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Will Bitcoin Replace The US Dollar?

Feb. 02, 2021 9:41 AM ETBitcoin USD (BTC-USD)1 Comment
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  • There are strong sentiments for and against Bitcoin, but Bitcoin is a market reality now that can't be ignored.
  • The US dollar isn't simply a currency. It's a symbol of US hegemony.
  • Bitcoin isn't a 'safe haven' but riskier and more volatile than the US dollar.
  • Regulation is slow and technology is fast, so regulating Bitcoin will be tough and could hurt innovation in fintech.
  • The US dollar will sustain its dominance against Bitcoin in the foreseeable future.

Will Bitcoin Replace the US Dollar?

By Salam Nahzat

There’s a mix of hype, hope and confusion about cryptocurrencies, particularly Bitcoin. Some regard Bitcoin as a medium of exchange. Others see it as an investment and trading instrument just like stocks. Yet there are those who are dismissive of cryptocurrencies altogether arguing that they have no place in the heavily-regulated financial sector. There’s no consensus on the importance of Bitcoin. But whether we like it or not, Bitcoin is a reality that can’t be ignored. If Bitcoin were a company, it would be a $600b company today. 

The US dollar is not just a currency, it’s also a symbol of US hegemony.

But one theme that stands out in any Bitcoin debate revolves around the US dollar and central banks. Some see Bitcoin as a potential replacement for the dollar which is also a global reserve currency. Some Bitcoin supporters fear that the US government runs increasingly large deficits and just keeps printing dollars. So they see Bitcoin that is limited in numbers as a reliable store of value — and also free from government intervention; they regard Bitcoin as a safe haven, a hedge against volatile US dollars. The scarcity element of Bitcoin is also important: you can’t just keep creating Bitcoins indefinitely the way you would print fiat currency. Some go as far as believing cryptocurrencies are the future of currency. But can the cryptocurrencies and in particular Bitcoin really replace the US dollar?

Photo by Bermix Studio on Unsplash

The answer isn’t so simple. There are significant differences; we're comparing apples with oranges. The US dollar is a traditional currency while Bitcoin is a tech-based currency: One is paper, the other is a collection of bits (hint: Bitcoin). One is tangible, the other is intangible. The dollar is governed by a centralized entity, backed by the government and banks can follow money trails. Governments, law enforcement, intelligence agencies and financial institutions collectively work to monitor, report and detect illegal transactions — including terrorism financing 24/7. Financial institutions are accountable to how they manage and protect people’s money. There are set rules and serious consequences when people and institutions break the law. There's no consensus on this point either as many believe the rich act with impunity when it comes to accountability pointing to 2008 financial crisis.

Bitcoin is a reality that can’t be dismissed. Remember, the first telephone was also dismissed when it was offered for sale in 1876.

Bitcoin on the other hand is decentralized (peer-to-peer) and transactions are verified by a public ledger that is built on blockchain technology. There’s no government (at least this is what some think), no bank, no guarantee and no regulation. Bitcoin is a store of value, an investment option, a medium of exchange, a currency and a digital wallet — depending on who you ask.

The for-Bitcoin and against-Bitcoin Camps

There’s no shortage of people fiercely believing in Bitcoin or strongly opposing it. There are basically two opposing camps. Here are a few examples that illustrate the divide on Bitcoin.

Chamath Palihapitiya, CEO of Social Capital and a former Facebook executive is a strong believer in Bitcoin — although he emphasizes that you should only put 1% of your total investment in Bitcoin:

This [Bitcoin]is now a confidence game, right, there’s no real utility in this, this is a fantastic fundamental hedge and store value against autocratic regimes and banking infrastructure that we know is corrosive to how the world needs to work properly. You cannot have central banks infinitely printing currency, you cannot have folks you know misguided and misdirected monetary and fiscal policy… 

Chamath Palihapitiya, CNBC, December 2017.

Anthony Pompliano, founder and partner at Morgan Creek Digital Assets is another strong supporter:

Everything that’s new looks different right in the beginning and I think what you’ve got to realize with Bitcoin specifically money is a belief system. So the US dollar, the only reason you and I use it is because we believe it has value so I’ll give you a dollar, you give me a good or service in exchange; we believe it has value. Bitcoin has value because two people who exchange it believe it has that value. And what we’re seeing is the volume, right, look at people using it, that’s what ultimately matters.

Anthony Pompliano, CNBC, May 2019

The anti-cryptocurrency is as strong and vocal as well.

