Bitcoin, USD, and the Changing World Order

Key takeaways:

The US dollar’s status as the reserve currency is under threat due to an inevitable cycle of increasing debt and inflation. Coinbase co-founder Brian Armstrong tweeted that bitcoin and cryptocurrencies could be the “best defender of American interests.” In this article, we talk about Bitcoin's democratization aspects that make it a perfect match for the US. We also compiled historic US economic data from 1950 to 2022 to allow you to assess the health of the US economy for yourself.

Coinbase co-founder Brian Armstrong has sparked a conversation about how Bitcoin could safeguard the US’ position as the leading world power.

More specifically, on 4 December 2023, Armstrong tweeted about the “natural trend” of a reserve currency, currently the USD, to lose its advantage over time due to inflation and deficit spending.

Armstrong said that cryptocurrencies could complement the US dollar as an inflation hedge. He added that moving from dollars to crypto is better than to a rival fiat like the Chinese yuan.

Bitcoin, US Dollar and the Changing World Order

Before we proceed further, we need to talk about world powers, reserve currency, and the changing world order, best explained by legendary investor Raymond Dalio in his book ‘The Changing World Order: Why Nations Succeed and Fail.’

According to Dalio, a leading world power that holds a reserve currency loses its status over time due to unsustainable debt levels. In order to pay the debt, the leading power prints more money (by lowering interest rates, quantitatively easing, and issuing bonds), which leads to inflation and devaluation of the reserve currency.

READ MORE: The World’s 15 Strongest Currencies

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History has repeated itself time and time again. A prime example was the mighty Dutch empire of the 17th century when the Dutch Guilder was the world’s reserve currency at the time. A decaying Dutch economy hurt by excessive debt levels, currency devaluation, and military defeats eventually led to the fall of the Dutch. Similar conditions led to the change in the world order as the baton passed from the UK and the British Pound to the US and the dollar following the two World Wars.

“Having the world’s reserve currency inevitably leads to borrowing excessively and contributes to the country building up large debt with foreign lenders. While this boosts spending power over the short term, it weakens the country’s financial health and currency over the long-term.

 

“Inevitably, the cost of maintaining and defending the empire becomes greater than the revenue it brings in, so having an empire becomes unprofitable.”

– Ray Dalio

A graph showing the rise and fall of a world power
Source: Principles for Dealing with the Changing World Order by Ray Dalio – via YouTube

Will the US Dollar Lose Its Reserve Currency Status?

We cannot say for certain if or when the US dollar will use its reserve currency status. We have compiled economic data points for you to assess the health of the US economy.

2022 2010 2000 1990 1980 1970 1960 1950 Sources
US domestic gross product (GDP) $25.7 trillion $15.05 trillion $10.25 trillion $5.96 trillion $2.86 trillion $1.07 trillion $542.4 billion $299.8 billion US Department of Commerce
US national debt $32.06 trillion $19.10 trillion $10.05 trillion $7.50 trillion $3.32 trillion $2.94 trillion $2.98 trillion $3.33 trillion US Department of the Treasury
US debt-to-GDP ratio 122% 91% 56% 55% 33% 35% 54% 92% US Department of the Treasury
US fiscal surplus/deficit -$1.38 trillion -$1.29 trillion +$0.13 trillion -$221 billion -$73.8 million -$2.8 billion +$301 million -$3.12 billion US Department of the Treasury; The White House
USD vs. gold (average closing price for December for 1 troy ounce) $1,891 $1,973 $479 $868 $2,117 $282 $364 $430 Macrotrends
US annual inflation rate 8% 1.6% 3.4% 5.4% 13.5% 5.8% 1.5% NA The World Bank
US Interest rate (as of December) 4.1% 0.18% 6.4% 7.3% 18.9% 4.9% 1.98% 0.8% (July 1954) Federal Reserve Bank of St. Louis

Where Does Bitcoin Fit In?

There are two key reasons why Armstrong called Bitcoin the “best defender of long-term American interest.”

  1. Inflation hedge

Armstrong tweeted that cryptocurrencies like Bitcoin were great alternatives to fiat currencies as “an antidote to inflation.”

We all have heard Bitcoin’s inflation-hedge narrative numerous times. Bitcoin’s decentralization, limited supply, halving cycles, and predictable emission rates give gold-like properties to the crypto, making it an excellent hedge against inflation and monetary policy risks.

In recent years, individuals living in hyperinflationary economies like Venezuela, Argentina, and Turkey have taken refuge in cryptocurrencies to protect their wealth.

We saw similar trends in Ukraine and Russia in February 2022 when their respective fiat currencies plunged at the start of the Ukraine-Russia war.

2. Democratization aspects

Out of all the developed nations in the world, the US is best suited to become the hotbed of cryptocurrency development due to its liberal values and free market system (ignoring what some people see as the chilling effect of the powers of the Securities and Exchange Commission).

Thus, the US democracy has a relative advantage over China and Russia in adopting, promoting, and nurturing cryptocurrencies.

Crypto’s decentralized and privacy-preserving properties present a key risk to authoritarian regimes, where governments are keen to maintain absolute control over financial systems. 

The Bitcoin Standard: Will Bitcoin Replace the US Dollar?

It is difficult to imagine a world where Bitcoin – a digital commodity with limited supply – becomes a reserve currency. The reason being that the global financial system has evolved to prioritize economic growth over all else.

 A key reason that led to the abandonment of the gold standard in the 1900s was to allow central banks (especially the US Federal Reserve) to print as much money as required. On the contrary, new bitcoins can only be mined and cannot be created at the will of a centralized authority.

READ MORE: BTC Crosses $40k

A monetary system where world currencies are backed by bitcoin – similar to the gold standard – will face similar problems as economies will be forced to store bitcoin as reserves, which makes a major chunk of an economy’s resource idle. 

Warren Weber wrote in a 2015 research paper for the Bank of Canada :

“My conjecture for this case is that the bitcoin standard would not last long. There would be a major cyclical downturn or financial crisis that would lead to political pressure and demands for central banks to remove the “bitcoin fetters” that prevent them from inflating to stimulate the economy or from providing assistance to financial institutions in trouble.” 

Meanwhile, Armstrong put it differently by saying that “fiat and crypto will co-exist for a long time” and that “they are more complements than substitutes.”

The Bottom Line

In the late 19th and early 20th century,  the gold standard monetary system gained global popularity because most nations wanted to be part of a common regime to facilitate efficient trading with each other.

Similarly, if we see a shift in the individual and government preference to use cryptocurrencies as an “alternative” due to their inflation-resistant, decentralized, privacy-preserved, and global properties, world powers like the US may be forced to re-evaluate the influence that bitcoin and cryptocurrencies may have in tilting the balance of world power.

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Mensholong Lepcha

Mensholong Lepcha is a financial journalist specializing in cryptocurrencies and global equity markets. He has worked for reputed firms such as Reuters and Capital.com. Fascinated with blockchain technology, NFTs, and the contrarian school of investing, Mensholong has expertise in analyzing tokenomics, price movement, and technical details of Bitcoin, Ethereum, and other blockchain networks. He has also written articles on a wide range of financial topics including commodities, forex, central bank monetary policies, and other economic news.