Could the U.S. dollar be replaced by Bitcoin as the global reserve currency? The reply is yes, according to Coinbase Cofounder/CEO Brian Armstrong. He predicted that by 2030, the digital currency could very well replace the greenback. However, Bitcoin needs to overcome several obstacles to achieve this milestone.
Medium Of Exchange
It must be an efficient medium of exchange for something to function as a currency. In other words, for goods and services, individuals, businesses, and other organizations must be able to trade them. In this respect, the U.S. dollar has certainly established itself, because it’s one of the world’s most widely traded fiat currencies. This milestone has not yet been achieved by Bitcoin, which has been around since 2009.
Its intense volatility is one major problem that undermines the use of Bitcoin as a medium of exchange. An example of this occurred in 2017, when the price of the digital currency climbed nearly 2,000 percent, rising from less than US$ 975 to almost US$ 20,000. This sharp rally may have been good for investors, but the fact that Bitcoin experiences such intense price fluctuations decrease its use as an exchange medium, which is one of the key elements needed to function effectively as a currency.
Due to inflation, the U.S. dollar loses a small amount of its buying power every year. This takes place so slowly, however, that the difference is not noticed by market participants. While the fluctuations in Bitcoin are much more severe, Armstrong has asserted that the problem will take care of itself.
“Volatility is a problem of self-correction, and we have seen that as it has fallen year-on-year in the last three years,” Armstrong said in late 2014. “I anticipate that it will continue to do that over the next few years.”
Armstrong is not the only observer of the market who has made such comments. Zeynep Gurguc, an Imperial College Business School researcher, and William Knottenbelt, a professor at Imperial College London, both identified this incidence of sharp price fluctuations as a key challenge to be overcome by cryptocurrencies in order to become widely used payment methods.
A total of six specific challenges that digital currencies must address if they are to become more conventional payment methods, such as scalability, usability, and regulation, were outlined by the two scholars.
Also, some blockchains were not designed to handle the traffic of a high number of users, a matter that industry participants must address for digital currencies to achieve more mainstream use. Further, the regulatory environment is highly complex because many nations have separate sets of rules, which means that global regulations are greatly fractured.
Store Of Value
A currency’s other key requirement is that it must function as a value store. To meet this requirement, Bitcoin will need to retain value over the long term. While some market observers believe that in this specific capacity it is effective, it is not unanimous.
In late 2017, Bill Gurley, a venture capitalist, said that Bitcoin is “an incredible store of value in the rest of the world. “He stressed that in parts of the world that suffer from significant geopolitical turmoil, the digital currency can be a great store of value, as these regions can see their native currencies experience substantial value changes overnight.
As Gurguc and Knottenbelt have claimed that cryptocurrencies have already established themselves in this manner, Gurley is not alone in saying this.
However, Raoul Pal, author of The Global Macro Investor’s investment newsletter, questioned the ability of Bitcoin to serve as a store of value. “He said that as a result of a permanent change in code known as a hard fork, the basic rules of the digital currency could change significantly. “Bitcoin was supposed to be a store of value, you couldn’t mess with the formula… and now they’re talking about a ‘hard fork’ changing it?
He explained: “The fact that they can, even if they don’t change the formula? That’s enough to say it’s not a long-term store of value. ”
Unit Of Account
In order to function as a currency and possibly replace the U.S. dollar as the reserve currency of the world, the third requirement that Bitcoin needs to meet is to function as a unit of account. A matter of debate is the extent to which Bitcoin serves this purpose.
In an op-ed piece on ETF.com, Joe Davis, a Vanguard economist, wrote that digital currencies function as value stores as they can be used to quantify the value of other goods and services. One example is that all alternative protocol assets (or ‘altcoins’) that have to be purchased instead of fiat currency by using Bitcoin.
Others have provided a different assessment, such as David L. Yermack, a professor at the Stern School of Business at New York University, who claimed that Bitcoin is too volatile to be an effective account unit. He said in 2013 that the exchange rate of the digital currency relative to the U.S. dollar was 10 times that of the exchange rate of the greenback versus other fiat currencies such as the euro and
Chris Burniske, an analyst for investment manager ARK Invest, agreed with this assumption, claiming in a 2015 article that the volatility of Bitcoin undermines its use as a store of value. He added, however, that the generalized lack of adoption of the digital currency exacerbates the situation.
However, if one or more countries with a highly volatile native currency link their fiat currency to Bitcoin rather than the U.S. dollar, the situation could change.
Bitcoin could potentially replace the U.S. dollar as the reserve currency of the world, but the digital currency would need to make progress in several important areas in order for this to happen.
Currencies serve as a medium of exchange, a value store, and an accounting unit. While in these specific areas, the U.S. dollar has established itself well, some analysts have expressed their doubts that Bitcoin could fulfill these key roles.