Can Bitcoin Become a Reserve Currency?

Bitcoin As a Reserve Currency

Despite all the volatility in the crypto market, many academics and crypto enthusiasts alike are still debating whether it is possible for Bitcoin (or any other cryptocurrency, really) to become a reserve currency. The answer is — as always — it depends.

Becoming the world’s reserve currency is no easy fit. There are some conditions that have to be met, like the ability to be a reliable creditor, having free capital flow, and so on. Because of this, some of the world’s largest currencies, such as the Chinese yuan, are still not included in the list.

But what about Bitcoin? Does it have what it takes, and… would it actually benefit from becoming a reserve currency?

What Is a Reserve Currency?

First, let’s establish what a reserve currency actually is. Simply put, it is the most influential currency in the world.

A reserve currency is a currency that is held in large quantities by governments and institutions across the globe.

The purpose of a reserve currency is to be used as a means of international payments and as support for the value of national currencies. As a result, it can be seen as the official international currency. The status of a reserve currency is lucrative: it offers the country to which the currency belongs quite a few benefits, including but not limited to lower borrowing costs. 

Although most conversations about reserve currencies only mention the US dollar as it is considered the world reserve currency and, therefore, the main one, it is not the only global reserve asset. There are other currencies that are held in reserve: the euro, Japanese yen, Swiss franc, and pound sterling.

Therefore, when we talk about Bitcoin becoming a reserve currency, we don’t mean its ability to oust USD from its throne. Bitcoin’s first challenge would be being recognized on the same level as the yen or the pound sterling.

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Can a Cryptocurrency Become a Reserve Currency?

The word “recognized” is key here as for Bitcoin to become a reserve currency, a relatively large number of countries worldwide would need to consider it trustworthy and reliable. And that is one of the biggest hurdles crypto, in general, has to take seriously. 

At the moment, the lack of regulation and the volatility in crypto markets cause most governments as well as institutional and retail investors to treat crypto as nothing but a profit-making scheme. Although some projects out there use blockchain and tokens to boost their platforms and business, most cryptocurrencies seem to be there just for trading, bought and sold in an endless cycle — until some whale dumps so much of their holdings that the project defaults to zero. 

Of course, that is unlikely to happen to Bitcoin, Ethereum, or even relatively smaller cryptocurrencies like Solana, but the possibility is there, and regulators, as well as non-blockchain companies, are very aware of it.

Bitcoin as a Reserve Currency

Now, let’s take a look at what Bitcoin can actually offer to the world as a reserve currency.

Benefits

Bitcoin has a lot of benefits as an international means of payment. It is cheaper, faster, and more efficient than fiat currencies in some ways. Additionally, it is, of course, decentralized — which makes it truly global.

Another argument for BTC becoming one of the reserve currencies includes its ability to transfer wealth regardless of sanctions and any other economic restrictions imposed by superpowers like the US. Besides, it is also easier to take it with you compared to any fiat currency as you won’t have to worry about laws and exchange regulations.

Although some crypto companies have to act in accordance with such sanctions, crypto itself is independent and can provide a haven for people trying to flee or operate in totalitarian countries isolated from the global economy. Additionally, it may be an alternative way to store currency reserves for countries that fear they may be sanctioned in the future, too.

Bitcoin has a limited supply, which makes it more resistant to inflation in comparison with currencies like the US dollar. Additionally, Bitcoin and the rest of the crypto industry have already proven that they can withstand global economic turmoil and even grow amid it. After all, this is what happened during the initial COVID-19 outbreak. This makes BTC a solid choice for reserve currency diversification that could help some countries during global crises.

Downsides

Let us be honest: at the moment, the downsides of Bitcoin becoming a global reserve currency outweigh the benefits. First of all, there’s a lack of some sort of centralized control and regulation. Although, as crypto enthusiasts, we see it as a benefit, international organizations, most governments, and institutional investors may see this as a huge downside.

Additionally, there’s also the problem that Bitcoin is not even the best cryptocurrency for making international payments. It is not energy-efficient and has relatively high fees, and its transactions can be quite slow. That said, there’s still no other crypto out there with its level of recognition and stability, both of which are also incredibly important factors.

Crypto Transaction Speed Comparison
Crypto Transaction Speeds (2020). Source: Shihab Shahriar Hazari, Qusay H. Mahmoud, “Improving Transaction Speed and Scalability of Blockchain Systems via Parallel Proof of Work”.

As previously mentioned, Bitcoin is unlikely to collapse as quickly and as easily as other cryptocurrencies or at all. However, it gets affected every time another big cryptocurrency goes down. Unlike what some journalists have said, the TerraUSD/Luna crash may not have “tanked” Bitcoin’s price, but it certainly caused it to descend. This makes Bitcoin not as reliable as fiat currencies, which get support from their governments and national economies.

So, Can BTC Actually Become a Reserve Currency?

Well… At the moment, it does not seem very likely.

There are a lot of issues Bitcoin and perhaps the crypto market as a whole will have to resolve to gain recognition by major financial institutions, such as the IMF (International Monetary Fund) and central banks worldwide. In our opinion, to do that, Bitcoin would have to abandon what makes it Bitcoin

The things that attract investors to crypto and BTC — decentralization, anonymity, and so on — would have to be sacrificed to some degree, at least until the global economy changes so drastically that the reserve currency status would mean something different than it does now.

Bitcoins Ads

There is a possibility that Bitcoin could become a digital reserve currency. Then, it would be different enough not to have to “compete” with existing prominent fiat currencies. However, several countries like China have already expressed their plans and ambitions to create digital versions of their national fiat currencies. That would make it harder for Bitcoin to distinguish itself as the leading digital currency.

Of course, Bitcoin could also technically become a “reserve currency” for other cryptocurrencies — and that has already been happening. However, seeing as UST, the crypto that did use BTC to back itself up, didn’t do too well (to say the least), other projects may hold off following their lead.

Several countries around the world hold Bitcoin or have adopted it as a legal tender. The world is keeping a close eye on how they fare and manage, especially during the tough times when the crypto market isn’t doing so well.

Final Thoughts

At the end of the day, we feel like the discussion around Bitcoin becoming a reserve currency is often not very objective. Some people believe that Bitcoin is the best thing since sliced bread and that it can transform (and save) the global trade and economy. Others think it is a scam and that its bubble is about to burst. Both positions are incredibly extreme, and reality is most likely somewhere in between.

Bitcoin has proven itself as a reliable store of value, yet it is still incredibly speculative and lacks some necessary instruments for becoming a currency that central banks can consider using in their reserves. We haven’t really touched on it in this article, but there’s still the issue with Bitcoin being used by criminals worldwide to escape the law. Could countries like the US or the EU make peace with holding their reserves in a currency like that?

Nonetheless, Bitcoin’s climb upward doesn’t seem to be stopping, even if its price is nowhere near its previous peaks. Who knows, maybe sometime in the future, it will go through drastic changes like Ethereum, and that would coincide with a new monetary era where decentralized digital currencies would be in demand across the globe. We are certainly waiting for that to happen!


Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.