I read an interesting article appearing originally on the website Aikon on the prospect of bitcoin becoming the globe’s reserve currency. The author makes the following points in support of his argument.
Bitcoin is transparent. All transactions involving a bitcoin are reflected on a public ledger. Bitcoin transactions are decentralized. There is no central authority controlling bitcoin issuance, valuation, or settlement. Bitcoin is garnering more participants including individuals, institutional investors, and governments willing to invest in the technology and its tokens.
The world, according to the article, is at the threshold of a financial revolution with changes in the financial system being brought about by the strains on the economic system caused by the Covid-19 pandemic. The article argues that although the United States has engaged less with the global economy over the last twenty years, China, forecasted to provide the world with the next reserve currency, is avoiding completing the tasks necessary for taking the number one spot. Compounding what Aikon has determined as an unwillingness to do what it takes to get the spot is a collapsing U.S.-Chinese relationship.
Given the above negatives against a continued use of the U.S. dollar as the globe’s reserve currency, and the unlikeliness of the Chinese yuan taking this position, Aikon asserts that bitcoin is positioned to be the global reserve currency because, again, of decentralization and the cryptocurrencies underlying financial system. But if we applied the definition of a reserve currency to bitcoin, we should find that bitcoin is not ready to be a reserve currency.
First, bitcoin is not a currency. A currency is a unit of account, a store of value, and a medium for the exchange of goods and services. That a dollar price has been placed on a bitcoin may satisfy the unit of account assertion. The existence of digital wallets that can store bitcoin may further compound the assertion of bitcoin as a unit of account since a wallet provides a place to go and determine the amount of the digital asset that you have.
A store of value, on the other hand, I have my doubts. A currency should reflect an underlying economy and where that economy is functional ie executes rules for trade and commerce in various markets, the currency provides a store of value. Bitcoin has no attachment to an underlying, viable economy as evidenced by the third element of the definition of currency: bitcoin is not used as a medium of exchange in a volume so sufficient that, like the US dollar of the euro, no other currency is necessary for making a transaction in a particular political economy. Bitcoin is not a currency.
The proof that bitcoin is not a currency should be sufficient to negate bitcoin as a reserve currency as well. The website Investopedia provides the following definition of a reserve currency:
“A reserve currency is a large quantity of currency maintained by central banks and other major financial institutions to prepare for investments, transactions, and international debt obligations, or to influence their domestic exchange rate.”
Bitcoin’s current market capitalization is approximately $668 billion with approximately 18.6 million digital tokens in circulation. This pales in significance to U.S. dollar reserves of approximately $6.7 trillion. Bitcoin is allegedly capped at 21 million tokens. If all 21 million tokens were available today, to equal total US global reserves, bitcoin will have to be valued at approximately $319,000 a token. While some analysts have called a rise in bitcoin valuation up $400,000 a token, I have seen no estimates as to the likelihood anytime in the near future.
Based on current valuation and uncertainty given the token’s volatility of bitcoin market cap equaling global US reserves, I don’t see the US government implementing any immediate strategy to counter bitcoin as a new reserve currency.
