Why Bitcoin Thrives (and Why It Won’t Replace the Dollar)

Why Bitcoin Thrives (and Why It Won’t Replace the Dollar)


Bitcoin is the leader of the pack in the crypto space. It has recovered from the disastrous crash of 2018 and is heading back towards the price it reached in December 2017. So what does the future hold for bitcoin? Could it eventually replace the dollar as the global reserve currency, as its loyal supporters claim? Will it eventually crash and die, as ? Or is it destined to remain a speculative asset, spicing up investment portfolios but never being adopted as a main medium of exchange?

More than a decade after its emergence from the ashes of the financial crisis, is still a minority sport. Predictions that seem wildly over-optimistic. Nor is it showing any signs of becoming a main medium of exchange. Over the last 10 years, the U.S. dollar has entrenched itself ever more firmly as the world’s premier settlement currency. Bitcoin is no nearer universal acceptance than it was when it started.

But bitcoin has survived two major crashes and numerous smaller ones, and is now on the way up again. Unlike many smaller cryptocurrencies, its value has never fallen to zero – indeed, over the 12 years of its existence, its value has risen considerably. Volatile though it is, it has demonstrated that it can hold value over the longer term. It has achieved a degree of maturity as a store of value, though not as a medium of exchange. 

It’s tempting to predict Bitcoin’s future based on its performance so far. Speculative high-yield asset, yes. Long-term store of value, maybe. Medium of exchange, not so much. But as any investor knows, past performance is not a guide to future returns. So let’s examine whether despite its apparent resilience, bitcoin’s value could still fall to zero, and conversely, what it might take for bitcoin to replace the dollar as the global reserve currency. 

To understand how either of these scenarios could happen, it’s instructive to look at how fiat currencies work. What gives fiat currencies value – and how do they lose it?

There are two competing theories for what gives fiat currencies value: what we might call a “metallist” theory, that the value of a fiat currency is conferred by the gold to which it used to be pegged, and the “chartalist” theory, which says that a fiat currency has value because people have to pay taxes in it. Of course, neither applies to bitcoin: it has never been pegged to gold, and no government accepts taxes in it. So are there other ways in which a currency can acquire and hold value over the long term?

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