The reign of the US dollar as the world’s reserve currency may be coming to an end. The latest market report from CryptoSlate explores global de-dollarization to see what role Bitcoin will play in the global economy.
The US dollar has been the medium of choice for international trade and the world’s reserve currency for 79 years. The Bretton Woods Agreement of 1944 established gold as the basis for the US dollar and pegged other currencies to the value of the dollar.
It was the first time in history that a group of nations negotiated a global monetary system, which proved successful in the years after World War II. The system is secured because the United States holds more than half of the world’s gold reserves.
However, the economic recovery in Europe and Japan reduced the dominance of the United States in world trade. In addition, the dollar’s appreciation due to inflation and growing public debt prompted the United States to suspend the conversion of dollars into gold in 1971.
Since the value of the dollar is no longer tied to gold, the Federal Reserve is tasked with maintaining the value of the currency. However, the central bank failed to maintain the dollar’s value and began to increase the money supply, causing the currency to lose two-thirds of its value in the following decade.
The dollar’s depreciation continued into the twenty-first century.
In 2023, the dollar’s status as the world’s reserve currency is in jeopardy, and while its global market dominance has been shaken in the past, the risk has never been so great.
This report explores the macroeconomic events that caused dollar fragility, the consequences of a weak dollar, and bitcoin’s place in the dollar-converted global economy.
The global financial crisis of 2007 exacerbated the growing trend of de-dollarization. In 2007, China launched the China International Payment System (CIPS), which made it possible to settle cross-border payments in yuan. In 2010, China and Russia signed a bilateral currency swap agreement, allowing them to trade in their own currencies.
In 2014, the BRICS countries, which include Brazil, Russia, India, China and South Africa, established the New Development Bank. The new financial institution was launched to provide alternative sources of financing to developing countries, reducing their dependence on the dollar. In addition, the EU created the SPV to facilitate euro trade with Iran, bypassing US sanctions on the country.
Last month, China and Russia reaffirmed their 2020 agreement to increase the use of the ruble and yuan in trade. The deal is set to increase use of the ruble and yuan, which already account for two-thirds of payments for trade deals between the two countries.
Foreign trade is not the only way countries are looking to ditch the dollar.
US Treasury holdings, once considered the safest and most liquid assets in the world, have become a geopolitical hot potato.
Last year, foreign demand for Treasury bills fell by about 6%. This marks a significant drop in demand after two years of heavy buying post-COVID-19 pandemic.
However, higher interest rates made these bonds less profitable. Almost every major country has sold its treasury holdings over the past year,
Data from the Federal Reserve showed that foreign holders sold more than $253 billion in Treasury securities last year.
While central banks around the world have been increasing their balance sheets in response to the COVID-19 pandemic, nowhere has this been as aggressive and dangerous as in the United States.
In the four months since the pandemic began in March 2020, the Federal Reserve has increased its balance sheet by more than 72%, adding more than $3 trillion to its assets.
The massive injection of liquidity into the financial system proved unsuccessful. The quantitative easing spree took less than two years to turn into inflation, with goods and services in the US experiencing record growth through 2023. In a debt-ridden country like the US, inflation can rapidly erode the value of government bonds and cause interest rates to rise.
The depreciation of government bonds prompts domestic and foreign bondholders to sell their holdings and even incur losses to put capital into more profitable investments.
Foreign holders of US Treasury securities sold their holdings to abandon their dependence on the dollar and switched to other currencies such as the yuan and the ruble. On the other hand, domestic holders have moved away from long-term bonds to short-term Treasury bills, because they provide a better yield that outweighs rising inflation.
Bitcoin has long been described as a safe-haven asset.
However, it was not until global markets began to notice them that a full-blown banking crisis began looming over the United States.
Bitcoin’s stable supply and decentralized infrastructure puts its owners in control of their money. With the ability to independently verify transactions, coins, and facilitate unsupervised cross-border transactions, it is slowly becoming a preferred asset for many looking to hedge against government interference.
Its volatility appears to be worth the cost to many investors. This is evident in its increasing correlation with market liquidity. Data analyzed by CryptoSlate has shown that the price of Bitcoin follows the highs and lows of the Federal Reserve’s net liquidity – which means that a large portion of the newly injected liquidity into the market continues to flow into Bitcoin.
Bitcoin’s role in the global economy will continue to increase as more vulnerabilities in traditional markets are exposed. However, while its use in developing countries has already been proven, developed markets such as the United States have yet to realize its value.
The continued erosion of the dollar will drive many retail and institutional investors to bitcoin. However, the asset’s market dominance will depend on US government regulatory pressure, with many anticipating a fierce battle to stifle its spread.
When inflation points the way, all roads really do lead to bitcoin. The question is how long does the market need to reach the finish line.