Posted inGlobal Affairs

Does The Rise of Bitcoin Mark The End of American Economic Power?

Bitcoin is now worth over £40,000 per coin. What does its rise mean for the dollar, how we perceive money, and American economic power?

Existential Dilemmas

Money, and the stability of a monetary system are things we take for granted. In fact, the ability for currency to work actually necessitates our taking it for granted: if we failed to subconsciously believe in the dollar, then the dollar — for all its branding, worldwide ubiquity, and institutional and national basis — would be as valuable as Monopoly money. That’s really what this is all about: what factors constitute a ‘real’, ‘trustworthy’ currency?

Lockdown and Inflation

The rise of cryptocurrencies and Bitcoin in particular over the last decade — and especially the last 12 months — is forcing us to reconsider everything we think we know about money. Indeed, over the last 12 months alone Bitcoin has increased in value by over five-fold. Meanwhile, the US dollar has dropped in value by 9%. In many ways, the latter was inevitable. With the imperatives of shutting down the economy for lockdown, as well as printing money, the US have been confident that they could make use of quantitative easing without undermining the dollar’s status as the world’s reserve currency. But the inflation of the dollar, and other prolific world currencies, has in fact had significant ramifications. Big-shot investors, worried about the devaluation of their wealth, have attempted to seek other means of storing their money which will not lead to inexorable devaluation.

Major companies such as MicroStrategy and Tesla have invested literally billions in Bitcoin over the last few months. The lack of institutional branding which critics have for years used as an argument against cryptocurrencies has been quickly turned on its head. What this branding — resulting from investment from the likes of Tesla — does is not only increase the value of Bitcoin, but, more importantly, create a (potentially false) sense of security and belief in the system: ‘Elon Musk dropped a billion into Bitcoin in January. Elon Musk is a clever guy. So Bitcoin must be reliable, right?…’ — is how the rationale goes.

Bitcoin as The New Dollar?

In many ways, though, the rise of Bitcoin and other cryptocurrencies — and how that occurred — is less interesting and less measurable than its potential consequence. Is it the case, as many avid cryptocurrency fans have propounded, that in the next few decades the likes of Bitcoin will replace the dollar as the world’s reserve currency? Has the US been too smug about their ability to perpetually print money, allow for inflation, and still retain credibility in their dollars?

Fred Bullard, the American Federal Reserve President, thinks not a chance. He points out that the cryptocurrencies are simply too volatile to ever replace the role of a reserve currency. And ultimately, the principal element required of a reserve currency is stability.

However, this line of argument does lead to wider, more existential problems. What makes currencies such as the dollar supposedly stable? They are, of course, not inherently stable: there is nothing tangible about the dollar — beyond the fact that it is backed by the largest economy in the world (which is, undoubtedly, an important fact) — which makes it credible. And herein lies the existential issue. Money, and the belief in a currency, is in the end about the perception of and belief in its stability. What’s to say that, if Bitcoin’s value continues to climb and it proceeds to attract investment from prestigious world corporations, people will begin to believe that it has inherent value.

Of course, one rebuttal to this is that — unlike the dollar — cryptocurrencies have no backing from institutions which will bail them out. And that this fact makes them innately untrustworthy and susceptible to market whims. However, at least in some people’s eyes, this lack of institutionalisation is what makes Bitcoin attractive: it is not simply another monetary system dominated by elites and the ‘greedy’ bankers who caused 2008, but a ‘popular currency’ — or so the argument might go.

America’s Economic Power

Either way, the fact that the replacement of the dollar is even being debated as a possibility is evidence of how Bitcoin has shaken things up. As one FT article put it, “Bitcoin’s surge may still prove to be a bubble” but nevertheless “should serve as a warning to government money printers everywhere” that trust in their currency is not always guaranteed. 

And cryptocurrencies are not the only aspect of the market which have challenged establishment monetary norms. Earlier in the year, the ‘GameStop rebellion’ proved a seminal moment in underlying the tentative nature of establishment bankers.

In an era of China’s rise and ever more apparent threat, though, America may become increasingly reliant on its use of the dollar as the ultimate form of economic  power. In many ways, despite the many pros of Bitcoin, I hope that at this point in time America does not lose that pivotal tool: the West now more than ever needs the dollar to have economic teeth. However, the rise of cryptocurrencies will hopefully act as a warning sign that our currencies are not infallible and do not compel unrequited belief.

Faith is the bedrock of any monetary system. And the rise of cryptocurrencies has acted as a poignant warning sign that that faith cannot be taken for granted.