Could Bitcoin replace the U.S. dollar as the global reserve currency? According to Coinbase Cofounder/CEO Brian Armstrong, the answer is yes. He predicted that the digital currency may very well supplant the greenback by 2030.1)Retrieved 21 July 2018 https://www.ibtimes.co.uk/coinbase-ceo-bitcoin-surpass-dollar-reserve-currency-within-15-years-1512429 However, to achieve this milestone, Bitcoin needs to overcome several obstacles.

Medium Of Exchange

For something to function as a currency, it must be an effective medium of exchange. In other words, individuals, companies and other organisations must be able to trade it for goods and services. The U.S. dollar has certainly established itself in this respect, because it’s one of the most widely traded fiat currencies in the world. Bitcoin, which has been around since 2009, has not yet reached this milestone.

One major issue that undermines Bitcoin’s use as a medium of exchange is its intense volatility. An example of this occurred in 2017, when the digital currency’s price climbed almost 2,000 percent, rising from less than US$975 to nearly US$20,000.2)Retrieved 21 July 2018 https://www.coindesk.com/price/ This sharp rally may have been great for investors, but the fact that Bitcoin experiences such intense price fluctuations lessens its use as a medium of exchange, which is one crucial element needed for it to function effectively as a currency.

The U.S. dollar loses a small amount of its buying power every year due to inflation. However, this takes place so slowly that market participants do not notice the difference.3)Retrieved 21 July 2018 https://cointelegraph.com/news/bitcoins-correction-could-well-have-shaken-out-potentially-damaging-investors While Bitcoin’s fluctuations are far more severe, Armstrong has asserted that the problem will take care of itself.4)Retrieved 21 July 2018 https://www.ibtimes.co.uk/coinbase-ceo-bitcoin-surpass-dollar-reserve-currency-within-15-years-1512429

“Volatility is a self-correcting problem, and we’ve seen that as it’s dropped in the last three years, year-on-year,” Armstrong said in late 2014.5)Retrieved 21 July 2018 https://www.ibtimes.co.uk/coinbase-ceo-bitcoin-surpass-dollar-reserve-currency-within-15-years-1512429 “I foresee it continuing to do that over the next few years.”

Armstrong is not the only market observer who has made these comments. Zeynep Gurguc, a researcher at Imperial College Business School, and William Knottenbelt, a professor at Imperial College London, both identified this incidence of sharp price fluctuations as a key challenge that cryptocurrencies must overcome to become widely used methods of payment.6)Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

The two academics outlined 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.7)Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

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.8)Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html Further, the regulatory environment is highly complex because many nations have separate sets of rules, which means that global regulations are greatly fractured.

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Store Of Value

Another key requirement of a currency is that it must function as a store of value. For Bitcoin to meet this requirement, it will need to hold value over the long-term. While some market observers believe that it’s effective in this particular capacity, it’s not unanimous.

Bitcoin is “an incredible store of value in the rest of the world,” Bill Gurley, a venture capitalist, said in late 2017.9)Retrieved 21 July 2018 https://www.cnbc.com/2017/11/17/bill-gurley-bitcoin-is-incredible-store-of-value.html He emphasized that the digital currency can be a great store of value in parts of the world that suffer from significant geopolitical turmoil, as these regions can see their native currencies experience substantial changes in value overnight.

Gurley is not alone in saying this, as Gurguc and Knottenbelt have asserted that cryptocurrencies have already established themselves in this way.10)Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html

However, Raoul Pal, author of investment newsletter The Global Macro Investor, has questioned Bitcoin’s ability to serve as a store of value. He said that the digital currency’s basic rules could change significantly as a result of a permanent alteration in code known as a hard fork.11)Retrieved 22 July 2018 https://www.forbes.com/sites/oliviergarret/2017/06/12/raoul-pal-bitcoin-is-mania-and-not-a-store-of-value-i-sold-out-last-week/#11f21a2465ad “Bitcoin was supposed to be a store of value, you couldn’t mess with the formula… and now they are talking about a ‘hard fork’ changing it?”

