Bitcoin is heading towards a new era of global reserve assets

Text | Joanna

The pandemic has lasted for more than half a year, and a recession in the U.S. economy is inevitable. Data shows that the U.S. GDP shrank by 31.4% year-on-year in the second quarter, and the impact it has had on the economy is self-evident.

Some people believe that the sustainability of the US dollar as the world's main reserve currency is being tested due to the US economic recession. If this situation continues, who can take on the responsibility of the global reserve currency...

As a result, the saying that "Bitcoin is expected to become the next global reserve currency" has become popular. Although some people think this is a fantasy, people are still happy about it.

Liu Changyong, the founder of Free Cash and advocate of crypto economy, said in an interview with Nuclear Finance APP that this statement is not new. "As early as the 2014 Beijing Bitcoin Summit, Mai Gang once proposed that 'Bitcoin may become a national reserve currency'," he said.

In the eyes of many Bitcoin believers, Bitcoin is a basic asset that breaks through centralized control and realizes financial democracy. The US economy and the status of the US dollar are mutually causal. With the Fed's unlimited quantitative easing policy and massive money printing model, its negative effects will be infinitely magnified. In order to prevent "stepping on mines", news of increasing holdings of Bitcoin as a reserve asset has been reported frequently in the newspapers. Imagine that, with this as a starting point, Bitcoin may enter a new era of global reserve assets.

Dollar's status as global reserve currency under threat

"Holding Bitcoin allows me to sleep well at night," said Chamath Palihapitiya, former Facebook executive and CEO of Social Capital, in a recent interview with CNBC.

"Bitcoin is a hedge against the traditional financial world. You hold it, not trade it." He said that the United States has printed a lot of money, and no matter who is in power in the White House, you will see asset price inflation. Bitcoin is not fundamentally related to the traditional market because it is completely based on the opposite of tradition. We use 1% of our portfolio assets to hold Bitcoin as a hedge, and regard it as an insurance strategy to prevent central banks and governments from "stepping on mines."

Not only that, Willy Woo, a well-known crypto analyst, said that if you invested $1 in Bitcoin on October 6, 2009, you would now have $13.9 million, and Bitcoin is quietly swallowing up the financial world. He also pointed out that the U.S. national debt exceeds $27 trillion, which may cause Bitcoin to accelerate its decoupling from gold and other traditional financial markets to create its own price trajectory.

In view of this, people are fond of Bitcoin in the hope of hedging against traditional financial markets.

U.S. Senate candidate Cynthia Lummis recently said that Bitcoin is a viable alternative to the value of the U.S. dollar. She explained that there are only 21 million Bitcoins, which makes it an attractive store of value.

"I have been concerned about the Fed's quantitative easing program and the amount of debt that the U.S. economy will rely on for the future," she said, noting that the U.S. has added $3 trillion in debt since March. Cynthia Lummis quoted economist Nassim Taleb as saying, "The most underestimated risk in today's financial markets is that the dollar is no longer a reserve currency, and that's something we should all be worried about."

Robert Kaplan, president of the Federal Reserve Bank of Dallas, said that it is "critical" for the U.S. dollar to maintain its status as the world's reserve currency because it allows the U.S. to repay existing debts at low interest rates. If it loses this status, it will face serious problems. He said that digital currency is a threat that has the potential to undermine the U.S. dollar's status as the world's reserve currency. Digital currency will appear in some other form or way, and the United States must think about it so as not to lose control of its currency, especially from a monetary policy perspective.

It can be seen that "Bitcoin is expected to become the next global reserve currency" is not groundless.

But no matter what, this dream seems difficult to achieve and may eventually come to nothing.

Marc Chandler, chief market strategist at Bannockburn Global Forex, said that Bitcoin is unlikely to replace the US dollar as the global reserve currency in the short term. He explained that the dollar is supported by the world's largest, deepest and most transparent government bond market. From this perspective, I don't know how Bitcoin can replace the US dollar.

"I think Bitcoin is more trustworthy than the U.S. dollar now." An industry insider who did not want to be named said that from the current point of view, Bitcoin has withstood the test of the market. As people's concerns about the future of the world's reserve currency grow day by day, the international reserve currency has now seen a pattern of diversified development. Even if Bitcoin has a one in ten thousand chance, we are willing to wait and see.

Bitcoin is better than fiat currency

"Bitcoin is exciting and it's better than fiat currency," Bill Gates once said in an interview with Bloomberg.

Hu Dinghe, director of the China Economic and Social Council and doctoral supervisor, believes that in terms of trends, Bitcoin will not become a reserve currency, but a reserve asset. Like gold now, you can't say it is a reserve currency.

He said that Bitcoin is like opening the Pandora's box of cryptocurrency. Over the past decade, there have been many people who "follow their heart's desire" and it has gradually been accepted by mainstream society.

Hu Dinghe believes that from the perspective of human history, when gold was used as currency, people found that its quantity could not be controlled. In the process of rapid economic development, gold production obviously could not keep up. Later, after a large number of gold mines were mined, the problem of gold surplus emerged again. In addition, Western countries plundered a large amount of gold and silver during their colonial expansion, which led to currency devaluation.

