Is USD losing reserve status? What it means for Bitcoin
What does it mean for Bitcoin if the US dollar loses its reserve status? Is it even possible? In light of the dramatic political developments, a debate is currently raging about exactly that. Whether Bitcoin can be a beneficiary or even the salvation is hotly contested.
Is the USD losing its reserve status?
Even Tesla CEO Elon Musk is worried about it. In response to a thread by Genevieve Roch-Decter, CEO of GRIT, in which she philosophized about whether the US dollar is losing its reserve currency status, Musk wrote:
Serious problem. US policy has been too heavy-handed, which has made countries want to ditch the dollar. Combined with excess public spending, which forces other countries to absorb a significant portion of our inflation.
Serious problem. US policy has been too heavy-handed, which has made countries want to ditch the dollar.
— Elon Musk (@elonmusk) March 29, 2023
In the aforementioned thread, Roch-Decter states that 2014 marked a turning point, with Russia and China beginning “de-dollarization.” Both countries no longer wanted to rely on the US dollar for international trade and investment.
Globally, this trend is evident. As Roch-Decter noted, central banks bought more gold last year than in any year since 1987, but China and Russia are the driving forces.
With the Russian central bank freezing foreign reserves in response to the Ukraine war, the US has taken a step that has sent a wake-up call to other nations such as China regarding their USD reserves. Since early 2022, the volume of Sino-Russian trade in Yuan has skyrocketed.
“Russia has turned to China’s yuan to reduce its dependence on the US dollar. Other markets are shifting to the yuan as China becomes a more influential superpower,” writes Roch-Decter, who explains, however, that the dollar is “far from doomed.” The analysts at The Kobeissi Letter see a similar trend:
Over the past ~25 years, the use of US dollars for foreign exchange reserves has steadily declined from 72% to 59%. Meanwhile, euro usage is up slightly from 19% to 21%. The most important part? Other currencies, including the Chinese yuan, rose from 4% to 10%.
The chart below shows that the dollar still dominates foreign exchange reserves, but that the lead is slowly eroding.
Inflation and the collapse of the banking system are causing people to question the system, the analysts said, pointing to the many alternatives to the US dollar. Nations such as China, Brazil and Russia (typically the BRICS nations) are currently doing a lot to move away from the USD.
The list is long, like The Kobeissi Letter notes. Only in the last two weeks has it become known that Saudi Arabia is considering accepting the Chinese yuan for oil sales. China and France completed their first LNG trade in yuan.
Russia is also considering using the Chinese yuan as a reserve currency. Saudi Arabia is building a $12.2 billion refinery with China. China and Brazil have agreed to use the Chinese yuan in cross-border transactions.
For Roch-Decter, however, it is clear: “There is still a strong demand for US dollars. But now the dollar has serious competition.”
Meanwhile, Monica Elizabeth Crowley, the former assistant secretary for public affairs for the US Treasury Department, noted the limits of such competition in an interview that went viral on Fox News. If Saudi Arabia, Iran, Russia, China and other countries start trading oil in yuan, she predicts a collapse of the US dollar.
If that were to happen, it would be a complete implosion of the global economic system, but certainly the American economic system. You will look at skyrocketing inflation, just rampant inflation in the Weimar Republic.
Fared Zakaria (CNN) and Monica Crowley (FOX) this past weekend both ran segments discussing the end of the US Dollar’s reserve currency status. Kenya’s president warned his country to “get rid of the dollar” and Xi and Putin just said civilizational change is coming.
Do you have gold?
— Dave Shuck 🇺🇸 (@dshuckit) March 28, 2023
Is Bitcoin or Gold the Answer?
Die-hard Bitcoiners will probably answer “Yes.” What is clear is that Bitcoin was developed as a hedge against the irresponsible policies of the US Federal Reserve and other central banks around the world. Due to its permissionless nature, it can be used by anyone.
But it’s not quite that simple, even if there are first signs. Russia is on the verge of legalizing Bitcoin and cryptocurrencies for international trade. According to the latest news, the Russian central bank and the Ministry of Finance have reached an agreement on this.
Bitcoin bull Max Keizer already predicted this in March 2019: “The sooner Russia starts adding Bitcoin to its strategic reserves alongside gold, the sooner the various sanctions imposed on them will start to become meaningless. It is not enough to dump $USD, you have to drive a stake through the heart with BTC.”
Renowned analyst Will Clemente tired yesterday: “The more headlines we see about countries trying to move away from the dollar, the more likely it is that national level Bitcoin accumulation is ongoing or has been.”
Critics doubt this. Keith Weiner, founder and CEO of Monetary Metals, recently expressed that ironically, Bitcoin hasn’t even entered the financial field yet, and certainly won’t disrupt it.” Yes, if it ever enters the field. Bitcoin doesn’t finance anything,” the analyst so.
Economists such as Lukas Gromen, founder and president of Forest for the Trees (FFTT), and also Peter Brandt see the answer in gold (as also shown by the central banks’ buying activity).
CNY/USD is flat since 3q18, as are Chinese foreign reserves. But: You know what’s NOT flat since 3q18? CNY/gold.
So, what does it mean about what some sellers exchange CNY (CNH) for? Gold.
In the end, only history will be able to tell who is right.
At press time, the Bitcoin price extended its consolidation phase and traded at $28,521.
Featured image from iStock, chart from TradingView.com
