The U.S.dollar's global reserve currency status has been weakened.Can Bitcoin pose a serious challenge to it?

The U.S. dollar has been the global reserve currency since the end of World War II and Bretton Woods. Today, more than 59 percent of foreign bank reserves are denominated in dollars, according to the International Monetary Fund. (Note: The Bretton Woods Conference was a meeting held during World War II, which mainly discussed world economic issues.)

However, the dollar's status as the world's reserve currency has faltered somewhat recently.

Last July, strategists at Goldman Sachs argued that the U.S. government's COVID-19 response, including fiscal stimulus and money printing, was causing a "devaluation scare" that could cause the dollar to slip from its status as the world's reserve currency .

With the U.S. dollar’s status as the global reserve currency likely to be up for grabs for the first time in decades, bitcoin advocates have jumped at the opportunity to tout bitcoin’s potential as an alternative currency.

Back in December 2020, Ruchir Sharma, Morgan Stanley's chief global strategist, published an op-ed in the Financial Times predicting the end of the US dollar's status as the global reserve currency Bitcoin replaced.

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“Many have been buying bitcoin in large quantities since March amid concerns that central banks, led by the Federal Reserve (FED), are devaluing the dollar,” Sharma wrote. His argument is that prudent savers are attracted to bitcoin because its supply is artificially limited, whereas the U.S. dollar and other fiat currencies have no supply constraints.

One of the consequences of devaluation is inflation. George Selgin, director of the Center for Monetary and Financial Alternatives at the think tank Cato Institute, explained that an established international currency can indeed be displaced by others and may eventually lose its dominance. But, he added, "it's not something that happens easily, it has to become very volatile in value."

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U.S. inflation last year was 1.25%. And according to calculations released last month by the Minneapolis Federal Reserve, there is a 33% chance that U.S. inflation will exceed 3% over the next five years. This all gives Selgin reason to be concerned about the dollar's long-term outlook, "but even then, it's not certain that we'll see double-digit growth in the medium to long term."

He argues that inflation in the United States is nowhere near Argentina's 36 percent or Turkey's 15 percent.

He then added that if the U.S. dollar collapsed, the next currency people would flock to would not be Bitcoin, but other fiat currencies. This is because they are liquid, which is what matters most in global trading.

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However, Sharma’s argument for Bitcoin as a reserve currency is not based solely on the devaluation triggered by money printing. Cryptocurrencies also need to serve as a useful medium of exchange.

But could bitcoin pose a serious challenge to the dollar's use as a global medium of exchange?

"The huge liquidity and network effects of the U.S. dollar are the biggest headwinds for Bitcoin to rise," Voorhees said. At the same time, he pointed out that the market value of Bitcoin has risen from zero to trillions of dollars in the past 10 years. Bitcoin is gaining its own network effects over time.

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Bitcoin's market capitalization of $827 billion may seem staggering. After all, as of March 2021, there are 2 trillion U.S. dollars in global circulation, slightly more than the 1.43 trillion euros.

But these numbers don't quite provide a side-by-side comparison. Dollars and Euros are actively used in day-to-day transactions - unlike Bitcoin, which may be adopted in some isolated cases. A report released by Deutsche Bank in March 2021 pointed out that the average daily transaction volume of Bitcoin is about 500 million transactions, which is equivalent to 0.02% of euro transactions and 0.009% of U.S. dollar transactions.

And the baht is not a contender for global reserve currency status, nor is it a competitor to bitcoin. If "international transactions" are a requirement for reserve currency status, then Bitcoin's odds are not strong, at least for the foreseeable future.

The status of a reserve currency does not simply come down to its use as a medium of exchange, but also in terms of assets held by financial institutions around the world.

“Anchor is an apt descriptor, but the U.S. dollar has been a purely fiat currency since it left gold in 1971,” Voorhees said. He believes that Bitcoin will similarly gain reserve asset status because it is scarce, immutable and apolitical.

There is no question that the dollar remains comfortably in that dominance for now. In the last quarter of 2020, central banks of 149 countries held $7 trillion, or 59% of all allocated reserves, followed by the euro with a 21% share and the Chinese yuan with a 2.25% share.

Erik Voorhees retorted that the central bank should not be the yardstick. Because there are many other financial institutions. He added, "Central banks are likely to be the last to acquire bitcoin, and will only do so when its dominance becomes apparent."

But bitcoin is unlikely to become a dominant means of payment, Miron explained, because the government's ubiquitous presence in the economy (not just taxing, but spending) makes the official payment method "a major part of most other payments." The most natural default way in transactions".

"Governments want to control how payments are made in their economies, so they can regulate to make it difficult for any new methods to emerge," Miron added. And governments have no incentive to allow a non-national currency (bitcoin) to replace their national currency's fiat currency.

In his first speech to the British Parliament in 2010, Steve Baker, a Conservative MP from Wycombe, stated: "The Bank of England controls the price, quantity and quality of money." He asked fellow MPs: " If money is a product of the state, we should ask ourselves: Is this a good idea?"

If it happened...

Selgin explained that the dollar’s loss of reserve currency status could unilaterally reduce Americans’ welfare. "Look at our debt, we're going to be in big trouble."

But bitcoin advocates argue that this is just a short-term pain that will pay off in the long run.

As Voorhees puts it, “Unlike the U.S. dollar, Bitcoin is neither a country’s burden nor a country’s privilege.”

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