Kevin O’Leary, chairman of O’Shares ETFs and co-host of “Shark Tank”, calls Bitcoin a “digital game” arguing on CNBC that:

The financial markets deal with regulators and you can only operate in the confines of those rules. And so when we glorify something like this [Bitcoin] and it has nothing to do with the financial markets that make the whole world work.

Kevin O’Leary, CNBC, December 2020

However, the most blunt and strong words come from the head of the Bank for International Settlements (BIS), Agustin Carstens who in 2018 called Bitcoin a “Ponzi scheme” arguing that cryptocurrencies aren’t sustainable as money and that they don’t meet the “textbook definition of currency”. He argues in support of central banks as a “trusted” institution against cryptocurrencies:

The tried, trusted and resilient modern way to provide confidence in public money is the independent central bank.

Agustin Carstens, February 2018, Condesk

I didn't expect the head of BIS would fall in love with Bitcoin, so not surprised by his position to call Bitcoin a ponzi scheme. Institutions have also taken notice of the popularity of cryptocurrencies. The following is a listing of top ten institutional Bitcoin holders.

Top Ten Institutional Bitcoin Ownership (as of June 2020)

Source: Forbes

The US Dollar is not Simply a Currency

Some opponents of the US dollar and those who favor cryptocurrencies have a very narrow understanding of the US dollar focusing merely on risk of devaluation of the greenback: They view the US dollar as a simple currency and focus solely on depreciation of the greenback as the US government prints more money. The reality is that the US dollar is more than a currency. It’s the symbol of the supremacy and hegemony of the United States as an economic, political and military powerhouse. The US dollar also sits at the throne of capitalism and the free market. And the power isn’t just symbolic, it’s real and forceful.

Running away from dollar towards Bitcoin is like running away from a snowstorm towards an oncoming avalanche.

But the argument against uncertainty and weakening of the US dollar is also valid. The chart below shows the US dollar index which measures the value of the dollar against six world currencies (Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona). The index was created in 1973 after the US abandoned the Bretton Woods Agreement. The US dollar index as of Jan 21, 2021 is 90.47; it was about 70 for a period during the global financial crisis and 160 in Feb 1985. Given the volatility of the value of the dollar, many investors are worried about being invested in the dollar. But the US dollar doesn’t exist in isolation and in a vacuum in the larger global financial market. Fluctuation in value and uncertainty about the future value of any asset are characteristics of the free market (sentiments, macroeconomics, political (in)stability, trade, etc).

US Dollar Index, DXY (1973–2020)

Chart source: The Globe and Mail. Monthly interval

Ironically, those who complain about the volatility of the US dollar should look at historical volatility of Bitcoin. If you run away from the dollar and take refuge in Bitcoin ‘safe haven’, it’s like running away from a snowstorm towards an incoming avalanche.The graph below depicts the volatility of Bitcoin. It isn’t uncommon for Bitcoin to lose more than 20% of its value in a matter of days. For example, on January 8, 2021, Bitcoin hit a high record trading at $41,962 and today (January 27, 2021), it’s $30,278. Bitcoin proponents should also assess the risk of the digital currency being stolen and permanently locked/lost (more on this later).

Bitcoin historical price. Monthly interval.

Source: Yahoo Finance

The Resilient Dollar

Despite the negative sentiments, the dollar remains dominant and relevant in the face of significant pessimism about its future value. This is not to say the dollar hasn’t depreciated, but to point the dollar hasn’t collapsed as some had predicted. Today, there’s over 2 trillion dollars in circulation globally. Basically, any local or online purchase is somewhat facilitated by the US dollar. The coffee you drink, the tomatoes you buy, the car you drive, the gas you pump at the petrol station, the gifts you purchase online are in away made possible because of the US dollar. The US dollar has an invisible hand in virtually all cross-border transactions and movement of people and goods and services. So the global trade and global banking systems are tightly linked to the dollar.

The greenback is also an instrument of US foreign policy to achieve its global strategic objectives. For example, when the US imposes sanctions on adversaries such as Iran, it relies on powers of the US dollar. When Iran is excluded from the global banking system (dominated by the US), it cripples the Iranian economy because Iran can’t sell its oil in the open market or collect payment. The US also used this strategy against Iraq when Saddam Hussein was in power. The US again threatened Iraq in 2020 with similar sanctions if it tried to ask US troops to leave Iraq (this was right after the US assassinated an Iranian general in Iraq).

