Last updated on July 27th, 2015 at 11:31 pm
Bitcoin has emerged as perhaps the next big deal. The peer-to-peer digital currency is now one of the world’s fastest growing investment markets for venture capital and offers a clear alternative to traditional government-backed currencies at a time when governments’ abilities to manage their finances are coming into question.
But Coinbase CEO Brian Armstrong now argues that Bitcoin will actually replace the US dollar as the world’s reserve currency.
That’s what Armstrong declared in a tweet:
Many will find this crazy, but I think Bitcoin could surpass the dollar as reserve currency within 10-15 years.
So, is Armstrong right? No one knows the future, of course, but while the entrepreneur’s claim may seem outlandish at first, there are some merits to his boisterous prediction. We need to remember that Bitcoin was designed from the ground up as an alternative to government-backed fiat (free floating) currencies, and thus has certain distinct advantages built into it.
The first thing we need to consider is that the total number of Bitcoin’s that can ever be created is limited to 21 million. Once 21 million Bitcoins are mined, no more new digital coins will ever be created. This is in contrast to government-backed currencies, which can be created essentially at will.
Through the use of quantitative easing, the sale of government bonds, and even literal printing presses governments can create money as they wish. Unfortunately, as governments create money, the currency itself tends to become less valuable. The reasons for this are complex, but consider that in the 1940’s you could buy a Coca Cola for about a nickel. These days, a single can or bottle of Coca Cola will generally cost at least one dollar, and often two dollars or more.
Over time, money has become less valuable. But Bitcoin should actually become more valuable as the years pass. The limited supply of cryptocurrency should help ward against inflation, making it a great currency to store wealth in, and thus offering a clear advantage over government-backed currencies, which almost always lose value over time.
But limited supply isn’t the only advantage Bitcoin has. In fact, the peer-to-peer currency’s biggest advantage might simply be the fact that it isn’t associated with a government, and thus isn’t beholden to the decisions and policies of any central power. Right now, governments across the world are racking up debt and mismanaging their finances, and that is having a big impact on the value of their respective currencies.
Fiat currencies are allowed to float, meaning the value of a currency can move up and down. For example, last August a single euro could buy about $1.33. These days a euro can buy only about $1.08, meaning the value of the euro has fallen compared to the US dollar. Heck, in 2008 a euro could buy nearly $1.60, so the drop over the last several years has been huge.
Why has the euro been dropping then? There are many reasons. European banks and investment institutions had loaded up on bad American mortgages and suffered the fall out of the housing bubble pop. Also, any European countries suffered from real estate bubbles of their own. Many European countries, and especially those in the south, have also piled up huge levels of debt.
And then the Greek financial crisis rolled around. Calling the situation an epic mess is an understatement. Years of cooking the books and mismanaging public spending had resulted in Greece being buried under massive debts. The country has been teetering on the edge of collapse for some time now. Bailouts were needed, but foreign governments and institutions have demanded harsh reforms in exchange for funds.
This has resulted in a nearly endless cycle of turbulence. The euro has been in a free fall ever since, and while the plummet has stopped after a renewed round of bailouts, the value of the European currency has suffered tremendously. Bitcoin, being free of government ties, will not have to worry about government’s mismanaging their finances.
So do the above factors mean Bitcoin is destined to become a global reserve currency? Let’s not get ahead of ourselves just yet. While most governments have offered cryptocurrency some basic recognition, they haven’t shown much interest in adapting the currency themselves.
Further, Bitcoin is meant to be an alternative to government currencies, not necessarily a replacement. If Bitcoin did become a reserve currency, it’s possible that governments and global financial institutions would try to exert more control over it. This is exactly what the creators of Bitcoin wanted to avoid, and could actually be a detrimental development for the crypto community.
For now, Bitcoin will likely remain an alternative to the US dollar, rather than a replacement, and for Bitcoin users that’s perhaps the best scenario.