With the recent talk about de-dollarization, let's explore its potential implications on the global economy, and how it may affect Bitcoin and other cryptocurrencies.
Arthur Hayes also dropped another must-read article talking about de-dollarization:
With everyone foaming at their mouths about "the dollar is going to zero!!!" now's the time to explain:
- What de-dollarization means.
- Whether de-dollarization is or isn't happening.
- What this means for crypto.
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What Is De-Dollarization?
"Dedollarisation is a process of substituting US dollar as the currency used for (i) trading oil and/ or other commodities (i.e. petrodollar), (ii) buying US dollars for the forex reserves, (iii) bilateral trade agreements, and (iv) dollar-denominated assets."
De-dollarization has become a major talking point that has made it to mainstream news thanks to headlines like:
- China-Russia yuan-denominated trade hitting record highs.
- Yuan's share of trade finance doubling since the start of the Ukraine War.
- China completing the first LNG trade with France in yuan.
You can easily spot the common denominator here: China currency good, green currency bad! That has even gotten the attention of a particular former US President:
In short, people are panicking at (or eagerly awaiting) the end of the dollar's dominance in those four points mentioned above.
Let's unpack whether that is actually happening.
Is De-Dollarization Happening? If Yes, How Much?
Here's where we have to get into the trenches of analyzing macroeconomic data. Good thing a couple of smart people have already done all the work.
The consensus among reputable experts is the following:
De-dollarization is happening at the margin, but the dollar's status as the world reserve currency is safe. For now.
Firstly, fear mongering about the dollar's imminent demise has been around before and never materialized as badly as it sounds.
Second, the dollar maintains a stable share of global payments volume.
Third, the dollar's share of foreign exchange reserves is down from its peak value, but the meat of that move happened a decade ago and isn't a problem for the US anyway.
Those are some of the main themes that repeatedly come up about de-dollarization and whether it's really happening.
- Changing the system is difficult because the challenging currencies cannot credibly replace the USD.
- In any case, America would have to actively support de-dollarization for it to happen.
- A hypothetical commodity currency would be worse than the dollar because it would be pro-cyclical and more volatile. When commodity prices are low, the states backing this currency would sell it to prop up their economies. But that is exactly when its value is the lowest!
In other words, China doesn't really want the yuan to replace the dollar and neither is it strategically well-placed for that to happen. What China does want is to use its dollars in a way that benefits its national interests.
You can, for example, buy lots and lots of American assets:
One American asset that's easy to acquire is US government debt, aka US Treasuries. China has been recycling its massive dollar surpluses into Treasuries, which is where the "China holds a lot of American debt" headlines come from.
If China buys less US debt, that would count as a form of de-dollarization. And that's exactly what is happening, according to Luke Gromen:
Gold is harder to weaponize and sanction.
Finally, we should ask:
Is the dollar as the reserve currency even the big deal it's made out to be?
Without getting into the economic nitty-gritty, having a bit less "global reserve currency" juice would probably help US manufacturing and thus, American blue-collar workers:
- The dollar isn't going anywhere for now.
- But other countries have less appetite for dollar debt and are looking for alternatives.
- And the US itself may welcome all of this.
What Does That Mean For Crypto?
The Bretton Woods III theory is essentially the "academic way" to argue for de-dollarization. Regarding crypto, here's what we concluded:
By design, de-dollarization means substituting the dollar for other currencies. Even if only a fraction of the liquidity is directed to cryptocurrencies, that could pump prices in the long run. But that is not guaranteed by any means.