The turmoil we’ve experienced in global markets this year – the global geopolitical upheaval fueled by the confluence of disrupted supply chains, inflation and heavy national debt – seems to herald the start of a new era. . All of this is within the context of the United States dollar serving as the main global reserve currency, which currently accounts for about 40% of global exports.
But financial history tells us that many global reserve currencies can exist at once. Many countries are actively seeking a reserve settlement isolated from the global political fight. Bitcoin (BTC) may fit the bill, and if it is adopted as an alternative reserve currency – even on the margins – we will see the release of Bitcoin-based trading and the rise 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, Japanese yen and more. But the dollar is the biggest by far in terms of popularity used for exchange.
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Bitcoin-based trading focuses on the idea that BTC can also act as a reserve currency that runs parallel to other reserve currencies. The resulting geopolitical reality is one where supply and demand are ahead of leverage between countries. Those who have raw materials, manufacturing capabilities or any other critical inputs for global trade may be able to negotiate based on demand for inputs. It will be implemented in the unit of exchange, Bitcoin, which remains a largely apolitical settlement network.
The importance of timing
There are many challenges facing the global economy. Two, in particular, are the products of a once-in-a-generation alignment 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 for the global economy. These are inputs such as raw materials, manufacturing costs, special manufacturing processes, intellectual property protection, etc. The time may be right for the geopolitical leverage that traditionally comes from the global demand for dollars to be dramatically weakened by a new unit of exchange, Bitcoin.
Whether the dollar should be moved out of the current reserve currency hierarchy is a topic for another time. Even just a few years ago, considering Bitcoin as a meaningful addition to existing reserve currencies was impossible. However, Bitcoin is now a viable entrant due to the network’s size and degree of decentralization.
Beyond any public skepticism or regulatory apathy, the Bitcoin blockchain is too slow and too energy-intensive to be a viable global reserve currency. Fast forward to today, the network has a feature set that can power the unique solutions needed for this purpose.
Simply put, the Bitcoin network is becoming more robust and multifunctional by the day. The rise of the lightning network makes it simple for participants to actively manage inbound and outbound liquidity. This is important because as countries and large businesses adopt the Bitcoin network, smaller countries and companies will follow. The Lightning Network continues to expand rapidly and will soon be able to handle this volume large enough to compete with fiat currencies at multiple trading levels.
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The second major challenge is the growing demand for critical inputs from the global economy. These are the inputs that represent the supply side of the market. This includes raw materials such as oil, computer chips, lithium and aluminum – and very specific manufacturing processes that require a high degree of specialization or manufacturing very cheaply. It also includes the ability to legally protect ideas. There are many categories of critical inputs on the supply side, but the bottom line is this: Without the use of monetary policy leverage and restricted trade settlement, the ability of countries with critical inputs to supply side to negotiate geopolitical escalation.
The sea change this will open cannot be overstated. This means 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 will lose some of their political power. . This is important because, as history has shown, these institutions exercise enormous political influence that is not consistent with the economic reality they claim to support.
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, IMF, World Bank and the countries to which they lend. According to Gladstein, the IMF extended loans “to 41 African countries, 28 Latin American countries, 20 Asian countries, eight Middle Eastern countries and five European countries, affecting the 3 billion people, or previously two-thirds of the world’s population.”
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To do business with the IMF, a country must join the IMF. One of the requirements for participation is a deposit denominated in the country’s native currency as well as in “harder assets” such as gold, dollars or European currencies. There are 190 countries that have participated so far. When a member country needs a loan for an emergency or large infrastructure project, it is common for them to receive that loan at interest levels and payment terms that are difficult to meet. Countries that do not fulfill this obligation are penalized. Sanctions vary but are commonly used in the form of interest rate hikes, currency devaluations, government spending restrictions, etc.
Therefore, the borrowing country becomes more indebted and is limited in its ability to repay the debt. Remember that the dollar is the global reserve currency. The United States has the heaviest vote within the IMF. And thus, it seems, the global monetary hierarchy is reinforced and maintained by indebtedness.
Considered through the lens of game theory, it makes sense. Those who are in power and stand to benefit from that power will do what they can and feel they must to maintain that position. All of this is business as usual until 2022, when critical inputs start to become more important than the unit of exchange used to sell and manage them.
The leverage has changed
The race is in reposition within a new paradigm. Critical inputs are more important than ever. Against the backdrop of a shift in US fiscal policy, leverage may be shifting. Aggressive interest rate hikes are wreaking havoc on world markets. Pressure is building on countries with dollar-denominated loans – such as those from the IMF. But many of those countries have critical inputs that the world needs. Countries like Russia, China, India and Saudi Arabia are now actively looking for alternatives to the dollar. Market analysts like Luke Gromen think that a shift to an alternative is certain.
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Gromen suggests that the low-cost alternative is gold. In the medium-to-long term, it will become an asset like Bitcoin. Alternatives can be explored because of the shifting leverage that the interested countries have and are now ready to use fully. Gold is considered a viable option because historical precedence suggests it. But as countries recognize the benefits of Bitcoin, gold’s pivot may be temporary.
And if that happens and we see a move towards Bitcoin-based commerce, all bets are off. A new geopolitical reality is emerging. A multipolar global trade regime will pave the way for new alliances between countries. New alliances mean new trading partners will establish new trade routes. Fiscal policy as a means of leverage will be undermined. Those countries with critical inputs have leverage they never had before.
The transition can be messy, and the outcome impossible to predict. But one thing is certain: We are witnessing a once-in-a-lifetime revolution in global commerce.
Now is the time to pay attention to the place Bitcoin can take in that paradigm.
Joseph Bradley is the 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 working at Gem (which was later acquired by Blockdaemon) and later moving into the hedge fund industry. He received a master’s degree from the University of Southern California with a focus on portfolio construction and alternative asset management.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.