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The turmoil experienced in global markets this year a global geopolitical turmoil exacerbated by the confluence of broken supply chains, inflation, and high sovereign debt burdens seems to mark the beginning of a new era. All of this is within the context of the US dollar, which currently serves as the main global reserve currency, accounting for about 40% of global exports.
However, currency history shows that multiple global reserve currencies can exist simultaneously. Many countries are actively seeking resolution of their reserves insulated from global political conflict. Bitcoin (BTC) could fit the bill, and if it is adopted as an alternative reserve currency, even at margins, Bitcoin-based trading will be unleashed and a new geopolitical reality will emerge. will be
The Bitcoin network is ready for this moment.
There are many key currencies in the world, from the US dollar to the Chinese yuan and the Japanese yen. However, the dollar is by far the most popular currency used for exchange.
Related: 5 reasons why 2023 will be a tough year for global markets
Bitcoin-based trading focuses on the idea that BTC could also act as a reserve currency running alongside other reserve currencies. The resulting geopolitical reality will be one where supply and demand are at the forefront of influence between nations. Companies that own raw materials, manufacturing capacity, or other critical inputs to global commerce can negotiate based on demand for those inputs. This remains a predominantly apolitical payment network, enforced by the unit of exchange Bitcoin.
There are many challenges facing the global economy. Two in particular are the product of a unique once-in-a-generation coincidence of circumstances. The first is the need for an efficient, relatively apolitical, and invulnerable reserve currency system. Second, the requirements for critical inputs to the global economy are becoming more stringent. These are inputs such as raw materials, manufacturing costs, specialized manufacturing processes, and protection of intellectual property. A key source of input required for all global commerce is in transition. It may be just in time for the geopolitical leverage that has traditionally come from the global need for the dollar to be dramatically weakened by the new unit of exchange, bitcoin.
Whether the dollar should be kicked out of the current reserve currency hierarchy is another time to consider. Even just a few years ago, it would have been impossible to see the point of adding Bitcoin to the existing reserve currency. Nevertheless, Bitcoin is now a viable entrant due to the scale and level of decentralization of the network.
Beyond public skepticism and regulatory inertia, the Bitcoin blockchain was too slow and energy-hungry to become a viable global reserve currency. To this day, the network has a feature set that can enhance the unique solutions needed for exactly this purpose.
Simply put, the Bitcoin network is becoming more robust and versatile by the day. The rise of the Lightning Network makes it easier for participants to proactively manage inbound and outbound liquidity. This is important because as countries and large companies adopt 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 quickly enough to compete with fiat currencies on multiple transaction levels.
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 the inputs that represent the supply side of the market. This includes raw materials such as petroleum, computer chips, lithium and aluminum, and highly specialized manufacturing processes that require a high degree of specialization or very cheap manufacturing. As such, it also includes the ability to legally protect ideas. There are many categories of important supply-side inputs, but the bottom line is: Without the use of monetary policy or limited trade settlement leverage, the geopolitical bargaining power of countries with significant supply-side inputs would be dramatically enhanced.
The ocean changes this unleashes cannot be overstated. This would mean that entities like the Bank for International Settlements (the Bank of 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 has shown, these institutions wield tremendous political influence that is inconsistent with the economic realities they profess to support.
Let’s take the example of the IMF. Alex Gladstein has conducted extensive research to better understand the complex relationships between entities such as the BIS, IMF and World Bank and the countries they lend to. According to Gladstein, the IMF “finances 41 countries in Africa, 28 in Latin America, 20 in Asia, 8 in the Middle East and 5 in Europe, affecting 3 billion people.” It’s giving, one-third of the world’s population.”
In order to trade with the IMF, a country must join the IMF. One of the requirements to participate is a deposit denominated in your home currency and a ‘harder asset’ such as gold, dollars or European currencies. To date, 190 countries have joined. When a member country needs financing for an urgent or major infrastructure project, it is usually granted at difficult interest rate levels and payment terms. Countries that do not meet this obligation will be penalized. Penalties vary, but often take the form of raising interest rates, devaluing currencies, and limiting government spending. As a result, the borrowing country takes on more debt, limiting its ability to actually pay the loan. Remember that the dollar is the world’s reserve currency. The United States has the most weighted votes within the IMF. As such, the global monetary hierarchy appears to be reinforced and sustained by debt.
If you think about this through the lens of game theory, it makes sense. Those in positions of power and in a position to profit from that power feel that they must do what they can to maintain their positions. All of this was business as usual until 2022. In 2022, material inputs will begin to matter more than the units of exchange used for trading and instructions.
The competition is about to reposition itself within a new paradigm that is emerging. Critical inputs are more important than ever. Leverage may be changing against the backdrop of changes in US monetary policy. A sharp rise in interest rates is wreaking havoc on global markets. There is increasing pressure on countries with dollar-denominated loans, such as the IMF. But many of these countries have important 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 believe the shift to alternatives is certain.
Gromen suggests that the short-term option is gold. In the medium to long term, it could become an asset like Bitcoin. Alternatives can be explored because of the changing influence that interested countries have and are currently seeking to fully exploit. Gold is seen as a viable option as historical precedent suggests. However, as countries recognize the capabilities Bitcoin has, the pivot to gold is very likely to be temporary.
And if that happens and we see a move towards Bitcoin-based trading, all bets are off.A new geopolitical reality will emerge. A multipolar global trading system will give way to new alliances between nations. A new alliance means new trade partners building new trade routes. Monetary policy as a means of leverage becomes ineffective. Countries with significant inputs will have influence like never before.
Transitions are chaotic and results impossible to predict. But one thing is certain: we are witnessing a once-in-a-lifetime reorganization of global commerce.
Now is the time to pay close attention to where Bitcoin sits on that paradigm.
Joseph Bradley is Head of Business Development at Heirloom, a software-as-a-service startup. He started working in the cryptocurrency industry as an independent researcher in his 2014, then worked at Gem (later he was acquired by Blockdaemon) before moving to the hedge fund industry. He earned his master’s degree in portfolio construction and alternative asset management from the University of Southern California.
This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.
