Will Bitcoin Be a Reserve Currency?
Such has been the success of cryptocurrencies that some are already wondering whether Bitcoin will be a reserve currency. The argument may be premature. The Romans used coins widely in antiquity, but they weren’t the first. The ancient Greek historian, Herodotus, says that the pioneers of coins were the Lydians, who lived on the western edge of present-day Turkey. They used coins to acquire goods in veritable retail shops. But it took hundreds of years to spread the idea of coinage and money, let alone the concept of Bitcoin as a reserve currency.
A reserve currency is one that governments and large institutions hold. It maintains its status by remaining the currency of choice to acquire goods that are sold in a large—in the present, we would call it a global—market. Thus, precious industrial metals and minerals are priced in dollars, as are oil and many other commodities including food such as wheat or corn. The U.S. dollar is the dominant reserve currency. But this is a relatively recent phenomenon. It has taken some 50 years for the dollar to rise to its present importance.
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The Bretton Woods Agreement—so named because it was signed in the small town of Bretton Woods, New Hampshire in 1944—established a global monetary and exchange rate system such that all international currencies were to be convertible to U.S. dollars. The dollar was also to serve as the currency of choice for all international or bilateral transactions. The dollar is not alone. The euro, the Swiss franc, and British pound have all been recognized as reserve currencies.
Of course, in a strict sense, any currency could serve as a reserve currency—that is, to enjoy full convertibility and acceptance everywhere. But because of market and political forces, only a few have the privilege. In 2016, the Chinese yuan was the latest to join the exclusive reserve currency club for the International Monetary Fund (IMF).
Given China’s economic and political ascendance—especially as the United States retreats—there’s a good chance that the yuan may one day replace the U.S. dollar as the leading reserve currency. One of the signals of such a shift would come if China ever manages to buy oil in yuan. But it will still take many years to dismantle the dollar-centered monetary system. Because of its importance, all major countries hold significant quantities of U.S. dollars, contributing to the stability of its demand. No wonder it accounts for almost 70% of the world’s reserve currencies.
Bitcoin Price Prediction 2030
It’s unclear how Bitcoin would fare in all this, given that stability of value is one of the key characteristics of a reserve currency. Consider that on January 9 alone, in the wake of the massive surge of Bitcoin at the end of 2017, the famous cryptocurrency rose by some $1,000 only to lose it again before the end of trading on January 9.
Meanwhile, who’s to say that Ethereum, another of over a thousand cryptocurrencies circulating for your attention, won’t be a reserve currency? After all, as Bitcoin struggled, Ethereum gained. Thus, rather than engaging in fruitless exercises like predicting the value of Bitcoin in 2030, let’s consider first if Bitcoin will be around in 2020—or 2018 for that matter.
Of course, the dominance of gold is not beyond question. It presents a certain irrationality. But it has behind it the strength of time and endurance. It’s also a valuable metal for artistic and industrial uses. So it has a life beyond serving as a tool to determine value in exchanges of goods and services.
Will Bitcoin Become a Global Currency?
Thus, to expect Bitcoin to be considered for reserve status, it would have to prove that same characteristic. Bitcoin would have to acquire the status of gold. The chances of that happening seem too slim to ponder the issue. Bitcoin was the first cryptocurrency, but new ones are literally “coined” every day. Thus, the question of whether Bitcoin will replace the dollar doesn’t even present itself.
There are many economists and investors—Warren Buffett among them—who feel Bitcoin is a bubble the likes of which have not inflated since the Tulip Mania implosion of 1637. Like bubbles—and many penny stocks—only the first to invest have a chance to come out alive and richer. The majority will be taken for a ride.
The government of China has banned Bitcoin trading. Japan has issued significant warnings about its stability and validity as an investment. (Source: “From China to Singapore, Asian countries are increasingly uneasy with the rise of bitcoin,” CNBC, December 22, 2017.)
Therefore, given the importance of Asian markets, Bitcoin or any other cryptocurrency has little chance of earning the trust it needs to serve as a reserve currency—let alone the largest for the next decade.
The dollar earned its reserve currency status in 1994 because it had the most stable economy amid the disruptive disaster that was World War 2. The U.S. paid a huge price during the war, losing thousands of soldiers in battlefields from Europe to Japan. But unlike most of western and eastern Europe, the Soviet Union, Japan, or China, it did not have to reconstruct. Its political and financial infrastructure remained intact. In other words, the equation that sustained the dollar was that it was as good and stable as the value of gold.
Bitcoin Is Modern Alchemy
Note that Bitcoin’s targets, as its “coin” image suggests, are the dollar and gold. It’s no accident that the Bitcoin symbol looks like a gold coin with a B crossed by two lines—like the $ symbol. I don’t believe that’s a coincidence.
When I first learned of Bitcoin, I thought it was a toy, a new “Monopoly” board game that used coins instead of the latter game’s famous paper bills. The more I learned about Bitcoin, following its galactic rise, the more I noticed how it mimicked gold in its terminology. After all, there are thousands of people “mining” bitcoins. Yet, unlike gold, there are no mines. It’s all virtual.
The most intriguing aspect of bitcoins is their artificial scarcity. There are now some 16.8 million bitcoins in “circulation.” There’s a set limit of 21 million. (Source: “Bitcoin breaks through the $16,000 mark,” BBC, December 7, 2017.)
Of course, you can bet that a good chunk of those is “owned” or controlled by a handful of people/accounts and you can double down on the fact that they were among the first to adhere to the Bitcoin concept. Those first holders are the ones who stand to gain. The dollar and gold are far more spread out, which is why their hold as tools to determine value and terms of exchange has endured.
Will Bitcoin be the currency of the future? For now, as noted, Bitcoin’s very future is in question. It’s rather a bubble and it risks a sudden and violent deflation at any moment. Bitcoin is to gold what alchemy is to chemistry.
Alchemy sought to create gold from base metals. It was a deceitful pursuit in some ways. But, even as it failed—of course—it left us the tools to build modern chemistry. Indeed, alchemy merely means “chemistry” in Arabic (the Arabs were the first to practice the art). Thus, the technology behind Bitcoin and the so-called blockchain will no doubt play a role in future monetary systems, perhaps digital evolutions of existing currencies or gold itself.
