ARK Invest CEO Cathie Wood’s call for Bitcoin (BTC-USD) to reach “$1 million by 2030” at the end of November 2022 was widely met with surprise, but Bitcoin’s characteristics are such that this scenario cannot be ruled out.
BTC shares gold and silver is a unique property of a financial asset: it is not a liability to anyone. This is often cited by Bitcoin promoters as a way to protect citizens’ assets from the legacy banking system, which is perceived as predatory when it comes to fund transfers and lacking in privacy. Storing Bitcoin in cold storage ensures full control over its storage, while a bank account can only be accessed with the bank’s permission. It should be emphasized that only cold storage contains this unique feature: storing Bitcoin with either an intermediary or an exchange institution deprives Bitcoin of this most valuable quality, as FTX customers have just come to know.
While this is obviously important to certain individuals, especially libertarians, it is even more important to these countries: central banks hold reserve assets to ensure they can finance imports from abroad when needed, or to increase the value of their national currency when investors are under pressure to leave the country. Currently, the main part of these reserve assets is in US dollars, and for some countries in gold. The relations between the world’s central banks form the International Monetary System, that is, the relations between countries that enable trade (import and export) and cross-border financing and investment.
The international monetary system is based on the US dollar as a reserve currency. What is a reserve currency? It is the unanimously accepted currency of settlement for cross-border transactions. It is also the currency in which commodities and oil are denominated. The US dollar, like all fiat currencies, is a liability of the central bank that issues it, in this case the Fed. Like all fiat currencies, the dollar is essentially debt. It is a debt issued by the dominant country, the United States.
As cross-border trade and investment expands, a steady supply of reserve currency is needed, so the issuing country can add to its debt, which we happily do in the US. For a country to add to the debt, it means consuming more than it produces, thus importing more than it exports, creating a trade deficit, and Congress spending more than it receives in taxes, creating a budget deficit. Economists call the resulting deficit “current account deficit management,” that is, foreign financing of your excess spending.
So in essence, issuing reserve currency is like an individual signing a grocery store invoice and never paying it, as the store owner can use the signed invoice to pay vendors or creditors who accept a claim against that privileged individual. . We in the United States are this privileged people.
This alleviates the US budget constraint: we can spend more than we produce. It also gives the United States formidable power over other countries. We can impose harsh sanctions on hostile aliens: North Korea, Iran, Afghanistan, and now Russia can confirm this.
What happens if the perception of US IOUs as a solution and the power it brings to the US is called into question? A replacement asset will be needed. This actually happened in the past, because in the 60s French General de Gaulle and French economist Jacques Rueff considered the role of the US dollar “too privileged” and moved French gold from the vaults of the New York Fed to Paris.
De Gaulle’s political legacy essentially faded and nothing came of it. But the current situation is different. In particular, the China/US fault line is widening. Sanctions against Russia sent a clear message from the US to the opposition: “You can be a candidate, but you can’t hide, because your assets are our debt, so they are as good as we want them to be.” Should this message encourage US dollar holders to diversify away from the Greenback, the question is which substitute could complement, if not replace, the greenback?
Gold is an existing candidate: Gold isn’t really anyone else’s liability: it’s already a traditional central bank reserve asset. His role is hampered by an uneven division. It is mainly held by traditional developed economies, the United States and Continental Europe. It also suffers from cumbersome transfer procedures for settlement purposes. Equally poorly divided. There is definitely room for an alternative asset that shares the characteristics of gold but lacks these drawbacks. Crypto assets stored in cold storage solve all the above issues. Others defended this idea.
Note that central banks have already shown great interest in digital currencies, but for the wrong reasons: Central Bank Digital Currencies (CBDCs) would be a liability of a national central bank – very different from Bitcoin – and would actually allow for more government control over citizens. The Fed issued a extensive research in CBDCs, highlighting privacy concerns as well as implications for the legacy banking system. Elsewhere, digital yuan it is already widely used in an experimental phase in China, potentially removing any privacy for local citizens.
Bitcoin’s finite nature is a major part of its appeal. It is true that there is no shortage of competition with other cryptocurrencies. Nevertheless, Bitcoin’s decentralization and security are unmatched among crypto-assets and thus make it suitable as a global unhindered reserve asset. It is sparse, mutable, immutable, immutable, pseudonymous, peer-to-peer, and does not require trust or permission. So Bitcoin checks all the boxes of an ideal reserve asset: it’s kept in cold storage, a last-resort holding that provides solid benefits as a store of value.
If the move towards using BTC as a reserve asset materializes, the price impact will obviously be dramatic. Currently, the total reserve assets of central banks are between 40 trillion and 50 trillion dollars. If half of these reserves are converted to BTC over time, the $25 trillion total will be followed by 21 million BTC. The math is easy to do, we’re actually looking at a BTC price of around $1.2 million. Unlike Cathie Wood, I don’t expect it to happen between now and 2030. However, I do not rule out a phasing out of BTC holdings by central banks for all the above reasons. This will provide strong formal sector demand, potentially increasing the value of Bitcoin to this mystical million dollar number over time.
Risks for this scenario
- So far, only one small country, El Salvador, has decided to add Bitcoin to its foreign reserves, drawing harsh criticism from the International Monetary Fund, which does not want to allow countries to break their dependence on the IMF. Russia’s fate of being cut off from access to its own resources may nevertheless inspire others to move their assets away from the liabilities of other countries. Bitcoin offers such an option because gold is already concentrated among several countries.
- Bitcoin volatility can also be seen as a major obstacle, as the reserve asset must have a predictable value. A move toward reserve asset inclusion would largely lend Bitcoin the legitimacy that is likely to push its value higher and higher, ushering in a virtuous cycle in which the current uneven value (pun intended) is replaced by consistent appreciation. with a high level of stabilization.