The Bitcoin revolution will take place when Bitcoin overthrows the U. S. Dollar as the world reserve currency. When central banks hold Bitcoin, and issue currency backed in it. When commodities like oil as priced in Bitcoin, and international transactions are settled in Bitcoin.
Before we discuss Bitcoin overtaking the dollars place as the world reserve currency, we’ll have to discuss what it actually means to be the world reserve currency.
The fact that the dollar is the world reserve currency means that central banks and other huge players keep it in large reserves to make international transactions, like investing and paying off debt.
This removes the risk of trading currencies every time they make an international transaction, resulting in things running smoother.
Also, commodities like oil and gold are often priced in dollars.
Having a a dollar reserve makes it easier to internationally trade it. If you’d try to buy it using Euro, you’d have to exchange it to USD first.
In other words:
The world reserve currency is what the big financial institutions have a lot of, making international transactions run smooth, as well as making it easy to price/buy commodities like oil and gold.
Why does this matter?
The fact that the dollar is the world reserve currency means that international transactions between big players happens in USD.
In addition, oil and other commodities are prices in USD.
One of the most important consequences of this, is the power this gives The United States.
To understand the true power of having control of the world reserve currency, we have to take a quick history lesson:
The fact that the dollar is the world reserve currency, means that everything else is backed by it. All other currencies are worth something in relation to the dollar.
Well, to be fair nothing is worth anything in a vacuum, but for several reasons we have chosen USD as our measuring stick of value.
Before the dollar, we had gold. Gold was what backed everything. Gold was our measuring stick of value. The reason gold was the chosen “backer of stuff” was because of three qualities:
It’s hard to make more of it in a short amount of time.
It’s durable.
It’s a good store of value.
Those three qualities are important, and any world reserve currency needs to inhabit all three. Gold inhabits them, and was therefore a good backer of stuff.
In the 70′ we dropped gold, and USD replaced it as the new agreed upon measuring stick. Now, does the dollar inhabit the three important qualities as gold?
It used to, but not anymore. Since 2008 it’s been obvious that it lacks the most important quality of the three – It’s easy to make more of it.
Therefore, the United States Dollar will eventually fail.
Why the Dollar Will Fail
The dollar is durable, meaning that it does not rust, melt or break easily.
However, it’s a terrible store of value.
More importantly, is it hard to make more of it in a short amount of time?
No. It’s not hard to make more dollars in a short amount of time. Dollars can be printed with ease, in massive quantities.
The Federal reserve, being in charge of the money printer can choose any number they want, and print it.
This is the key reason that The United States have so much power over the world economy. They control the circulating supply of USD.
They control the world reserve currency.
Another way to think about this is to imagine that we still have the gold standard, meaning that gold is the agreed upon measuring stick, and that The United States control all the gold mines in the world.
This means that if the US wants more money, they can just print some.
This sounds like a great deal for the US, but how does this effect the strength of the dollar over time?
The Strength of the Dollar over Time
To keep it simple, printing more dollar makes the dollar it self weaker. Now, what the heck does it mean for the dollar to “become weaker”?
If the dollar loses strength, you can buy less stuff per dollar you have.
Below you see an image visualizing the purchasing power of the dollar since 1913.
This only goes to 2019, and does not include the crazy printing we’ve seen since COVID-19 hit us.
Knowing all this, The Federal Reserve probably wouldn’t print money like crazy, right?
Well, both yes and no. They try to print as little as possible.
But printing is a addictive:
Addicted to the Printing
The economy gets a boost every time they print new dollars. This pushes the economy back up when it starts slowing down.
It’s kind of like a coffee cup in the morning.
However, it’s highly addictive:
Once the economy gets pushed back up, the federal reserve has to keep printing to keep the economy from slowing down again.
Once they start printing, they cant stop. If they do, it slows down again.
This addiction gets even worse when we encounter a crisis like COVID-19.
Whenever we face an economic crisis like COVID-19, they print like crazy to keep things from crashing.