After the signing of the Bretton Woods Agreement in 1944, the status of the US dollar as the world's official reserve currency was officially established. The United States promised to hold a large amount of gold and peg the dollar to gold, and other currencies to the dollar.

"As the world's currency, the excessive issuance of US dollars is tantamount to reaping the wealth of the world, and its credit foundation will naturally be gradually weakened. Goldman Sachs has warned several times this year that the US dollar is at risk of losing its status as the world's reserve currency." Hu Dinghe believes that considering the intensity of economic stimulus and quantitative easing policies in the financial crisis caused by the epidemic, the US dollar will still be at risk of depreciation if this continues.

This year, Ray Dalio, founder of Bridgewater Fund, said in his work "Changing World Order" that people tend to think that money is almost permanent and that "cash" is a safe asset that can be held. But this is not the case, because when cash and bonds depreciate or are eliminated, the currency associated with them will also depreciate or die.

He claimed that of the approximately 750 currencies that have existed since 1700, only 20% have survived, and all of those that have survived have depreciated.

"After the emergence of Bitcoin, it has natural advantages over gold." Hu Dinghe believes that, first, Bitcoin is obtained through mathematical calculations and the total amount is constant, while gold is obtained through physical mining and the total amount is difficult to control; second, Bitcoin can be divided infinitely, while gold cannot do this easily; third, Bitcoin is highly secure and easier to carry, while gold is not easy to carry and difficult to find a trading market.

Liu Changyong believes that since the market value and transaction depth of Bitcoin have increased many times compared to 2014, and the global economic crisis and economic friction have also increased the risks of traditional reserve currencies, this possibility has increased. However, for large countries, the scale of Bitcoin is still too small to be used as a reserve currency; for some small economies, they can consider appropriately allocating Bitcoin in their reserve currencies.

Bitcoin has highlighted its value as a reserve asset

"Prepare for winter!" During the National Day holiday, several investment tycoons including Ricks "pessimistic" the cryptocurrency market on different occasions. Against this backdrop, Lin Yun, who holds a large amount of Bitcoin, was trembling with fear and treading on thin ice.

Unexpectedly, Bitcoin has seen three consecutive increases since October 8. Seeing this, Ricks tweeted that he couldn't understand it, which triggered a fierce war of words in the comment section.

Lin Yun analyzed that this sudden rise was positively correlated with the stimulus from the news. "First, the payment giant Square announced that it had purchased $50 million worth of Bitcoin. In a statement, it said, 'Square believes that cryptocurrency is a means of economic empowerment and provides a way to participate in the global monetary system, which is in line with the company's purpose'; secondly, the Shenzhen Municipal People's Government recently launched a digital RMB red envelope pilot with the People's Bank of China, distributing 10 million yuan of 'digital RMB red envelopes' to individuals in Shenzhen, and spending them at designated merchants in Luohu District within the validity period." He said.

Shenzhen Luohu District launches digital RMB red envelope pilot

In fact, Square's purchase of $50 million worth of Bitcoin is just the tip of the iceberg. There are many other people who have secretly bought large amounts of Bitcoin in the market.

According to data provided by BitcoinTreasuries, 11 companies listed on the New York Stock Exchange have officially announced that they hold 592,800 bitcoins, accounting for about 3.2% of the total circulation. This shows that Bitcoin is gradually being accepted by mainstream institutions.

In addition, on September 28, Casa co-founder Jameson Lopp tweeted that the Grayscale Bitcoin Trust now holds 450,000 BTC, accounting for 2.4% of the current supply.

Glassnode said that the number of Bitcoin whales (addresses holding more than 1,000 Bitcoins) has been on the rise in the past few months. This is a sign that more high-net-worth individuals are investing in Bitcoin, expecting the price of Bitcoin to rise. Glassnode data also showed that the number of addresses holding 0.1 or more Bitcoins has reached 3,148,331, a record high. This shows that the number of holders of 0.1 or more Bitcoins has been growing since the beginning of 2010.

The number of addresses holding at least 0.1 Bitcoin hits a record high

"Although BTC cannot stay above $12,000, influential investment institutions and investors are buying Bitcoin collectively." An analyst at TradingShot said that the on-chain smart currency indicator shows that after on-chain accumulation, prices usually enter a bull trend.

According to the research report "Bloomberg Crypto Outlook" released by Bloomberg in October, given the "historical growth guide" and "demand and adoption trade-off", the price of Bitcoin is expected to reach $100,000 by 2025.

On October 8, Anthony Pompliano, co-founder of Morgan Creek, tweeted that individuals have been using Bitcoin as a reserve asset for some time. Companies are just beginning to use Bitcoin as a reserve asset now. Ultimately, central banks will also use Bitcoin as a reserve asset, it is only a matter of time. On October 11, he said that according to statistics, 63% of the circulating supply of Bitcoin has not moved in more than a year. This is not to increase value, but to protect wealth.

I have to say, Anthony Pompliano hit the nail on the head.