Why bitcoin won’t be a global reserve currency

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Neal Acheson, a member of the Coindesk team, has written a very interesting article about the current situation with global currencies and looks at why bitcoin probably won’t be considered as a reserve currency.

He starts by looking at the current state of the markets. The US stock market, he argues, is overvalued and its yields are dropping. However, he says the more important story is what is happening in the global currency markets, which he claims are under a heavy strain. He says “A combination of monetary easing, trade tensions and the threat of military action in the Middle East is a noxious cocktail for currency holders and hedgers as international conversions get risky and costly.”

There are many questions being asked about the role of the US dollar as a global reserve currency, a currency that has held the leading position for almost a century.

The history is enlightening: “In 1944, an agreement was drawn up between delegates from 44 nations that established the U.S. dollar as the world’s reserve currency, which would be pegged to gold. The other member nations would peg their currencies to the U.S. dollar, and the resulting relative stability between denominations would smooth world trade and boost the post-war recovery.The agreement also created the institutions of the International Monetary Fund (IMF) and the World Bank to coordinate global currency movements and channel loans to developing nations.”

However the US dollar stopped being the ‘official’ global reserve currency in 1971 when President Nixon took the country off the gold standard. But it remained the ‘de facto’ reserve currency.

Why not bitcoin?

With so many questions being asked about the need for a fiat-based, single-issuer global reserve currency, it is natural that bitcoin might enter the conversation. As Acheson says, “Surely a sovereign-free, algorithm-based alternative would be more stable and trustworthy?”

However, his answer is that it won’t be bitcoin and here is why: “First, a global currency needs to have a flexible supply. Second, bitcoin will not become a universal settlement token for trading contracts. It’s too volatile.”

He concludes that while bitcoin is unlikely to replace a currency like the dollar in the currency markets, it has added “a new tool to the box of potential solutions,” adding, “it could well form an integral part of a new type of reserve currency, which could help smooth or even avoid the shocks to come.”

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