So it’s a mistake to see the US dollar as just a currency — it should be seen as what it’s: an instrument of power and control by the United States on global stage. The so-called economic sanctions imposed by the US on adversaries are practically ‘US dollar sanctions’ because without the US dollar there’s no ‘economic’.

Why won’t Bitcoin Replace the US Dollar?

It’s been said ‘you can predict everything, but the future’. With that in mind, I refrain from making any prediction, but rather outline reasons why Bitcoin may not replace the US dollar:

  1. Technology and regulation: Technology can’t easily displace regulation. Just because a community that is obsessed with technology and cryptocurrency and are distrustful of central banks doesn’t mean regulators would stand aside and let technology make them irrelevant. Ironically, the state of Ohio became the first in the US to accept tax payments in Bitcoin — but the plan was short-lived. It was forced to abandon the program after it was reported that Ohio’s Bitcoin Tax Program Was Illegal, State Attorney General Says. This is a proof of how difficult it’s to adopt technology without understanding legal and regulatory implications. Regulation is slow and technology is fast, but both are complex. This is why it’s hard to regulate technology because before regulators have a chance to review a technology they are trying to regulate, the technology is probably already obsolete.
  2. Global domino effects: There’s the risk of domino effects on the global banking system. Imagine the theoretical scenario where a given central bank announces that they would also use Bitcoin as reserve currency’. The end result would be chaotic when dealing with other banks that don't recognize Bitcoin.
  3. Lack of infrastructure: Existing financial and system infrastructures in most countries aren’t ready for Bitcoin (this includes central banks). This  also includes retailers.
  4. Volatility of Bitcoin: Volatility and instability of Bitcoin as a store of value is a big risk. It’s not uncommon for Bitcoin to lose 20% of its value within a few days. Imagine, holding Bitcoin or borrowing in Bitcoin; you would be financially and emotionally ruined.
  5. Illegal transactions: There’s a real risk of money laundering, tax evasion and terrorism financing although propnennets of cryptocurrencies argue otherwise. The fact that some cryptocurrencies can’t be traced and identified makes them a magnet for criminals and terrorists as they can engage in illegal activities and collect and transfer the proceeds globally without fear of detection by law enforcement agencies (or at least that’s what they think).
  6. Future innovations: Risk of displacement by future innovations and technologies is always present. We never know what’s in store in the future. Could there be another innovation that would outsmart and replace cryptocurrencies and especially Bitcoin? If you believe the answer is no, the future could surprise you. Remember, cryptocurrencies and Bitcoin aren’t the ‘final frontier’ of currency evolution.
Technology is fast; regulation is slow, but both are complex. This is why it’s hard to regulate technology.

The Declining Powers of the United States?

As I stated earlier, the dollar’s dominance is driven by the supremacy of the United States as an economic, military, technological, political and diplomatic superpower. The power dynamics between proponents of Bitcoin and the United States government is crystal clear: In a battle for dominance between the US government and a group of tech enthusiasts and ‘central bank rejectors’, the US government will have the upper hand for a very long time.

And if one day Bitcoin were to become a dominant currency, medium of exchange, store of value or a standard payment method, the US government would probably dictate the rules (at least in the US). The US government has already started taking steps to take a grip on cryptocurrencies by introducing an enforcement framework. Just last October it was reported that, The US Crypto Enforcement Framework Is a Warning to International Exchanges.

I think in the long-term one way that the dollar could lose dominance would be the declining powers of the United States globally across economic, financial, diplomatic and military spectrums. And even if that were to happen, there would be other contenders: The Chinese Yuan and the Euro. The collapse of dollar could have existential consequences for the US as a dominant power.

US Government vs. Bitcoin

For now, the US is in a strong position against the potential dominance of Bitcoin. The US government has reasons to push back on Bitcoin. Bitcoin in a way tries to challenge the hegemony of the US and if left unchecked it can have unintended consequences to US economic, military diplomatic and intelligence capabilities worldwide — I’ve alluded to this already.

Throughout history, other currencies and commodities have been the common currency and reliable store of value. For example, until a century ago, it was the British sterling that was the dominant currency; Britain used its colonial and imperial powers to promote and maintain the dominance of the sterling. Some could argue this was an exploitation and an extension of illegal occupation of foreign lands by the British, but that’s another discussion. So although the US is well mindful that the US dollar won’t be the dominant currency till eternity, it won’t easily let Bitcoin make the greenback irrelevant.

