In Bitcoin circles it is more and more common that BTC will replace the US dollar one day. But does digital gold really have what it takes to become a world reserve currency?
The world reserve currency plays a unique role in the global financial system. It is the currency that almost every central and commercial bank holds as a reserve. One also speaks of a “safe haven” — simply because it is the most liquid and most stable currency of all. But: Fiat money is not forever. The half-life of fiat currencies is shorter than some think. More precisely, it only takes an average of a stupid 27 years for a national currency to abdicate and be replaced by another. With reserve currencies like the US dollar (USD), things are only partially better.
Because much more than 110 years has not yet been possible for the dominant form of money. The US dollar is not immune to devaluation either.
And devaluation is the keyword. Because one thing is certain: as long as states have a monopoly on money creation, there will be inflation. That is not surprising; after all, the monopoly on the creation of money is one of the foundations of statehood. With good reason. Devaluation makes debt-based public finance viable. Because if the value of the national currency decreases, the real debt of the creditor also decreases — and the largest creditor in an economy is still the state itself.
The Maastricht Treatytherefore expressly provides for the independence of the European Central Bank (ECB). This is to prevent incentives according to which states prefer to turn on the printing press instead of exercising fiscal discipline. This is because it is unpopular and usually leads to redistribution (falling social spending, rising taxes, etc.).
But there is such a thing as the independence of the ECB. At least since Mario Draghi’s “whatever it takes,” it should also be clear to the last advocate of state money that monetary policy, financial stability and state financing go hand in hand. What was meant was the commitment to protect the euro through unconditional asset purchase programs. In plain language, it was clear to the European tax authorities that they had (via detours) found a buyer for bonds. Quantitative easing took its course.
However, expansionary monetary policy does not necessarily lead to an increase in the price level. If the provided liquidity seeps into the financial sector, inflation is not to be expected initially. At least with the major currencies. Because with financial uncertainty the foreign demand for reserve money always increases, which can even lead to an additional shortage and thus deflation of the reserve currency. This scenario is more conceivable in the short term for EUR, USD and British pound (GBP) than galloping devaluation.
A look at Turkey shows that secondary fiat currencies cannot keep up. The Turkish lira (TRY) has been on the downside since the beginning of the year and has lost almost 23 percent of its value in 2020 alone. Woe if the Turkish population finds out about Bitcoin.
As a citizen, you have previously been at the mercy of central bankers. With excessive inflation, capital controls generally make it difficult to seek salvation in stable fiat money or gold. But these can hardly be used effectively against BTC. Bitcoin is designed from the ground up in such a way that confiscation is hardly possible. That is why it is so important to control the private key for crypto assets and not to store money on the exchange.
With the “digital gold,” a private alternative to state money appears for the first time, one that has all the characteristics of one day becoming a world reserve currency.