Blog 03: BTC and USD: Compete or Coexist?
Bitcoin Valuation Framework Series.
This post is part of a multi-part series designed for relative newcomers to bitcoin who are hoping to better-understand various bitcoin valuation frameworks. Today’s post provides thoughts on how bitcoin can coexist alongside the U.S. Dollar, with the latter remaining the world’s primary reserve currency. Nothing in this post—or any other post on the blog—is intended to serve as investment advice.
As bitcoin continues to monetize—currently at a market cap of nearly half a trillion U.S. dollars as of this post—a logical question that many people will continue to ask is what threat, if any, does bitcoin pose to the existing global reserve currency, the US Dollar (“USD”)?
Bitcoin maximalists will assert that bitcoin will ultimately displace the need for all fiat currency, including USD, given its superiority in ability to serve the key jobs of money that we have reviewed in this space before—i.e., a store of value, a medium of exchange, and a unit of account.
At the other end of the spectrum, USD maximalists will assert that bitcoin represents a threat to the USD hegemony the United States has enjoyed for the last ~80 years (since Bretton Woods) and, by extension, bitcoin threatens the United States’ geopolitical supremacy .
Like many things in life, when considering two extremes, the optimal outcome usually lies somewhere in the middle. Here, with respect to the interplay between BTC and USD, Cantilever believes that the optimal outcome—and the most likely one—is a symbiotic relationship in which both assets can thrive in the evolving digitally native global monetary system. For the foreseeable future, it is Cantilever’s view that BTC and USD can and should coexist in such a monetary order, with bitcoin serving as a global neutral reserve asset while USD continues to serve as a major global currency as it has for the last ~80 years.
Reserve Asset Vs. Neutral Reserve Asset
Hold on, what’s a reserve asset? And what makes something a neutral reserve asset?
A reserve asset is defined as an asset that serves as the collateral/settlement base of a monetary system. As discussed in our recent post, Improving Gold: The Case for Bitcoin as a Store of Value, gold historically served this role in many monetary systems in the past and for over hundreds of years. The history of this use case for gold reveals that gold was selected by the free market as a superior monetary good because it was optimized across 6 key characteristics of store of value: durability, fungibility, divisibility, verifiability, portability and (especially) scarcity.
Today the global reserve asset of the global monetary system is the U.S. Treasury bond, whose issuance and management is governed by United States monetary policy. But such a reserve asset is distinguishable from a neutral reserve asset because a neutral reserve asset like gold or bitcoin is apolitical and cannot be controlled by one entity or nation state.
A brief history of how gold was displaced as a global reserve currency is instructive.
Due to technological advances in commerce (namely telecommunications) during the 20th Century, a need arose throughout the world to accelerate the speed of value transmission to keep up with the increasing speed of commerce. Porting physical gold coin currency to exchange value in an analog capacity became a constraint to economic growth as the world globalized alongside telecommunication adoption. From this, monetary innovations such as paper money (believe it or not paper money was considered a technological advance at one point) and payment networks (wire transfers, ACH transfers, etc.) arose to meet the economic needs of a globalizing economy.
For some time, gold continued to serve as the reserve asset of the global monetary system, and most recently it was a key component of the Bretton Woods monetary system that was created following World War II. In that system, monetary innovations like paper money and payment networks were utilized to move value around the world as they were more efficient than gold to transmit value.
However, throughout the mid-1900s (1945-1971, culminating with President Nixon’s famous speech severing the tie between gold and the U.S. dollar), the global monetary system slowly moved away from gold in favor of the U.S. Treasury bond as the preeminent global reserve asset, even though it has proved to be far more abundant than scarce assets like gold or bitcoin. Replacing gold for the U.S. Treasury as the preeminent global reserve asset effectively created a debt-based monetary system. And as we’ll address in future posts, debt-based monetary systems are inherently fragile and depend on unsustainable credit expansion in order to survive.
As society continues to experience the shortcomings of the existing debt-based monetary system (excessive debt levels, inflation, etc.), and moves to a digitally native system, it will be critical to have predictable digital monetary and financial systems to deliver meaningful stability and efficiency. In our mind, the pairing of the reemergence of scarce, neutral reserve assets and the digitizing of the monetary and financial systems is the bull case for bitcoin as it emerges as the preeminent neutral global reserve asset due to its absolute scarcity, predictable monetary policy, and apolitical nature.
Global reserve or currency?
Ok, so bitcoin becomes a global reserve asset. Isn’t it also a currency? If so, why does a digitally native monetary system need USD at all?
In theory, Bitcoin (referring here to both the asset and network) could simultaneously serve as a global reserve asset while also being a global currency. After all, the Bitcoin White Paper talks about bitcoin as currency, not a reserve asset. With that said, today bitcoin is nowhere close to being sufficiently understood and owned across the world to effectively serve as a medium of exchange (i.e., how you buy goods/services) or unit of account (i.e., how goods/services are priced and value is measured), both of which would be necessary to serve effectively as a global currency. Indeed, bitcoin’s elevated short term price volatility relative to low USD short term price volatility renders bitcoin inferior to USD as a medium of exchange today.
Could we envision a world in which bitcoin begins to expand beyond a store of value and eventually serves as a medium of exchange and unit of account? Absolutely. And this is where much of the venture capital activity in Bitcoin (the network) is focused—building out the necessary infrastructure and networks to allow bitcoin (the asset) to evolve into a viable medium of exchange and unit of account. However, based on bitcoin’s current adoption levels and the limited infrastructure surrounding it, in our view, the world is decades away from Bitcoin being a viable alternative to existing currencies like USD, which continue to be serviceable in meeting the medium of exchange and unit of account functions of the global economy.
Comparatively, the USD today effectively serves the medium of exchange and unit of account at global scale. One way to think about USD is akin to an algorithm running in the minds of individuals, institutions, and governments across the world. Most energy contracts are priced in USD; many emerging economies are either utilizing USD outright or pegging their local currency to it. On balance, most people in the world are comfortable quantifying and exchanging value in USD. So long as U.S. monetary policy remains relatively disciplined such that the value of USD remains generally stable in the short-term (i.e., avoids hyper-inflation), USD will likely continue on as one of the major fiat currencies in the world.
In future posts, we’ll discuss stablecoins and how the United States might use them as a tool to digitize the dollar and its payment networks to extend the reign of the U.S. dollar as a major medium of exchange and unit of account for global commerce.