Will bitcoin end the dollar’s reign?
When the pandemic hit, the US dollar was as mighty as ever. Despite talk of faltering American supremacy, the dollar ruled as the medium of international trade, the anchor against which other nations value their currencies, and the “reserve currency” most central banks hold as savings.
Before the US, only five powers had enjoyed the coveted “reserve currency” status, going back to the mid-1400s: Portugal, then Spain, the Netherlands, France and Britain. Those reigns lasted 94 years on average. At the start of 2020, the dollar’s run had endured 100 years. That would have been reason to question how much longer it could continue, but for one caveat: the lack of a successor.
There are contenders. Europe had hopes for the euro, introduced in 1999. But the currency has failed to gain the world’s trust, owing to doubts about the effectiveness of the eurozone’s multi-state government. China’s aspirations for the renminbi have been stymied for the opposite reason: concern about the arbitrariness of a one-party state.
US officials were thus confident that, in response to the Covid-19 lockdowns, they could print the dollar in limitless quantities without undermining its reserve currency status, allowing the country to keep running large deficits without apparent consequences. But a new class of contenders is emerging: cryptocurrencies. Operating on peer-to-peer networks ungoverned by any state, cryptocurrencies such as bitcoin are being pitched by their champions as decentralised, democratic alternatives.
The pandemic has made those crypto-pitches sound less like pure digital hype. Fearful that central banks led by the US Federal Reserve are debasing the value of their currencies, many people have bought bitcoin in bulk. Its price has more than quadrupled since March, making it one of the hottest investments of 2020.
From its launch in 2009, bitcoin’s builders have aspired to establish it as “digital gold,” a trusted store of value that offers a safe haven in tumultuous times. But doubters find it hard to feel safe investing in an asset that is so volatile: the last bitcoin bubble popped less than three years ago, and its daily price swings are still four times larger than gold.