The chaos we’ve witnessed in global markets this year – global geopolitical upheaval compounded by the confluence of disrupted supply chains, inflation and high levels of sovereign debt – appears to herald the dawn of a new era. All of this is related to the US dollar, which serves as the main global reserve currency and currently accounts for about 40% of world exports.
But monetary history teaches us that multiple global reserve currencies can exist simultaneously. Many countries are actively seeking a reserve regime that is sealed off from global political unrest. Bitcoin (BTC) could fit in, and when it is introduced as an alternative reserve currency – even marginally – we will see the unleashing of bitcoin-based commerce and the rise of a new geopolitical reality.
The Bitcoin network is ready for this moment.
What is bitcoin based trading?
There are many reserve currencies in the world, from the US dollar to the Chinese yuan, Japanese yen and more. But the dollar is by far the most popular exchange rate.
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Bitcoin-based trading focuses on the idea that BTC could also act as a reserve currency, running alongside other reserve currencies. The resulting geopolitical reality would be one in which supply and demand are at the forefront of leverage between nations. Those who have the raw materials, manufacturing capacity, or some other number of critical inputs to global trade would then be able to negotiate based on demand for those inputs. This would be enforced by the exchange unit bitcoin, which remains a largely apolitical settlement network.
The importance of timing
The global economy faces many challenges. Two in particular are the products of the one-time alignment of unique circumstances. The first is the need for an efficient, relatively non-political and anti-fragile reserve currency system. The second is the increasingly challenging requirements for critical inputs to the global economy. These are inputs such as raw materials, manufacturing costs, specialized manufacturing processes, intellectual property protection, etc. The sources of critical inputs required for all global trade are changing. The timing may be just right for the geopolitical leverage traditionally derived from the global need for dollars to be dramatically dampened by a new unit of exchange, bitcoin.
Whether the dollar should be ousted from the current reserve currency hierarchy is another matter. Just a few years ago, it was impossible to consider bitcoin as a meaningful complement to existing reserve currencies. Nonetheless, Bitcoin is now a viable entry point due to the size and degree of decentralization of the network.
Barring any public skepticism or regulatory inertia, the Bitcoin blockchain has been too slow and too energy-intensive to be a viable global reserve currency. To date, the network has a number of features that can support unique solutions needed precisely for this purpose.
Simply put, the Bitcoin network is becoming more robust and multifunctional every day. The rise of the Lightning Network makes it easy for participants to actively manage incoming and outgoing liquidity. This is important because as countries and large corporations take over the Bitcoin network, smaller countries and corporations will follow. The Lightning Network continues to expand rapidly and will soon be able to handle this volume fast enough to compete with fiat currencies on multiple trading tiers.
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The second major challenge is the increasing need for critical inputs from the global economy. These are inputs that represent the supply side of the market. This includes raw materials such as oil, computer chips, lithium and aluminum – and very specific manufacturing processes that require a high degree of specialization or extremely cost-effective production. This also includes the possibility of legally protecting ideas. There are many categories of critical supply-side inputs, but the bottom line is that without using the leverage of monetary policy and constrained trade execution, the ability of countries that have critical supply-side inputs to negotiate geopolitically is dramatically increased.
The great change this would unleash cannot be overstated. This would mean that bodies like the Bank for International Settlements (the bank for central banks), the International Monetary Fund, the World Bank and many other global financial institutions would lose some of their political power. This is important because, as history has shown, these institutions wield outsized political clout that is at odds with the economic reality they purport to defend.
Let’s take the example of the IMF. Alex Gladstein has done extensive research to better understand the complex relationship between entities like the BIS, IMF, World Bank and the nations to which they lend. According to Gladstein, the IMF “lent to 41 countries in Africa, 28 countries in Latin America, 20 countries in Asia, eight countries in the Middle East and five countries in Europe, representing 3 billion people, or two-thirds of the world’s population at the time.”
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In order to do business with the IMF, a country must join the IMF. One of the requirements for joining is a deposit in the local currency, as well as “harder assets” such as gold, dollars or European currencies. 190 countries have joined so far. When a member state needs credit for an emergency or major infrastructure project, it typically obtains that credit at interest rates and payment terms that are difficult to meet. Countries that fail to meet this obligation will be penalized. Penalties range, but are often offset in the form of interest rate hikes, currency devaluations, government spending restraints, and more.
The borrowing nation thus becomes more indebted and its ability to actually pay the loan is reduced. Remember that the dollar is the global reserve currency. It is the United States that has the most weighted vote within the IMF. And so it appears that debt strengthens and perpetuates the global monetary hierarchy.
If you look at this through the lens of game theory, it makes sense. Those in power and able to benefit from that power will do what they can and feel they must to maintain that position. All of this went on as usual until 2022, when critical inputs became more important than the unit of exchange with which they were traded and governed.
Leverage has shifted
The race to reposition within an emerging new paradigm is on. Critical inputs are more important than ever. Against the background of the changed US monetary policy, the leverage effect could shift. Aggressive rate hikes wreak havoc on global markets. The pressure is building on countries that have dollar-denominated loans – like those from the IMF. But many of these countries have critical inputs that the world needs. Countries like Russia, China, India and Saudi Arabia are now actively looking for alternatives to the dollar. Market analysts like Luke Gromen believe a move to an alternative is safe.
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Gromen suggests that the short-term alternative will be gold. In the medium to long term, it could be an asset like Bitcoin. Alternatives that can be explored are due to the changed leverage that interested countries have and are now ready to take full advantage of. Gold is viewed as a viable option as historical precedent suggests. However, as countries recognize Bitcoin’s characteristics, the move to gold may very well be temporary.
And if that happens and we see a move towards bitcoin-based trading, all bets are off. A new geopolitical reality will emerge. A multipolar global trade regime will give way to new alliances between nations. New alliances mean that new trading partners will establish new trade routes. Monetary policy as leverage is defused. Those countries that have critical inputs will have leverage like never before.
The transition will be chaotic, and the outcome is impossible to predict. But one thing is certain: we are witnessing an unprecedented restructuring of global trade.
Now is the time to pay close attention to where bitcoin might fit in this paradigm.
Joseph Bradley is Head of Business Development at Heirloom, a software-as-a-service startup. He started as an independent researcher in the cryptocurrency industry in 2014 before joining Gem (which was later acquired by Blockdaemon) and subsequently moving into the hedge fund industry. He received his master’s degree from the University of Southern California, majoring in portfolio construction and alternative wealth management.
This article is for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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