Bitcoin, by its very design, lends itself very well to displace the US Dollar as an alternative global reserve currency. And it might be called upon to do so sooner than many of us might have imagined.
The turbulence in the current geopolitical scenario threatens to ramp up over 2019, given the distinctly idiosyncratic nature of global leadership in many of the major nation states, whether it be the US, China, Russia or various Middle Eastern, European and Latin American nations. The common theme is of a leadership by what media might sometimes euphemistically refer to as ‘strong men’.
A few weeks ago, we had opined
on the imminent possibility of nation states at the receiving end of a Trump-led sanctions regime deciding to launch CBDCs or central bank digital currencies. Iran, especially after its ostracisation from the global SWIFT network is reputed to be working on a crypto version of its digital currency. Venezuela has already thrown its hat into the CBDC ring, albeit with the much-maligned and clumsily structured Petro. Among others, Russia is said to be following suit as well with its own crypto ‘Ruble’.
In this scenario, it is therefore a no-brainer that these nations states, in addition to investing heavily in exploring crypto versions of their currencies, will also look at diversifying their foreign exchanges reserves by investing in non-sovereign currencies like Bitcoin, in a bid to decrease their dependence on the US dollar. Sanction-hit countries such as Russia and Iran will be among the earliest to take the first step toward de-dollarization as their currencies are at the risk of significant devaluation, owing to the impact of US-sanctioned embargoes on their export/import operations and trade settlements.
In line with our prediction from a few months ago, Russia will now likely be the first major nation state to consider a coordinated, official investment program to acquire bitcoin. The move will be aimed squarely at fighting the detrimental effects of US sanctions, according to a Russian economist who reportedly has close ties to Kremlin. Needless to say, if the alleged rumor indeed turns out to be true, it will end up becoming a big boost for Bitcoin from an adoption standpoint. The high-impact, but hitherto theoretical use case of bitcoin being a non-sovereign reserve asset class for nation states looking for an alternative to dollar hegemony would have finally come to fruition, setting a template for many other nations states that might feel themselves wronged in the current global economy.
Regular followers of this newsletter might recall our earlier mention of a dystopian version of crypto singularity
Russia currently holds close to $460Bn in foreign currency reserves and the country is reportedly expected to purchase approx. $10Bn in Bitcoin in the first quarter of 2019 itself. Incidentally, the price crash of 2018 might have made Bitcoin more attractive from a valuation standpoint for the Russians to consider investing on such a large scale. If you are wondering how big of an impact this might have on Bitcoin’s price, if Russia invests $10Bn as speculated, at current prices, it would own roughly 15% of the world’s Bitcoin in circulation at the moment. Of course, prices would jump up exponentially if Russia were to buy this $10Bn worth of Bitcoin, and it would require a concerted market making operation across markets over a period of time for the Russians to acquire this amount. Regardless, the move will be a testament to Bitcoin’s role in the modern world as an unseizable, uncensorable, non-sovereign currency.
Things will get really interesting if and when other countries follow suit and start buying bitcoin to diversify their foreign currency reserve base. At a 20% deployment into crypto by sanctioned nations, there could be over $140b worth of sovereign demand for BTC.