The Dollar's Demise: Is Crypto Poised to Take the Throne?

While the US president and his administration are going hard on crypto regulations and Bitcoin, the world is slowly but surely turning away from the once most powerful fiat in the world, the US Dollar.

In light of recent news, let’s review what happened with the US dollar and how the crypto market will be affected if it loses its #1 place in the world.

How Did the US Dollar Become So Powerful?

For decades, the USD was the most powerful fiat currency in the world. No wonder why most people, banks, and organizations are holding and trading using this asset. It is backed by many governmental assets like political stability (at least till Biden’s presidency), military power, and judiciary independence.

Before getting into today’s macro state of the USD, let’s review how it became the fiat we all know about.

Historical context

The US Dollar's position as the world's primary fiat currency can be traced back to the end of World War II. At that time, the United States was the world's dominant economic and military power, and the Bretton Woods system was established.

This system made the US dollar the sole currency convertible to gold, and other countries pegged their currencies to the US dollar. This system lasted until the early 1970s when the United States ended the convertibility of the US dollar to gold, but the US dollar's position as the primary reserve currency persisted, and so did its position on the international trade stage.

Economic and Political Stability

The US dollar's position as the main currency in the world is supported by the US economy's stability and the country's political system. The United States has the world's largest and most stable economy with a highly-developed financial system. This makes it an attractive destination for foreign investment. Thus, the demand for US dollars increases.

In addition, the political stability of the United States is a crucial factor in the US dollar's dominance. The United States has a well-established legal and democratic political system that promotes stability and confidence in the country's institutions. This has helped to build trust in the US dollar as a reliable currency for international trade and finance.

Trade and Investment

The US dollar's position is also influenced by the country's significant role in global trade and investment. The United States is the largest economy in the world and a major exporter of goods and services. This means that many countries need US dollars to buy US goods and services, increasing currency demand.

Moreover, the United States is also a significant source of foreign investment, with many multinational companies and institutional investors based in the country. Therefore, a significant amount of global investment is denominated in US dollars, further strengthening its position in the global economy.

What Happens Now?

The USD's long-standing dominance is slowly losing support as its three main advantages diminish one by one.

To begin with, the US no longer has the same level of political and economic stability that it used to. A series of misguided decisions have weakened its image and reputation on the global stage, dealing a hard blow to the US dollar's value and giving its competitors a significant advantage.

The Fed's mishandling of inflation only worsened the situation. By printing an excessive amount of USD, they flooded the market with unnecessary paper and digital currency. The banking system in the US has also started failing, with poorly regulated banks like SVB able to cause significant damage to the system if they choose to, while the Fed continues to print more money for them to burn through.

Once considered the world's most influential and intelligent human beings, US politicians are now a shadow of their former selves. The current political climate is characterized by old, dogmatic leaders who are out of touch with modern advancements, such as TikTok, crypto, and blockchain. The US Congress is filled with lazy, uninspired politicians who believe that US dominance is something they are entitled to rather than something they need to work for.

As soon as the US let its guard down, other countries seized the opportunity to take a shot at the moon. Saudi Arabia, in particular, has always been a significant player on the world stage, wielding its power through its vast reserves of oil and money. Recently, the Crown Prince of Saudi Arabia announced that he is no longer interested in pleasing the US, which is a cause for concern.

In a move that could easily undermine the US's power, China, Russia, and Saudi Arabia (among other countries) have formed economic and political alliances. For instance, Saudi Arabia, Russia, UAE, Iraq, Kuwait, Oman, and Algeria agreed to cut oil production output until the end of 2023, which is likely to impact the West and suffocate the power of Europe and the USA.

Meanwhile, more and more countries are getting rid of USD on a global trade scale, with China and France recently completing the first LNG gas trade using the Chinese Yuan, ending reliance on the US dollar for energy trades. Moreover, Saudi Arabia entered a trade alliance with China, Russia, India, Pakistan, and four Central Asian nations, further distancing itself from the USD and relying on their own currencies for exchanges and forming bank reserves. Even Malaysia (not a huge political or economic power) is mocking the USD by saying there’s no need to continue depending on the US dollar.

As the USD continues to lose its position on the global stage, the world is poised for a shift toward a new era of economics. With the prospect of a new reserve currency on the horizon, other countries are likely to rethink their reliance on the USD, which could have significant implications for the global financial market. Here are more of them:

Reduced global demand for US Treasury bonds

As the world's reserve currency, the US dollar enjoys great demand for US Treasury bonds. This demand helps to keep interest rates low in the US, making it easier for the government to finance its debt.

If the dollar were to lose its reserve currency status, demand for US Treasury bonds could decline, leading to higher interest rates and potentially making it harder for the government to finance its debt.

Weakened US influence on the global stage

The US dollar's reserve currency status gives the US significant influence over the global economy. Losing this status could weaken the US's ability to influence economic policy and international trade.

Increased competition for US exports

If the dollar were to lose its reserve currency status, it could make US exports more expensive than other countries' exports. This could hurt US businesses that rely on exports and make it harder for them to compete in the global marketplace.

Inflationary pressures

If the dollar were to lose its reserve currency status, it could lead to inflationary pressures in the US. This is because the US would no longer be able to rely on the demand for US dollars from other countries to keep the dollar's value stable. This could lead to higher prices for goods and services in the US.

What Happens with Crypto?

If the US dollar were to lose its position as the world's reserve currency, it could have both positive and negative implications for the cryptocurrency market.

On the positive side, weakening the US dollar's reserve currency status could lead to increased interest in cryptocurrencies as an alternative store of value. Cryptocurrencies, particularly those with limited supply like Bitcoin, are often seen as a hedge against inflation and currency devaluation. Therefore, if the US dollar were to lose value, cryptocurrencies could become more attractive to investors looking for a stable store of value.

Also, all the most important stablecoins on the market are currently pegged to the value of USD. They are also backed by US Bonds, USD cash, and other assets directly or indirectly related to United States currency. If the USD loses its global value, we could have a shift in the stablecoin market. Currencies like USDT and USDC will lose a large proportion of their market, while DAI will probably get a bigger market share, as it is backed by algorithms and crypto treasuries.

We will also see more and more projects focusing on developing Euro-backed or Yuan-backed stablecoins.

Bitcoin will definitely see an increase in demand. Thus, the value will skyrocket. This is because a major factor that drives Bitcoin adoption is its ability to serve as an alternative store of value and medium of exchange, especially in times of economic uncertainty or instability.

If the US dollar were to lose its dominance, it could lead to increased inflation and reduced purchasing power, prompting individuals and institutions to seek alternative assets to preserve their wealth. Bitcoin, with its decentralized nature and limited supply, could be seen as a viable alternative to traditional fiat currencies

On the negative side, a loss of confidence in the US dollar could also lead to a broader economic downturn, which could also hurt the cryptocurrency market. Cryptocurrencies are often seen as a high-risk investment, and in times of economic uncertainty, investors may be less willing to take on that risk.

Moreover, the loss of the US dollar's reserve currency status could lead to increased regulatory scrutiny on cryptocurrencies. Governments around the world may see cryptocurrencies as a threat to their own currencies and financial systems and could seek to regulate or even ban them in response. Especially if the Chinese Yuan gets into the first position in the top fiat currencies.

It's difficult to predict exactly how a loss of the US dollar's reserve currency status would impact the cryptocurrency market. However, it's clear that the global economic landscape is complex and interconnected, and changes to the status quo can have far-reaching consequences, both negative and positive.