Could Bitcoin Actually Replace USD as The Prominent Global Currency?

The Bitcoin vs. USD debate has been popping up in the media and Reddit since at least 2007, when people realized that BTC can actually be worth a lot of money.  In this post, I’d like to focus on two aspects of the debate:

1) The maximalist arguments for why BTC will replace the dollar;

2) The actual chances that the USD crashes in the near future.

I won’t attempt a systematic classification of all the arguments that the Bitcoin proponents use, but you could roughly divide them in four partially overlapping groups:

- The economy is going to the dogs, and crypto is the only thing that can fix it;

- The USD in itself is flawed;

- Bitcoin rarity and preciousness cannot be ignored

- Bitcoin is great, and soon everyone will see it.

Let’s examine these arguments one by one and see if they hold water (spoiler: I believe they don’t).

The argument goes along these lines: we are facing a growing mountain of debt coupled with high inflation. The government keeps pumping billions in unbacked money into the economy, and corporations are gorging on cheap debt. Stock prices are forming a huge bubble, while consumers see inflation erode their income. Soon there will be a huge crash, the dollar will lose credibility, and BTC will take its place.

The last thing Bitcoin needs is an economy-wide collapse. Before the USD crashes, other markets have to go into a nosedive – first and foremost stocks.

We’ve already seen what happens when stock prices start falling suddenly: remember the ‘black swan event’ in March 2020? Leveraged traders had to sell off their assets (including crypto) for cash to avoid liquidations on stocks. This initial sell-off triggered a cascade of liquidations in the crypto derivatives market, and the price of BTC dropped by 40% in a day as a result.

Something similar, but on a much smaller scale, happened this September, when the traders holding Chinese real estate stocks had to cover their positions, and BTC ended up losing 7%. The takeaway is that when stocks dump, crypto dumps harder; and for the USD to really dump, you’d need the US markets to dump first, which would spell doom for crypto, at least in the short term. However, even if we see a strong correction, crypto will recover faster than stocks and even take over some of the market share from the traditional markets - especially if there is positive news, like approval of ETFs, more investment firms offering crypto products to their clients and so forth.

The argument in a nutshell: the USD has been losing its purchasing power for the past 100 years. It’s going to be worth less and less, because it’s ultimately paper not backed by any real assets. The government prints dollars out of thin air and dupes you into believing it has value. It’s also a weapon that subjugates poorer nations to the US economic dominance. But soon the dollar will lose its value completely – and everyone will see it for what it is and switch to BTC.

It’s true that $1 in 1913 is equivalent to $26 today. Over the course of the 20th century, the government continually increased the money supply to finance wars: WWI, WWII, the Korean War, and the Vietnam war. Next came the 2008 financial crisis, when the Fed injected a lot of money into the system to help struggling companies; and finally, the Covid-19 pandemic.

However, there is no reason why a currency’s value shouldn’t fall over time. The US dollar isn’t unique in this: the British pound, the Swiss franc, the Rouble – all have lost a serious chunk of their purchasing power over the decades. In fact, moderate inflation is a sign of a healthy economy – and decreasing purchasing power is simply the other side of the same coin. 

By contrast, when there isn’t enough money in the economy, the opposite happens: deflation. It has a negative effect on the economy, leading to lower spending, weakening production, layoffs, etc. If society were to switch from fiat money to crypto, we’d need to ensure that there’s enough crypto supply to keep the economy going – or we might face a serious deflation-induced recession.

It’s attractive to think that Bitcoin and other coins are somehow ‘deflationary’ while the USD is ‘inflationary’ – but that’s exactly why they may not be a good replacement for the good old fiat.

We should also remember that, regardless of the dollar’s possible flaws, current governments will not do anything to hurt its positions, because it’s the foundation of the global economy - and their power. The only way for crypto to obtain an ‘official’ role is if the new generation of politicians actively promote it. The Mayor of Miami Francis Suarez with his MiamiCoin and the idea to lure BTC miners is a good example.

Here the focus is on investment value rather than a currency’s role as a means of payment. BTC’s total supply is limited to 21 million, out of which 18.8m have already been mined, and up to 20% of these are lost forever. As people realize how rare/scarce BTC is, more and more capital will flow into it, making Bitcoin the most coveted asset on the planet. 

The last Bitcoin should be mined around the year 2140, so there is no risk of a supply crisis just yet (though Crypto Twitter loves the phrase). As for Bitcoin’s potential value, it can definitely keep rising – but this won’t help BTC replace the dollar. It’s actually the opposite: the more 1 BTC is worth, the more it will turn into a pure investment asset – something that people don’t want to spend. It will become more like gold than like universal currency. 

This is the most idealistic argument of all. Bitcoin is just superior: it’s decentralized, it’s not controlled by any nefarious central entity, its supply curve is very predictable, and so on. Bitcoin will make the existing financial system obsolete, and it (the system) will transform itself to adapt to crypto. It’s programmed. 

I do agree that Bitcoin’s code is a work of genius and possibly one of the most important innovations of the 21st century, like the creation of the World Wide Web by Tim Berners-Lee in 1989. But in and of itself it’s not enough to make BTC the universal currency, because decentralization and supply predictability isn’t what most people value most. 

You have to think of regular consumers in different regions of the world and what they want from money in their everyday life. Low  transaction cost, speed, stable value, universal acceptance – all the things that Bitcoin doesn’t have. Cryptos like XLM or XRP are perhaps closer to the ideal, but acceptance will remain a huge problem for many years. Being decentralized and fair isn’t enough: digital money needs to become as easy to use on the day-to-day level as fiat, and right now it’s just not the case. 

So far we’ve been looking at theoretical scenarios, but some analysts are warning that the dollar will crash as soon as next year. Indeed, the global reserve system may see some changes, and the dollar’s influence could very well diminish, but I would argue that we won’t see any drastic devaluation of the greenback against other currencies – at least not in 2021 or 2022. There are two reasons for this.

1) Tapering is coming. Throughout the pandemic, the Federal Reserve has pursued the policy of quantitative easing (QE), buying $120bn worth of assets monthly to keep the interest rates low and support the economy. Now the Fed is planning to taper the QE program, meaning that it will spend less and less on asset purchases. This will slow down inflation and – even more importantly - put investors in a risk-off mood, which favors the dollar as a risk-off asset.

2) Other economies look worse. China has a real estate crisis on its hands that could spread to other areas; Europe is taking a long time to recover from the effects of the pandemic, etc. Comparatively speaking, the US is in a better position, and so is the dollar. 

Economic recovery will take a long time, and the first real interest rate hike in the US won’t happen until late 2022. Meanwhile, the crypto industry has a lot to process, too. The rise of interoperable smart contract platforms like Polkadot, Avalanche, and Solana can cause a fundamental shift in how investors view Bitcoin. If Ethereum comes close to flipping BTC (though it’s unlikely to happen in 2022), the BTC vs. the USD debate might even become irrelevant – and in the meantime, it will be a very interesting space to watch.