He elaborated: “Even if they don’t change the formula, the fact that they could? That’s enough to say it’s not a long-term store of value.”12)Retrieved 22 July 2018 https://www.forbes.com/sites/oliviergarret/2017/06/12/raoul-pal-bitcoin-is-mania-and-not-a-store-of-value-i-sold-out-last-week/#11f21a2465ad

Unit Of Account

The third requirement that Bitcoin needs to meet in order to function as a currency—and possibly replace the U.S. dollar as the world’s reserve currency—is to function as a unit of account. The extent to which Bitcoin serves this purpose is a matter of debate.

Joe Davis, a Vanguard economist, wrote an op-ed piece on ETF.com that digital currencies function as stores of value as they can be used to quantify the value of other goods and services.13)Retrieved 22 July 2018 <a href=”http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining“>http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining One example is that all the alternative protocol assets (or “altcoins”) that must be purchased by using Bitcoin instead of fiat currency.14)Retrieved 22 July 2018 https://www.cnbc.com/2018/06/01/bittrex-exchange-will-let-investors-swap-their-dollars-for-cryptocurrency.html

Others have provided a different assessment, such as David L. Yermack, a professor at the New York University Stern School of Business, who asserted that Bitcoin is too volatile to be an effective unit of account.15)Retrieved 22 July 2018 https://www.technologyreview.com/s/524666/bitcoin-lacks-the-properties-of-a-real-currency/ He said in 2013 that the digital currency’s exchange rate relative to the U.S. dollar was 10 times that of the greenback’s exchange rate versus other fiat currencies like the euro and yen.

Chris Burniske, an analyst for investment manager ARK Invest, agreed with this premise, contending in a 2015 article that Bitcoin’s volatility undermines its use as a store of value.16)Retrieved 22 July 2018 https://ark-invest.com/research/investigating-bitcoin However, he added that the digital currency’s generalised lack of adoption exacerbates the situation.

The situation could change, though, if one or more nations with a highly volatile native currency links their fiat currency to Bitcoin instead of the U.S. dollar.17)Retrieved 22 July 2018 https://ark-invest.com/research/investigating-bitcoin

Summary

Bitcoin could potentially replace the U.S. dollar as the world’s reserve currency, but for this to happen, the digital currency would need to make progress in several important areas.

Currencies serve as a medium of exchange, a store of value and a unit of account. While the U.S. dollar has established itself well in these particular areas, some analysts have voiced their doubts that Bitcoin could fulfill these key roles.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

References   [ + ]

1, 4, 5. Retrieved 21 July 2018 https://www.ibtimes.co.uk/coinbase-ceo-bitcoin-surpass-dollar-reserve-currency-within-15-years-1512429
2. Retrieved 21 July 2018 https://www.coindesk.com/price/
3. Retrieved 21 July 2018 https://cointelegraph.com/news/bitcoins-correction-could-well-have-shaken-out-potentially-damaging-investors
6, 7, 8, 10. Retrieved 22 July 2018 https://www.prnewswire.com/news-releases/cryptocurrencies-could-become-mainstream-payment-solution-within-next-decade-finds-new-imperial-college-and-etoro-report-833609231.html
9. Retrieved 21 July 2018 https://www.cnbc.com/2017/11/17/bill-gurley-bitcoin-is-incredible-store-of-value.html
11, 12. Retrieved 22 July 2018 https://www.forbes.com/sites/oliviergarret/2017/06/12/raoul-pal-bitcoin-is-mania-and-not-a-store-of-value-i-sold-out-last-week/#11f21a2465ad
13. Retrieved 22 July 2018 <a href=”http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining“>http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining
14. Retrieved 22 July 2018 https://www.cnbc.com/2018/06/01/bittrex-exchange-will-let-investors-swap-their-dollars-for-cryptocurrency.html
15. Retrieved 22 July 2018 https://www.technologyreview.com/s/524666/bitcoin-lacks-the-properties-of-a-real-currency/
16, 17. Retrieved 22 July 2018 https://ark-invest.com/research/investigating-bitcoin