Could bitcoin emerge as the world’s reserve currency?

Reserve currencies are those held in significant quantities by governments and institutions as part of their foreign exchange reserves, often influencing international trade and finance. Their role has been shaped by major wars throughout history.

Historically, wars have been pivotal in shifting the balance of economic power, and consequently the dominance of reserve currencies.

The British pound held the title through the 18th and 19th centuries, bolstered by the British empire’s colonial reach and maritime supremacy. However, the two world wars strained the UK economy and led to a decline in its financial dominance. After World War 2, the dollar was established as the world’s primary reserve currency, backed by the strongest post-war economy and over two thirds of the world’s gold reserves.

Imagine a scenario in which escalating tensions in the Middle East spiral into a global conflict. The unrest between Israel, Palestine and Iran could hypothetically draw in the US, Russia and China, among others. In such a scenario extensive military spending and financial aid could necessitate large expansions in money supply, leading to inflation and even currency debasement.

Amid such instability fiat currencies might falter. Historically, similar circumstances have led to shifts in reserve currency status. In our imagined scenario, as national currencies weaken and trust in traditional financial systems wavers, global investors could turn to decentralised alternatives.

Bitcoin, recognised for its attributes as a non-sovereign, hard-capped supply, global, immutable, decentralised, digital store of value, could see unprecedented demand. Unlike fiat currencies, bitcoin is not controlled by any central authority, making it immune to policies of currency expansion. In a world where trust in national currencies dwindles due to inflation and political risk, bitcoin could emerge as a digital safe haven.

Consider a situation where central banks, in a bid to stabilise economies, begin diversifying their reserves to include cryptocurrencies. As more institutions and individuals invest in bitcoin to hedge against inflation, its price could soar. With a limited supply capped at 21-million coins, bitcoin’s value could theoretically reach the $1m mark in response to immense demand amidst global currency crises.

The Covid pandemic shifted economic paradigms, compelling nations to abandon austerity measures in favour of aggressive fiscal and monetary policies. This unprecedented response potentially prevented a deeper economic collapse, demonstrating the necessity of adaptable policy frameworks in crisis management. The response to the pandemic saw an increase in public debt and a dramatic expansion of central bank balance sheets, reminiscent of wartime economies. While necessary, these measures have complex implications for economic stability.

Economic growth has traditionally been the primary measure of a nation’s success, associated with advancements in societal welfare. However, recent crises have exposed the inadequacies of GDP as a comprehensive indicator of progress. Post-pandemic recovery is revealing deep-seated global challenges that are likely to temper economic growth.

These include demographic shifts, rising indebtedness and geopolitical conflicts.

With the rapid evolution of cryptocurrencies and fintech blurring traditional financial boundaries, these technologies could offer profound changes in monetary policy and financial stability, presenting both opportunities and challenges.

In a hyper-conflict scenario in a multipolar world, the advantages of a decentralised currency become even more pronounced. Countries and individuals seeking autonomy from the influences of dominant national currencies such as the dollar might see bitcoin as a neutral currency that transcends geopolitical disputes. This transition could signify a shift in how global financial systems operate, potentially leading to a redefinition of economic power dynamics.

While speculative, the potential for bitcoin or similar cryptocurrencies to rise as a dominant reserve currency in the context of global conflict and economic instability highlights the dynamic nature of international finance.