price of gold was completely decoupled from the value of the dollar.

Why all the history on the U.S. dollar? Because it’s important to understand how the gold standard fits into the equation of a Bitcoin world reserve currency. When the gold standard was in place, the dollar was backed by an asset. When it was decoupled, the government had to back it. A government backing and declaring a currency to be legal tender is called ‘fiat money’.

Bitcoin is not fiat money. Instead, Bitcoin is a digitally secure asset for transferring value. It’s also a store of value. Bitcoin has the characteristics of both gold and fiat money, as it’s limited in supply, and its price is a function of supply and demand.

He Who Wields the Power

The world reserve currency status for a country’s domestic money yields tremendous power. Think about it, entities around the world are using a single country’s money for trade. They keep it in reserves and use it to settle large debts. Governments often use it as a political and economic weapon or as punishment meted out on countries or companies.

In 2015, a French International Banking group called BNP Paribas violated U.S. sanctions imposed after they laundered $100 Billion USD from Sudan, Iran, and Cuba. These three countries had active sanctions imposed by the United States. The U.S. federal court barred the banking group from engaging in certain U.S. dollar-denominated transactions and fined them $8.9 billion dollars for the affair.

This shows the power of a fiat world reserve currency, but it goes even deeper than that.

The Printing of Money and Inflation

Fiat currency is printed by central banks, just as the USD is minted and regulated by the U.S. Federal Reserve. Contrary to popular belief, the U.S. Federal Reserve is not a government entity. In fact, seven presidentially-appointed board members govern what some consider to be a private, central bank. These board members can make decisions that do not have to be approved by regulators. It is an independent entity.

The Federal Reserve Bank prints U.S. notes according to its evaluation of the economy at any given time. This supposedly controls inflation. The risk is, this can lead to hyperinflation, as seen recently with the Venezuelan Bolivar. That currency has experienced such severe inflation in a short time that the currency has become virtually worthless.

The International Monetary Fund had this to say about the situation;

“We expect the government to continue to run wide fiscal deficits financed entirely by an expansion in base money, which will continue to fuel an acceleration of inflation as money demand continues to collapse. We are projecting a surge in inflation to 1,000,000 percent by end-2018.”

Venezuela is in crisis as the country’s debt continues to grow. Meanwhile, its domestic currency is practically worthless. A Bitcoin world reserve currency could be the solution.

The US Economy and Its Serious Debt Problem

Venezuela’s continuing currency crisis is a case study of how unchecked money printing can cause an economic collapse. Many fear the same could be coming for the United States. Despite the booming GDP following President Trump’s election, the U.S. national debt continues to grow.

Image depicting ratio of US debt to GDP as it pertains to bitcoin world reserve currency

As of today, the U.S. national debt stands at $21.7 trillion. That’s trillion with a T. With a debt-to-revenue ratio of negative 4%, the debt cannot feasibly be paid off.

The fear many economists have is that the U.S. is on the path to a major collapse if it defaults on its debts. Because the U.S. dollar is the world reserve currency, a crash could cause a global economic crisis of never-before-seen proportions. The USD held in reserve by countries around the world could become worthless overnight.

During times of economic duress, investors typically turn to uncorrelated assets, such as gold or other currencies. During the global financial crisis, gold prices went up for two and a half years straight.

Image depicting graph of gold prices during economic duress at it pertains to bitcoin world reserve currency

This is exactly where considering a Bitcoin world reserve currency starts to make more and more sense, especially given the current economic climate.

The Case for a Bitcoin World Reserve Currency

No one party controls Bitcoin. It is fully decentralised. The supply is completely transparent on the blockchain. Even the rate of inflation is publicly available, down to the exact block height. The characteristics of Bitcoin and its proven use-case as a store of value and peer-2-peer currency has been proven for 10 years now.

So could a Bitcoin world reserve currency really happen? And if so, how?

We examined earlier that a world reserve currency needs to be stable, liquid, and used globally. Even in its current early state, Bitcoin is all of those things. Let’s look at some important facts.

  • Bitcoin currently has 30 million wallet addresses and continues to grow.
  • It has a market cap of $100 billion, with its peak hitting $333 billion in December 2017.
  • Bitcoin allows the transfer of significant sums of wealth across borders for near-zero fees.
  • It operates on 24/7 global markets.
  • It’s traded on over 200 markets doing > $4.5 billion in daily trading volume.
  • Bitcoin has new financial products such as Bitcoin Futures (approved) and ETF’s are pending approval.
  • No one has ever hacked Bitcoin.
  • It’s the most secure network of any cryptocurrency
  • Wallets, products, merchants and other services for Bitcoin consumers and businesses are improving by the day.
  • Bitcoin has received SEC clarification that it is not a security
  • Global cryptocurrency regulation is catching up while many projects are building frameworks and infrastructure.

Year after year, Bitcoin continues to grow, expand its infrastructure, and exceed people’s expectations.

The Bitcoin Network Effect

Trace Mayer is a prominent Bitcoin investor, educator, expert, and host of the Bitcoin Knowledge Podcast. Back in 2015, Trace explained his thesis on the 7 Network Effects of Bitcoin. These were:

  1. Speculation
  2. Merchant Adoption
  3. Consumer Adoption
  4. Security
  5. Developer Mindshare
  6. Financialisation
  7. The adoption of a Bitcoin world reserve currency

We know that points 1 through 7 have already occurred or are in the process of occurring. We also know that people invest in Bitcoin speculatively, merchants around the world accept Bitcoin as payment, and consumers are slowly adopting it. The network has stayed secure for 10 years. To this end, developers such as those at Blockstream continue to develop and innovate the Bitcoin protocol. Lastly, we have Bitcoin financial products in the process of creation as we speak.

The final phase of the network effects is the realisation of a Bitcoin world reserve currency. Trace has this to say about it:

Eventually all transactions will be settled on the blockchain, including house titles, stock purchases, car titles, and other monetary instruments and currencies.

Trace’s remarks back in 2015 seem to be right on the money. Today, we know that blockchain projects are building upon Bitcoin developments like Liquid, which is a sidechain that attaches to the main Bitcoin Blockchain allowing for the issuance of new tokens and assets. This one development alone has the potential to bring additional an value to Bitcoin that is hard to quantify.

Image depicting logo of Liquid, as example of projects building upon the Bitcoin Blockchain, as it pertains to possibility of a bitcoin world reserve currency.

In Conclusion

The modern fiat-backed economic system is in dire straits. Rising inflation, global debt, quantitative easing and mismanagement from central banks are all contributing to the demise of the USD. The American superpower is now trillions in debt that it cannot repay.

So where does this leave us for the future?

We don’t know, and it’s risky to speculate. The truth is, we are looking at an uncertain future, but it’s one that is filled with optimism as the popularity of self-sovereign assets like Bitcoin and cryptocurrencies continues to grow. These assets have brought back total control and the self-sovereignty of money, empowering a new and digitally able generation. With the capabilities at our fingertips, it seems only a matter of time before we see a Bitcoin world reserve currency.

Beau is the Founder & Chief Editor at Cryptocurrency Australia Media, an educational platform designed to help anyone learn about cryptocurrency investment and blockchain technology. Beau is also the Founder & Principal Consultant of Blockchain Management Solutions, a specialist technical and project management consultancy, is an advisor with Masternode Ventures, a blockchain incubator, and is an advisor with THORChain, a new decentralized exchange protocol.