After the crises, the economy is addicted to new, higher levels of printing, which forces the Federal Reserve to keep the printer going.
Whenever the Federal Reserve prints money, they force themselves to print more money in the future.
Instead of facing the economic crash, they “kick the can down the road” by printing more money, trapping themselves, as well as making the next crisis even worse than it initially had to be.
This is the start of a downwards spiral, and it’s the reason the dollar will eventually fail as a world reserve currency. It’s to easy to print more of it!
How Much USD Are They Printing?
The Federal reserve printed just shy of one trillion dollars in June 2020.
They printed more money in one month, than in the two first centuries after the founding of The United States.
The trillion USD printed in June 2020 was used “stay afloat” and keep the economy from crashing.
Here’s a quote from Pantera Capital CEO Dan Morehead, listen to this:
“With that first trillion [USD printed] we defeated British imperialists, bought Alaska and the Louisiana Purchase, defeated fascism, ended the Great Depression, built the Interstate Highway System, and went to the Moon.”
The Printing is Accelerating:
Below you see the FED balance sheet (source: Federalreserve.gov). It basically shows how much money is being printed.
The numbers on the right vertical axis is number of million USD. The “2M” stands for two million million USD, which is equal to two trillion USD.
We all remember the 2008 financial crisis, as you see the FEDs increased their balance sheet from around 800 billion, to over 2 trillion USD.
The crazy spike you see at the end is their response to COVID-19. The balance sheet ballooned from four to seven trillion USD.
From 2007 until now it has increased from 870 billion USD to 7.1 trillion USD. That’s a 6 230 000 000 000 USD increase in 12 years.
Remember how printing gets addictive? Remember how every time they print, they have to print even more in the future?
We can speculate that the way 2007-2009 looks on the chart above, is how the COVID-19 response will look the next time a crisis hits us.
This will have dire consequences for the dollar as a world reserve currency.
At some point in the future, the dollar will fail, and we’ll have to replace it with something else.
This is where Bitcoin comes in:
The Bitcoin Revolution
Given the fact that The United States Dollar will fail, something has to replace it. Choosing the new measuring stick is going to be hard, damned near impossible.
All the big guys want their currency to be the currency, giving them more power over the global economy.
Given the turbulent political environment, and the history of non-cooperative relationships between USA, Russia and China, this is likely something that’ll be near impossible to agree upon.
The great thing about Bitcoin is that it’s trust-less, and no single party can control it. Bitcoin is practically unchangeable, and impossible to control, which is great.
The leaders of different country could come to an agreement on Bitcoin, because no-one has to trust each-other, and no-one gets the unfair power that comes with controlling the world reserve currency.
Basically, Bitcoin is the most fair, and safe choice.
It’s important to note that Bitcoin actually wouldn’t be used by the average man when buying stuff like groceries or coffee.
It would be what backed the currencies we use to buy groceries. All currencies would derive their value from Bitcoin.
Bitcoin would be the “measuring stick of value” that all other currencies was valued with respect to.
One way to do this, is to let banks have a reserve of Bitcoin, and issue a Bitcoin-backed stablecoin that is optimized for day-to-day usage.
Before we get ahead of our self, we have to ask an important question:
Does Bitcoin inherit the qualities needed to be an efficient global reserve currency?
Remember, we need Bitcoin to be:
1) A good store of value
2) Hard to make more of it in a short amount of time.
3) Durable
Why the Bitcoin Revolution “Works”
One of the biggest reasons we used gold as our standard prior to the 70′, is because of the great stock to flow (S2F) of gold.
As we’ll see, Bitcoin shares this trait with gold. Without it, the Bitcoin revolution can’t happen.
The Stock to Flow is number, telling us to how much is being made of something, compared to how much there already is of this thing.
The Stock to Flow of Gold:
Gold is hard to make more of in a short amount of time, and has a high stock to flow. This means that the new supply (new mined gold) is insignificant compared to the existing supply (all the gold in circulation).
The S2F tells us how long it would take to double the existing supply of something, at the current rate of production.
