Cryptocurrencies have gained momentum in the last decade, can they overthrow the global dominance of the dollar?
When the pandemic broke out, the dollar was as strong as ever. Despite the talk of “instability” of American supremacy, it dominates as the medium of international trade, the exchange rate against which other countries value their currencies and the “reserve currency” in which most central banks hold their savings.
Going back to 1,400 AD, before the US, only five powers had enjoyed the valuable status of “reserve currency”: Portugal, followed by Spain, the Netherlands, France and Britain. These Kingdoms lasted an average of 94 years. In early 2020, the dollar series reached 100 years. That would be a reason to start wondering how long it can take, but there is one limitation: the lack of a successor.
There are candidates. Europe has high hopes for the euro, which began in 1999. The currency, however, failed to gain global confidence due to doubts about the effectiveness of multi-member eurozone governance. China’s ambitions for the yuan have not been confirmed for the opposite reason: concern about the Chinese Communist Party’s arbitrariness.
U.S. officials were therefore convinced that, in response to lockdowns due to Covid-19, they could print dollars in unlimited quantities without undermining its status as a reserve currency, allowing the country to continue to run large deficits with no apparent consequences.
But a new class of competitors has emerged: cryptocurrencies. Operating on peer-to-peer networks, without being ruled by any state, cryptocurrencies such as bitcoin are described by their followers as decentralized, democratic alternatives.
The pandemic has made cryptocurrencies look less like pure digital advertising. Fearing that central banks, led by the Fed, are devaluing their currencies, many have bought bitcoin. Its price has quadrupled since March, making it one of the hottest investments in 2020.
Since its launch in 2009, bitcoin makers have struggled to establish it as “digital gold”, a reliable store of value that offers a “safe haven” in turbulent times. Challengers find it difficult to feel safe investing in assets that are so volatile: the last bitcoin bubble burst less than three years ago and the daily price changes are still four times greater than those of gold.
Skeptics are well represented, especially among those who did not grow up with digital technology. They tend to prefer gold, which has been bought as protection against currency devaluation for hundreds of years. In a recent survey, only 3% of baby boomers said they owned cryptocurrencies compared to 27% of millennials. And yet these rates are rising, and there is reason to believe that bitcoin hunting has deeper roots.
It comes at a turning point for the dollar. Last year, after rising for decades, US debt to the rest of the world exceeded 50% of the country’s GDP, a threshold that often signals a crisis. Since then, with the government borrowing heavily, under lockdown conditions, these liabilities have skyrocketed to 67% of GDP, deep in the “concern” zone. The dollar reign is likely to end when the rest of the world begins to lose confidence that the US will continue to pay its debts. This is how dominant currencies fell in the past.
In addition, the US and other powerful governments have shown little enthusiasm to tame their growing deficits. Money printing is likely to continue, even after the pandemic is over. Believe it or not, bitcoin will benefit from growing distrust of traditional alternatives.
Bitcoin is also beginning to make progress in its ambition to replace the dollar as a means of trading. Today most bitcoins are held as an investment, not to pay bills, but that is changing. Small companies are beginning to use cryptocurrency in international trade, especially in countries where it is difficult to find dollars (such as Nigeria) or the local currency is volatile (Argentina). And in recent weeks, PayPal subsidiary Venmo has been storing bitcoin with a view to starting accepting it as a means of payment next year.
The bitcoin rally may prove to be a bubble, but even if it bursts, this year’s turn in cryptocurrencies should serve as a warning to state money printers around the world, especially in the US. Do not assume that your traditional currencies are the only repositories of value or means of trading that citizens will trust forever.
People who are aware of technology are unlikely to stop looking for alternatives until they find or invent one. And intervening to regulate the explosion of digital currencies, as some countries are already looking at, can only accelerate this popular revolution.