Could A Cryptocurrency Become A Global Reserve Currency?

Could a non-state cryptocurrency like bitcoin become a global reserve currency? I first proposed the idea back in November 2013, long before bitcoin's rise to $19,000, decline to $3,200, recent ascent to $13,000 and current retrace.

The idea is intriguing on a number of levels. In terms of retaining value through thick and thin, the ultimate reserve currency cannot be printed (and thus devalued) with abandon by a government. Gold and silver have served as the ultimate reserve currency, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value.

While many observers believe gold is still the only reliable reserve currency (or if you prefer, the only reliable backing for government-issued paper money), it's a worthy thought experiment to ask if a digital currency could also act as a reserve currency.

Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency's acceptance as money that can be used to buy commodities, goods, services, and (the ultimate test) gold.

It follows that the first step in a non-state issued digital currency becoming a reserve currency is that it isn't created in quantities that dwarf demand. If the digital currency is issued with abandon, it cannot be scarce enough to gain any value. If I own one quatloo (our hypothetical digital currency) and a trillion new quatloos are issued tomorrow, the value of my one quatloo will decline to near-zero.

The second step is its widespread acceptance globally as money, i.e. a store of value and something which can be traded for goods and services.

There is a bit of a built-in conflict in these two requirements. To be useful in the $60 trillion global economy, the quatloo must be issued in size: there must be enough of it around to grease transactions large and small in all sorts of markets. Using the U.S. dollar as a guide (since the USD is the primary reserve currency), we can estimate that a minimum of $1 trillion in quatloos would be needed to become a practical global currency.

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Disclosures: None.

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Michele Grant 2 years ago Member's comment

Simple answer is no.

Currency Trader 2 years ago Member's comment

Why do youthink that?

James Goldstein 2 years ago Member's comment

Too many questions, from security to governments eventually regulating it if it gets too popular.

Michele Grant 2 years ago Member's comment

There's so much to say about #crytpocurrencies but in brief, it isn’t tangible, you can’t store it yourself & it can be hacked.

Derek Snyder 2 years ago Member's comment

It's true, people think #blockchain means secure. But exchanges can and do get hacked all the time. And most tokens are pure scams. In fact this just happened yet agaiin:

talkmarkets.com/.../exit-scam-cryptocurrency-exchange-bitsane-vanishes-with-users-funds

Gary Anderson 2 years ago Contributor's comment

Government currency appears far more stable than Bitcoin, doesn't it? The dollar is hardly prone to hyperinflation. Bitcoin's worth is massively volatile.

Doug Morris 2 years ago Member's comment

What about the concept of a stable coin. For example #Facebook's new #Libra. $FB.

Gary Anderson 2 years ago Contributor's comment

Yes, as long as the corporation guarding it is secure. Not sure if Facebook could be that secure based on its record. That is for experts in the field.

Danny Straus 2 years ago Member's comment

Anything is hackable. Including #Facebook. $GB