In fact, the US government already has somewhat of a grip on Bitcoin. In November 2020 it was reported that the US government seized $1 billion Bitcoin from Silk Road, the dark web marketplace. It’s not the first time the US has seized Bitcoins. The US Marshals Service also auctioned 4041 Bitcoins in February 2020.

Bitcoin Security and Recoverability

Misconception about the security of Bitcoin is abundant. People often confuse ‘integrity’ of a Bitcoin transaction with security of Bitcoin or digital wallet holding Bitcoins. Transactions are verified because it’s replicated through a global public ledger built on blockchain. But that doesn’t stop people with the right tool and know-how to steal or seize Bitcoins from your ‘private’ digital wallet.

An evidence of this is the seizure of Bitcoins by the US government and multiple instances of lost and stolen Bitcoins. The US is probably sending a message to those who want to hide behind perceived anonymity of cryptocurrencies believing they can’t be traced or identified.

You should read about the story, Man makes last-ditch effort to recover $280 million in bitcoin he accidentally threw out or The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster. Then there’s the story of a tech journalist who advises, “Please learn from my mistakes.”, as he describes ‘How I lost £25,000 when my cryptocurrency was stolen’.

Could you lose your money if you put it in your bank’s safety deposit box? While it’s possible, at least you have the bank and regulators providing a level of protection and guarantee. Shockingly enough, Ledger, a France-based company that makes secure hardware digital wallets itself became the target of a cyber attack when it was reported, After Ledger Hack, Who Can You Trust For Bitcoin Storage? Using stolen customer data, hackers have been using phishing attacks to trick people to disclose their private key used to protect their Bitcoins. All this is related to security, but relevant to the discussion regarding dollar: In the absence of protection and guarantee and presence of risk of theft and hacking, most people would be unwilling to swap their hard-earned dollars for Bitcoin.

Final Remarks

In the final analysis, I think Bitcoin is a reality and it has a place in the financial market but safeguards and assurance are needed to address risk, uncertainty and the potential for rampant criminal transactions on cryptocurrency peer-to-peer networks. But I also don’t think there’s a case to be made for Bitcoin even nearing the journey to start to replace the US dollar. As I argued earlier, regulation travels slow while technology travels fast, so that should tell you how I feel about regulating Bitcoin in its entirety: If regulation tries to destroy Bitcoin or Bitcoin tries to destroy regulation neither will succeed. 

If one tries to destroy the other neither will succeed.

So I believe regulating Bitcoin is a painful task and it could also impede and slow innovation in fintech and also interfere in the free market. But without a degree of government oversight, it’s unlikely Bitcoin would gain acceptance and endorsement in the broader market and by major financial institutions — let alone the likelihood that Bitcoin would one day replace the US dollar. Not a chance.

If one tries to destroy the other neither will succeed.

References and Further Readings

The dollar has had a 100-year run as the world’s reserve currency. But a new class of contenders is…

Opinion: Digital currency poses a significant threat to the greenback’s supremacy When the pandemic hit, the U.S…financialpost.com

The Fed — How much U.S. currency is in circulation?

The Federal Reserve Board of Governors in Washington DC.www.federalreserve.gov

U.S. to Reimpose Sanctions Targeting Iranian Economy

WASHINGTON-The U.S. moved to reimpose punishing sanctions on Iran and threatened even-tougher measures for later this…www.wsj.com

The Dollar Underpins American Power. Rivals Are Building Workarounds.

U.S. allies, looking to buck American control over international trade, are developing alternate systems that don’t…www.wsj.com

Trump Pushes Iraq, Threatens Sanctions After Vote to Expel U.S. Troops

Iraq’s parliament voted in favor of expelling U.S. troops after a U.S. airstrike killed a powerful Iranian general on…www.wsj.com


US DOLLAR DOMINANCE: How long will it last?

Bitcoin: $1bn seized from Silk Road account by US government

USMS Asset Forfeiture Bitcoin Sale

20 Institutional Bitcoin Investors Revealed, But Soon The List May Vanish

BIS Chief Slams Bitcoin As Ponzi Scheme and Threat to Central Banks - CoinDesk

Morgan Creek’s Anthony Pompliano and Kevin O’Leary debate Bitcoin

Watch Shark Tank’s Kevin O’Leary challenge the bull case for Bitcoin

Inventing the Telephone?And Triggering All-Out Patent WarOn March 3, 1876, Alexander Graham Bell celebrated his twenty-ninth birthday and received the one present he'd been…web.archive.org

Article by Salam Nahzat

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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