What Bitcoin Must Do to Replace the Dollar

Bitcoin is on a tear again. Some days it seems like crypto winter never ever happened. From a low of $16,529 at the end of December of 2023 the leading cryptocurrency has skyrocketed back to the $60,000 plus range in March through May of 2024. There is talk again about eventually that Bitcoin will replace the US dollar as the leading world currency. That being the case we began to wonder what Bitcoin must do to replace the dollar as the default world currency.

Buying and Selling Commodities Requires Dollars

Even since the end of World War II the US dollar has been the most powerful world currency. It is the currency of the richest nation in the world with the largest economy. It is how most commodities like oil, gold, wheat, cattle and coffee are priced. In order for a buyer in most world nations who do not produce enough or any of their own oil, gold, wheat, or coffee to buy these things they need to convert their currency into US dollars. On the world Forex markets about $6.6 trillion dollars in currency value is traded every day and 88% of those trades are either to buy or sell US dollars!  At current Bitcoin highs the total value of all Bitcoin in existence is about $2.5 trillion. Bitcoin has a way to go if it is going to replace the greenback in this regard.

Top view earth globe on a dollar banknotes. Business concept

The Dollar Is the International Reserve Currency of Choice

Nations all over the world hold US dollar reserves generally as US Treasuries which are dollar denominated bonds backed by the US government. Total world dollar reserves come to about $12 trillion in US treasuries while another $15 trillion in US treasuries are held within the USA. Total US bank deposits run around $30 trillion, total US farmland is worth about $3 trillion, total value of all US commercial real estate is about $20 trillion and the total value of all US residential real estate Is about $47 trillion of which there is about $20 trillion in dollar-denominated residential real estate.

US Laws and Regulations Versus Bitcoin Wash Trading

Whenever the US has an economic downturn one might expect people to sell dollars. But they typically don’t because there are few if any good alternatives. The US is a nation of laws. Nobody is going to park their assets in Russian rubles, Chinese Yuan, or either Iran’s or North Korea’s currency because “dear leader” can devalue their currency to zero if it suits them. Safe alternatives to the dollar from the legal and regulatory point of view include the euro, Swiss franc, British pound, Canadian and Australian dollars as well as the Japanese yen. The problem is that none them has comparable depth of liquidity with the possible exception of the euro.

Contrast this with Bitcoin, its wild price swings, and rampant Bitcoin wash trading that makes trading this market chancy. Another contrast is how the crypto world routinely fights any regulation while US banks, insurance companies, and others holding large amounts of assets in the US are heavily regulated which makes people’s dollar assets held with them far more secure.

Why Foreigners Dislike the US Dollar As the De Facto World Currency

When the US has inflation the US Federal Reserve generally increases interest rates. This makes the dollar more valuable on the Forex market because traders can park their money in dollars by converting their local currency to dollars and buying US treasuries. This sucks money out of that foreign country. Also, in order to keep their currencies pegged more or less to the US dollar they need to raise their own interest rates even when their would be no other reason to do so. That can send a smaller economy into a recession and even destabilize their economy. So, the same folks who like the dollar as a reserve currency may hate it depending on actions of the US Federal Reserve!

How Good Is the Full Faith and Credit of the US Government

The US has never defaulted on its debts or dropped its currency to zero and issued a new one. However, the US is addicted to deficit spending. Every year or so now Congress has to raise the debt ceiling and the government has, in fact, been in default a couple of times already. Because of moving money around in the US Treasury and staggering when to pay the bills nothing has, as of yet, gone unpaid. However, this is the lone, big issue that threatens a permanent dominance of the greenback on the world stage

Where Does Bitcoin Fit Into This Picture?

In the foreseeable future the maximum number of Bitcoins will have been mined. Until then one can predict exactly how many will exist. Unlike the yearly circus in the US Congress Bitcoin will not go into default. In this regard Bitcoin stands out as a viable alternative to the US dollar. However, in regard to its possible use as a world reserve currency, it pretty much fails every other single test.

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