Bitcoin - the leading currency of the cryptocurrency world – is on everybody’s mind with searches for Bitcoin and its derivatives trending at an all time high. The phrase “Buy Crypto” accumulated a comprehensive maximum score of a perfect 100 on Google trends in Feb 2021 along with record high scores for Bitcoin and Ether. Going by the noise alone, it may seem the decade old conquest of ushering a global digital currency system may be gaining mainstream popularity, supported by almost all cryptocurrency and stable coins hitting record high trade volumes and prices. However, as has often been the case with Bitcoin and other cryptocurrency, appearances can be deceptive and there are a lot of contrary happenings going on beneath the scene.
The (digital) trust in the banking system is at an all time low ever since the 2008 global financial meltdown and cryptocurrencies have risen up in response to provide an alternative currency system that is much more democratic and indifferent to manipulation. The cryptocurrencies were created in response to banking excesses is beyond doubt – the first ever bitcoin block mined, the Genesis block, contains the ominous text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". Cryptocurrency has been always seen as a fair and just system of currency which is not controlled and manipulated by the Big Banks. Ever since the Global Financial Crisis investors and companies alike have accepted the cryptocurrencies with open hands. Though there are some regulatory troubles with each currency but it isn’t damping any interests of the investors.
Two very important events took place in the 1940s – the Yalta conference which reorganized the world into the Soviet bloc and the NATO bloc and the Bretton Woods conference which created a financial order called the Bretton Woods system. This financial order not only enabled the creation of the IMF and the World Bank but also ensured the rise of the US dollar as the global reserve currencies. Over 44 countries decided to peg their exchange rates against the US dollar which in turn was fixed to gold at $35/ounce setting the stage for the dollar to be ‘as good as gold’ all over the world.
This set the stage for half a century of American exorbitance as the US Fed printed dollars to match the Soviet space race, fight wars in Vietnam, Korea and Iraq and to avert multiple economic crises at home. This system came to a huge standstill in 2008 with the global financial crisis wiping out over $10 trillion in value all over the world. This brought the calls to abandon the dollar as the global currency out from the conspiracy fringes and into mainstream discussion.
Since its inception Bitcoin has witnessed a tremendous growth, its growth has been halted by bubbles and driven by events such as bitcoin halving and adoption by technology companies as an asset class. Bitcoin crossed $1 valuation per unit (Satoshi) in 2011 and currently stands at $ 56,874.80 as of March 2021 – a phenomenal rise of 56000% in just one decade with all time high trade volumes of $3 billion daily. This growth triggered the emergence of a whole basket of cryptocurrencies – like Binance coin, Ethereum, Litecoin with some cryptocurrency working on completely different technology than Bitcoin like EOS.io or Tether which is backed by fiat dollar. The top 5 cryptocurrencies traded today hold capitalisations of more than $ 2 trillion. From misbehaving banks being too big to fail we have reached an era where cryptocurrency is now too big to ignore.
Does that mean the future world reserve currency will be something other than the US dollar – the answer experts say is both yes and no. Having the printing press to produce the world’s dominant currency is the most important asset in the world and the Fed is not likely to let that advantage slip away without a fight. It is worthwhile to note the price of Bitcoin has reached record highs when events occurred that drove down the price of the dollar such as the US Capitol rights, Bitcoin thus seems to be gaining at the expense of the value of the dollar and not despite of it. However, writing off the dollar may be a fool’s errand, it has witnessed bigger selloffs in the past and still maintained its status as the global currency reserve – the latest examples being the fall triggered in the aftermath of the Lehman bankruptcy and the record firesale of US dollar denominated bonds after the emergence of the coronavirus pandemic.
Knocking the dollar off its pedestal may not even be in the best interest of most countries as most notable economies around the world hold tremendous amount of US Treasury securities as foreign exchange reserves. Japan and China together hold $2 trillion of these securities out of a total of $7 trillion held worldwide, a huge amount that would be worthless if the dollar loses its value to digital currencies.
This new arrangement may seem as strange to us, as the movement away from in ‘Gold we trust’ to ‘In God we trust’ of the US currency may have seemed to economists in the 1940s, as economist Tyler Cowen comments – “Every era’s monetary institutions are virtually unimaginable until they are created.”
We will have to wait and watch how the monetary systems accepts alternative currency to the US dollars.
1.Satoshi Nakamoto Bitcoin: A Peer-to-Peer Electronic Cash System
2.Ioannis Tsoumanis ‘Can a cryptocurrency become the next global reserve currency?’. Master Thesis Economics of Management & Economics, Erasmus University, Rotterdam
3.‘Bitcoin and beyond: Cryptocurrencies, blockchains, and global governance’. RIPE Series in Global Political Economy, Taylor and Francis.
4.Aleksander Berentsen, Fabian Schär ‘A Short Introduction to the World of Cryptocurrencies’. Federal Reserve Bank of St. Louis
5. Digital currencies and the future of the monetary system – Hoover Institution policy seminar
Prof. Sangram Jagtap
Assistant Professor,
DR V N BRIMS, Thane
Also read : Learning while losing
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