The S2F of gold is around 75. This means that it would take 75 years of mining gold, at the current mining-rate, to double the supply of gold.
Having a high S2F means that we don’t need to worry about supply shocks from miners selling tons of gold, driving the price down.
It’s good to have a high S2F, and a necessity for any currency/commodity that wants to be used as a measuring stick/reserve currency.
Bitcoins stock to flow is unique, as it changes every four years because of something called “the halving”. This is one of the major reasons Bitcoin is a good store of value, and considered “hard money“.
The Stock to Flow of Bitcoin
The Bitcoin halving refers to the event where Bitcoins block rewards get cut in halve, which happens every four years.
This means that Bitcoin miners receive half of the BTC that they used to receive as rewards for mining Bitcoin.
This sounds boring, i know, but it’s actually super juicy and a major piece of the puzzle. You need to know this, if you want to understand the Bitcoin revolution.
Think about the significance of this fact:
The halving events cuts the Bitcoin-miners rewards by 50% every four years. Effectively doubling the stock to flow of Bitcoin at an exponential rate!
“Eh, What..??“
It’s a mouthful, I know. Let’s break it down:
Bitcoin-rewards are the Bitcoins that miners receive when they confirm transactions and keep the network safe. If you need more on what Bitcoin mining is then I recommend reading this article: What is Bitcoin Mining?
Think of it this way:
Imagine that every four years, gold miners would mine 50% less gold. This doubles the S2F, and dramatically decreases the selling pressure miners create, making the price rise due to supply/demand.
We just had a halving this may, putting us on a path to a S2F of 52. In four years we’ll double again, giving us a stock to flow of 104. That’s more than gold!
Bitcoin will have a higher S2F than Gold in four years, that’s not bad for a 12 year old!
Here’s an overview of the stock to flow, and market value of different precious metals, and Bitcoin:
The diagram on the left in on a linear scale, while the diagram on the right is increases exponentially.
Notice how a linear increase in stock to flow leads to an exponential increase in market value?
This is what Plan B used to create the stock to flow model, and what I used to create the Fair Value S2F Model.
Below you’ll see the chart predicting the price of Bitcoin – The Stock to flow model by Plan B.
The price is represented by the colored dots, and the Stock to flow is the line that the price hovers around.
On the left you see the price per BTC, and at the right side you see the number of days until the next halving that the different colors represent.
(source: lookintobitcoin.com)
Remembering that the S2F was a major reason that gold was working so well as the international standard of value, the fact that Bitcoins S2F is going to be even better is really amazing, and a good argument for the Bitcoin revolution.
Bitcoins as a Store of Value
I would argue that Bitcoin is an excellent store of value, but it’s too early to draw any conclusions. We’ll have to see how it behaves over the next few years.
Remember, this is the first crisis Bitcoin has lived through. How Bitcoin handles COVID-19 will bring us closer to answering the questing about Bitcoins ability to hold value, and if the Bitcoin revolution will ever happen.
What we know is that Bitcoin has a high S2F, protecting it against supply shocks, it’s a decentralized network, protecting it against government control and other authoritarian agents trying to change it for their own benefit. It’s also durable, as it can’t break down over time.
The facts above is why I think that Bitcoin would be a great world reserve currency, given that it matures through COVID-19 and the current political chaos we’re witnessing today. I’m convinced we’ll see the Bitcoin revolution take place, making the life of our children will have better.
Now, something to think about: The longer Bitcoin stays around, the harder it’ll be to get rid of it.
I would like to end with a quote from the book “The Bitcoin Standard” by Saifedean Ammous:
“Bitcoin, having no counterparty risk and no reliance on any third-party, is uniquely suited to play the same role that gold played in the gold standard. It is a neutral money for an international system that does not give any one country the “exorbitant privilege” of issuing the global reserve currency”
If you found this article interesting, you’re going to love this one:
What is Inflation? The Consequences of Printing Money
It’s a deepdive into how the economy works, how inflation is ruining the poor and middle class, and why Bitcoin is the solution.
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