The term cryptocurrency suggests that digital placeholders on a blockchain serve the same purpose as euros or US dollars, for example. However, this is not the case, as 90 percent and more of all cryptocurrencies have an application that is above their function as a universal means of payment and storage of value. There is no logical reason why you should pay for your rolls at the bakery with Cardano, Solana or Polkadot. After all, you don’t pay for your coffee with a token Tesla share.
If cryptocurrencies are going to pose a threat to fiat currencies, then one should focus on those that are designed as payment tokens, such as Bitcoin, Monero, or Dash. But here you also have to ask yourself critically why you should pay for purchases with Bitcoin instead of euros. Unless you are a hyperinflationary country without a working currency, there are practically no rational reasons other than idealism to pay for your purchase with a currency other than the respective fiat currency.
Storage of value yes, currency no
In terms of currency, Bitcoin should not pose a threat to any currency area that does not have massive economic problems. The situation is different with the storage of value function, which has represented the real core function of Bitcoin in recent years. In the spirit of digital gold, the narrative is captured that Bitcoin benefits from the loss of confidence in fiat currencies and their inflation. In principle, this thesis cannot be contradicted.
However, motivation can be compared more to an investment in gold than to a flight to another currency. In principle, gold is also not used for payment. After all, it makes a difference whether you invest in a precious metal to own a limited material asset or another currency like the Swiss franc. The risk that Bitcoin may now replace another fiat currency cannot yet be justified.
Best central bank policy through Bitcoin?
What is not, still can be. Nonetheless, careful attempts to use Bitcoin as a payment currency, as in El Salvador, give rise to hope that Bitcoin, with decreasing volatility in the coming years, may increasingly become a fiat currency alternative. On this basis, the theoretical conclusion can be drawn that cryptocurrencies can play an important educational role in monetary policy.
Unless digital currencies are banned, they can theoretically compete with the respective fiat currency. As a result, this increases the motivation of the central bank to pay more attention to monetary stability. However, the competition has a problem here too: it only works as long as fiat currency dominates. If things turn out differently and people switch to private cryptocurrencies to pay, then a ban, as it is already in place in some countries, would quickly be imposed.
When inflation began to escalate in Turkey a few months ago, one of Erdogan’s first reactions was to ban cryptocurrency payments. Therefore, one can never speak of free competition between fiat currencies and crypto currencies, not even in the euro zone or the US dollar area.
Here’s how the US dollar benefits from cryptocurrencies
You can see how much Bitcoin and Altcoins can contribute to strengthening a fiat currency with a glance at the US dollar. While the state US dollar is “only” about 60 percent of the world’s reserve currency, this share is over 90 percent for tokenized fiat currencies, or more precisely stablecoins. Of the 20 largest stablecoins, 18 are based on the US dollar. The largest derivatives of USD Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) also account for more than 90 percent of total stablecoin sales in terms of trading volume.
This additional demand for US dollars, due to stable currency hedging, in turn strengthens US monetary policy. The more US dollars that are demanded through external demand, the more the US state can borrow. In other words, the more USD stablecoins in circulation, the easier it will be for the Fed to print money without negative consequences. The mechanism of action is comparable to that of crude oil, which is normally billed in US dollars.
Key cryptocurrency: tie instead of bitcoin
Anyone who is active in the crypto sector can tell a song about it. Almost no one should have a foreign currency account in US dollars at their home bank. Most of the people who are active in the crypto market have certainly had USDT or USDC already.
To put it a bit exaggeratedly, Bitcoin is not the currency of the cryptographic key, but Tether USDT. After all, its daily trading volume is the highest of all cryptocurrencies. In a few days, your daily volume represents more than 50 percent of total sales in the crypto market.
The more the crypto sector grows, the greater the demand for stable tokenized fiat currencies in the crypto market. Therefore, the escape from the volatility of cryptocurrencies is also an opportunity for fiat currencies.
Don’t ignore interdependence
If you depart from the idea of competition between crypto currencies and fiat currencies, then a stronger bitcoin while the fiat currencies remain stable at the same time is not mutually exclusive. Crypto adoption involves much more than just distrust of fiat currencies.
Stable fiat currencies are the basic requirement for investment and growth. Capital flowing into cryptocurrencies must be generated within an economy, unless it is withdrawn from other assets, as can be seen with gold.
If we want to see the market capitalization of the numerous digital currencies increase, we also need a US dollar, a euro, etc. stable. Without stable currencies, there will be no strong economies, and without strong economies, there will be no strong cryptocurrencies. -The economy either.
More opinion than science
It’s hard to deny that Bitcoin competes with fiat currencies in parts. Still, it would be too easy to base Bitcoin’s value proposition solely on fiat currencies. Especially since most cryptocurrencies of this type look more like decentralized tech companies, ergo stocks, than coins.
Due to the short history of cryptocurrencies, many of these assumptions are based only on guesswork or only for short periods of observation. How Bitcoin will react to planned US dollar interest rate hikes, for example, can only be guessed on the basis of our assumptions, but not scientifically proven. Finally, comparable precedents from the past are lacking, in which Bitcoin already existed and possessed comparable macroeconomic relevance.
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