The chaos we have experienced in global markets this year – global geopolitical turmoil amplified by the confluence of broken supply chains, inflation and high sovereign debt – seems to herald the beginning of a new era. All this within the context of the US dollar serving as the primary global reserve currency, which currently accounts for about 40% of global exports.
But monetary history teaches us that several global reserve currencies can exist at the same time. Many countries are actively seeking a reserve arrangement isolated from global political strife. Bitcoin (BTC) may fit the bill, and if adopted as an alternative reserve currency – even on the margins – we will see the unleashing of Bitcoin-based commerce and the emergence of a new geopolitical reality.
The Bitcoin network is ready for this moment.
What is Bitcoin Based Trading?
There are many reserve currencies in the world, from the US dollar to the Chinese yuan, the Japanese yen and more. But the dollar is by far the largest in terms of popularity in exchange.
Related: 5 reasons 2023 will be a difficult year for global markets
Bitcoin-based trading focuses on the idea that BTC could also function as a reserve currency in parallel with other reserve currencies. The resulting geopolitical reality would be one in which supply and demand are paramount as leverage between nations. Those who have the raw materials, production capabilities, or any other number of critical inputs for global trade would then be able to negotiate based on the demand for those inputs. This would be enforced by the unit of exchange, Bitcoin, which remains a largely apolitical settlement network.
The importance of timing
There are many challenges for the global economy. Two in particular are the products of the one-time tuning of unique circumstances. The first is the need for an efficient, relatively apolitical, antifragile reserve currency system. The second is the increasingly challenging requirements for critical inputs to the global economy. These are inputs such as raw materials, production costs, specialized production processes, the protection of intellectual property, etc. The sources of critical inputs required for all global trade are in transition. The timing may be just right for geopolitical leverage that traditionally stems from the global need for dollars to be drastically dampened by a new currency, Bitcoin.
Whether the dollar should be pushed out of the current reserve currency hierarchy is a topic for another time. Just a few years ago, it was impossible to think of Bitcoin as a meaningful addition to existing reserve currencies. Nevertheless, Bitcoin is now a viable entrant due to the size and level of decentralization of the network.
Barring any public skepticism or regulatory inertia, the Bitcoin blockchain has been too slow and energy-intensive to be a viable global reserve currency. Fast forward to today, the network boasts a range of features that can power unique solutions that are needed precisely for this purpose.
Simply put, the Bitcoin network is becoming more robust and multifunctional by the day. The emergence of the lightning network makes it easy for participants to actively manage incoming and outgoing liquidity. This matters because as countries and large companies start using the Bitcoin network, smaller countries and companies will follow suit. The Lightning Network continues to expand rapidly and will soon be able to handle this volume fast enough to compete with fiat currencies at multiple levels of trade.
Related: 4 Legislative Predictions for Crypto in 2023
The second major challenge is the growing need for critical inputs from the global economy. These are inputs that represent the supply side of the market. This includes raw materials such as oil, computer chips, lithium and aluminum – and very specific production processes that require a high degree of specialization or production that is extremely cheap. So also included is the ability to legally protect ideas. There are many categories of supply-side critical inputs, but the bottom line is this: without using the leverage of monetary policy and limited trade arrangements, the ability of those countries that have critical supply-side inputs to negotiate geopolitically is dramatically increased .
The sea change this would unlock cannot be overemphasized. This would mean that entities such as the Bank of International Settlements (the bank for 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 excessive political clout that is inconsistent with the economic realities they claim to uphold.
Let’s take the example of the IMF. Alex Gladstein has done extensive research to better understand the complex relationship between entities such as the BIS, the IMF, the World Bank and the countries they lend to. According to Gladstein, the IMF has made 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, affecting 3 billion people, or what was then two – third of the world’s population.”
Related: Brazil could cement its status as an economic leader thanks to the CBDC move in 2024
To do business with the IMF, a country must become a member of the IMF. One of the requirements to become a member is a deposit in the national currency of the country, as well as “harder assets” such as gold, dollars or European currencies. 190 countries have joined so far. When a Member State needs a loan for an emergency or a major infrastructure project, it usually receives that loan at hard-to-find interest rates and payment terms. Countries that fail to comply with this obligation will be penalized. Sanctions vary, but are often used in the form of rate hikes, currency devaluation, restrictions on government spending, and more.
So the borrowing nation becomes more indebted and limited in its ability to actually pay the loan. Remember that the dollar is the global reserve currency. It is the United States that has the most votes within the IMF. And so it seems that the global monetary hierarchy is being strengthened and maintained through debt.
Seen this through the lens of game theory, it makes sense. Those in power who can take advantage of that power will do what they can and feel they must to maintain that position. This was all business as usual until 2022, when critical inputs began to take precedence over the unit of exchange used to trade and direct them.
Leverage has shifted
The race is on to reposition within an emerging new paradigm. Critical input is more important than ever. Against the backdrop of shifting monetary policy in the US, leverage could well be shifting. Aggressive interest rate hikes wreak havoc on global markets. Pressure is being exerted on countries that have dollar-denominated loans, such as those from the IMF. But many of those countries have essential inputs that the world needs. Countries such as 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.
Related: 5 tips for investing during a global recession
Gromen suggests the short-term alternative will be gold. In the medium to long term, it could be an asset like Bitcoin. Alternatives can be explored because of the shifting influence that interested countries have and now want to fully exploit. Gold is considered a viable option as historical priority suggests. But as countries recognize Bitcoin’s characteristics, the pivot to gold may very well be temporary.
And if that happens and we see a move toward Bitcoin-based trading, all bets are off. A new geopolitical reality will emerge. A multipolar world trade 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 leverage method will be debunked. The countries that hold critical inputs will be leveraged like never before.
The transition will be chaotic and the outcome is impossible to predict. But one thing is certain: we are witnessing a one-off realignment of global trade.
Now is the time to pay close attention to Bitcoin’s place in that paradigm.
Joseph Bradley is head of business development at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry in 2014 as an independent researcher before joining Gem (which was later acquired by Blockdaemon) and then moving into the hedge fund industry. He received 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 information purposes and is not intended to and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.