The dominance of the dollar cannot last forever, and in the view of some economists, the dollar’s status as the de facto world reserve currency Fate is rapidly approaching its end. But if dollar hegemony does collapse, who will replace it? For many people, the answer is Bitcoin. This article will explain why.
For more than 75 years, the U.S. dollar has been the global reserve currency. The Bretton Woods Agreement of 1944 signaled that the dollar Begins to replace the gold standard globally. Hundreds of representatives of the world’s central banks reach an agreement to maintain a fixed exchange rate between the local currency and the U.S. dollar. Meanwhile, the U.S. dollar remained gold and bound. Until 1971, Nixon severed the link between the dollar and gold, thus consolidating the dollar’s hegemony.
The dollar is not tied to the supply of stable assets, so the U.S. is able to print dollars at will. Coincidentally or not, consumer prices have increased exponentially since 1971.
Since 1971, much macroeconomic research has been devoted to figuring out what went wrong. Many studies have argued that the answer lies in a major change in the global financial system.
In hindsight, the gold standard could have worked just fine. It worked for centuries before it was abolished in 1971. As a result, there have always been a number of economists and analysts over the years who have suggested a return to the gold standard, or at least a variation of the gold standard.
One such analyst is Jim Reid, global head of thematic research at Deutsche Bank. In a 2019 paper that Deutsche Bank authorized him to publish, Reid said that fiat currencies are fading away and will soon be replaced by other currencies Substitution. Their thesis not only cites the problem of innate inflation due to the lack of a native system, but also notes that governments also tend to print money out of thin air. This is particularly prescient given the current economic turmoil.
The article states.
“The forces that bind the current fiat currency system together look fragile now, and they could disintegrate in the 2020s. If so, this will lead to a strong rejection of fiat currencies, and demand for alternative currencies such as gold or cryptocurrencies could soar. ”
bitcoin standard (computing)
Instead of restoring the gold standard, the rise of Bitcoin over the past decade has prompted a new wave of thinking about a Bitcoin-led global currency reset.
One important study looking at Bitcoin as a global reserve currency comes from the late analyst and Bitcoin multi-tasker Tyler Jenks.
Jenks boldly suggested that Bitcoin could provide the world with a stable global reserve currency that cannot be inflated or deflated.
While this idea may seem like an overstatement, Jenks is not alone.
The analyst draws on economist Saivedean Ammous’ seminal book, “The Bitcoin Standard” ( (The Bitcoin Standard). In this book, Ammous defines the role of Bitcoin in replacing gold’s historical position.
Ammous stands in opposition to Keynesian economics, which advocates increased government intervention in the financial system. Instead, Ammous argues that central governments cannot intervene in Bitcoin, which makes it ideal as a major reserve currency.
The lack of connection between Bitcoin and any national government promotes Bitcoin as a global reserve currency because it means that such a Assets can overcome the Triffin Dilemma (Triffin Dilemma). The Triffin Dilemma refers to a conflict of interest between the monetary policies of reserve currency countries in their own countries and globally. David Andolfatto, senior vice president of the Federal Reserve Bank of St. Louis, noted in a question-and-answer session that countries like Cryptocurrencies like Bitcoin have the potential to solve this conundrum.
“If a private cryptocurrency replaces some world reserve currency, it will eliminate the dilemma of that reserve currency.”
Bitcoin: a global reserve currency?
Although one does not need to apply to anyone to become a reserve asset, there is one universal criterion: hard currency.
Hard currency is any widely traded asset that can act as a reserve of stable value. Although bitcoin has traditionally been considered unstable, studies have shown that its volatility has declined significantly throughout its lifetime.
In addition, a 2019 report by Bayern LB, one of Germany’s leading banks, notes that bitcoin is a “super hard currency” based on a “stock-yield” model.
The report draws on Ammous’ book “The Bitcoin Standard” and the work of anonymous bitcoin analyst PlanB on the “stock-yield” model of bitcoin.
The stock-yield method is an analytical method that is commonly used in commodities such as gold and silver. The “stock” represents the amount of assets in circulation and the “yield” represents the annual production. The combination of these indicators provides a ratio to quantify the “ease of production” or scarcity of an asset.
When the “stock-production” model is applied to Bitcoin, the results show a strong correlation between Bitcoin’s market capitalization and its SF ratio.
The report argues that the SF ratio of bitcoin and the resulting impact of a halving of bitcoin’s four-year term and the lesser supply that comes from it The “difficulty of production” of bitcoin is already set to increase. The bank concludes that bitcoin will become “a scarcer asset than gold”.
“No one really knows what the implications of this currency standard will be. Only one thing is clear: if Bitcoin does become the currency of the 21st century, then its characteristics (primarily high scarcity) That’s why.”