The first-ever digital currency, Bitcoin (BTC), is arguably one of the fastest-growing financial assets in the world today. The technology was conceived by an individual with the pseudonym Satoshi Nakamoto as a digital currency with the capabilities to overhaul the world’s global payment ecosystem. While Bitcoin is living to its potentials of providing an alternative to the slow and expensive payment systems we have today, it has successfully added more use cases including its direct usage as a treasury reserve asset for most multinationals. With Bitcoin, corporations like Tesla Inc. could purchase as much as $1.5 billion with a much lower cost and increased speed than what traditional cash transactions can offer.
Amidst the growing momentum and uniqueness that Bitcoin is gaining today, many people believe the cryptocurrency may attain a mainstream adoption that is broad enough to let the coin be adopted as the world’s reserve currency.
According to Wikipedia, a reserve currency is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments, and all aspects of the global economy.
The US Dollar is currently the world’s reserve currency. The ascendancy of the US Dollar as the world’s reserve currency dates back to the World War II era, with a coalition of 44 countries meeting at Bretton Woods, New Hampshire, to unanimously approve the fiat currency US Dollar as the world’s reserve currency. The arrangement, which came to be known as the Bretton Woods Agreement, established that the central banks would maintain fixed exchange rates between their currencies and the dollar.
Through the status of the world’s reserve currency, the US Dollar is ubiquitous and can be found in almost all economies. The U.S. Federal Reserve, however, is tasked with the responsibility of printing enough fiat notes to meet the global demand for the currency.
Many Bitcoin advocates have touted Bitcoin to displace the dollar as the world’s reserve currency, the feasibility of which is marred by three major factors highlighted below:
For much of the existence of Bitcoin, the digital currency has battled a lot of backlash from regulators around the world. While some countries have duly embraced Bitcoin and cryptocurrencies into their financial ecosystems, many others are still antagonistic to the innovations being heralded by the digital currency. The likelihood of Bitcoin being used or even considered as the world’s reserve currency is hampered with few nations positive about the coin at this time.
The fact that Bitcoin has a finite supply of 21 million coins may also pose a bit of a challenge to its possibility to be considered as the world’s reserve currency. As a digital asset that will need to cater to the global financial need of international trade, the limited cap of the coin may disrupt the global financial ecosystem in ways not yet imagined.
The fact that investors HODL their Bitcoin holdings is also a big factor in limiting Bitcoin circulation to favor its candidacy for the world’s reserve currency. A Morgan Stanley report has also confirmed this noting that people HODLing the cryptocurrency limits the potentials of the coin to be used for buying and selling, one of the primary reasons it was created.
Bitcoin is doing remarkably well as a store of value and in offering financial independence from Central Banks and other financial institutions. Its clamor to be used as the world’s reserve currency however will be defeated by these points and many more. Hence, the digital currency should be better leveraged as the next big investible asset in our world today.