Economic Fragility Could Soon Give Bitcoin a New Role in Global Commerce
The chaos we have seen in global markets this year – global geopolitical upheaval amplified by the confluence of broken supply chains, inflation and heavy national debt – seems to signal the start of a new era. All this against the backdrop of the US dollar serving as the world’s main reserve currency, currently accounting for around 40% of global exports.
But monetary history teaches us that several world reserve currencies can exist at the same time. Many countries are actively seeking a settlement of reserves free from global political conflict. bitcoin (BTC) can do the trick, and if adopted as an alternative reserve currency – even at the margins – we will see the unleashing of Bitcoin-based commerce and the emergence of a new geopolitical reality.
the The Bitcoin network is ready for the moment.
What is Bitcoin Based Trading?
There are many reserve currencies around the world, from the US dollar to the Chinese yuan to the Japanese yen and more. But the dollar is by far the most popular in terms of exchange popularity.
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Bitcoin-based trading focuses on the idea that BTC could also function as a reserve currency working 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 own the raw materials, manufacturing capabilities or any other number of critical inputs for global trade would then be able to trade based on the demand for those inputs. This would be enforced by the unit of exchange, Bitcoin, remaining a largely apolitical settlement network.
The importance of the moment
The global economy faces many challenges. Two, in particular, are the products of a unique alignment in a generation of unique circumstances. The first is the need for an efficient, relatively apolitical and antifragile reserve currency system. The second concerns the increasingly demanding requirements for essential inputs for the global economy. These are inputs such as raw materials, manufacturing costs, specialized manufacturing processes, intellectual property protection, etc. Sources of critical inputs needed for all global trade are in transition. Now may be a good time for the geopolitical leverage that traditionally comes from the global need for dollars to be significantly mitigated by a new unit of exchange, Bitcoin.
Whether the dollar should be moved from the current hierarchy of reserve currencies is a subject for another time. Even just a few years ago, it was impossible to consider Bitcoin as a meaningful addition to existing reserve currencies. Nonetheless, Bitcoin is now a viable entrant due to the network’s size and level of decentralization.
Beyond any public skepticism or regulatory inertia, the Bitcoin blockchain was too slow and energy-intensive to be a viable global reserve currency. Fast forward to today, the network has a set of features that can power unique solutions needed for exactly this purpose.
Simply put, the Bitcoin network is becoming more robust and multifunctional day by day. The rise of the Lightning Network allows participants to actively manage incoming and outgoing liquidity. This is important because as countries and large companies adopt the Bitcoin network, smaller countries and companies will follow. The Lightning Network continues to grow rapidly and will soon be able to handle this volume fast enough to compete with fiat currencies on several business levels.
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The second major challenge is the growing need for critical inputs from the global economy. These are inputs that represent market supply. This includes raw materials such as petroleum, computer chips, lithium, and aluminum, as well as very specific manufacturing processes that require a high degree of specialization or extremely inexpensive manufacturing. The ability to legally protect ideas is also included. There are many categories of critical inputs on the supply side, but the bottom line is this: without using the leverage of monetary policy and restricted trade regulation, the ability of countries that possess critical inputs the supply side to be traded geopolitically is greatly increased.
The change this would unlock cannot be overstated. This would mean that entities such as the Bank for International Settlements (the bank of 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 disproportionate political influence and out of step with the economic reality they claim to defend.
Take the example of the IMF. Alex Gladstein has done extensive research to better understand the complex relationship between entities such as the BIS, IMF, World Bank and the countries to which they lend. According to Gladstein, the IMF has extended loans “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, reaching 3 billion people, or which was then two-thirds of the world’s population.
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To do business with the IMF, a country must join the IMF. One of the requirements for joining is a deposit denominated in the national currency of the country as well as “harder assets” like gold, dollars or European currencies. There are 190 countries that have joined so far. When a member country needs a loan for an emergency or a large infrastructure project, it usually receives that loan at interest rate levels and payment terms that are difficult to meet. Countries that do not comply with this obligation are penalized. Penalties vary, but often take the form of interest rate hikes, currency devaluations, restrictions on government spending, and more.
Thus, the borrowing nation becomes more indebted and restricted in its ability to actually repay the loan. Remember that the dollar is the world’s reserve currency. The United States has the most weighted vote in the IMF. And so, it seems, the global monetary hierarchy is reinforced and maintained by indebtedness.
Considering this through the prism of game theory, it makes sense. Those in power who should benefit from this power will do what they can and feel they must to maintain this position. This was all business as usual until 2022, when critical inputs began to become more important than the unit of exchange used to trade and direct them.
Leverage has changed
The race is on to reposition itself in a new emerging paradigm. Critical contributions matter more than ever. In the context of the evolution of US monetary policy, leverage may well be changing. Aggressive interest rate hikes are wreaking havoc on global markets. Pressure is mounting on countries that have dollar-denominated loans, such as those of the IMF. But many of these countries have essential 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 think a transition to an alternative is certain.
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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 can be explored due to the shifting leverage that interested countries have and are now ready to fully utilize. Gold is considered a viable option because historical precedents suggest so. But as countries recognize the characteristics that Bitcoin possesses, the pivot 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 trading regime will give way to new alliances between nations. New alliances will mean that new trading partners will build new trade routes. Monetary policy as a method of leverage will be disfigured. Countries that have critical inputs will have leverage like they have never had before.
The transition will be chaotic and the outcome is impossible to predict. But one thing is certain: we are witnessing a unique reshaping of global trade.
Now is the time to pay close attention to where Bitcoin could fit into this paradigm.
Joseph Bradley is the Business Development Manager at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry in 2014 as an independent researcher before going to work at Gem (which was later acquired by Blockdaemon) and later moving into the hedge fund industry. He earned his master’s degree from the University of Southern California with a focus on portfolio construction and alternative asset management.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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