Instead of engaging in speculation, let’s treat the matter more broadly: Can cryptocurrencies displace the dollar? For this, we first take a look at the role the U.S. dollar plays in the global economy, then we consider what cryptocurrencies are and what economic functions they might potentially fulfill.
So what is the U.S. dollar? Money, of course, and more specifically currency: The dollar is generally used for payments in the United States. As a general medium of exchange it naturally also functions as a store of value. And as is widely known, the dollar is not only the legal tender in the world’s biggest economy but it is also the dominant world currency, playing a central (though not unchallenged) role in the global economy . By far the largest share of international trade and transactions is done in dollars. Vital commodities like energy, metals and many others are priced in U.S. dollars. Practically every country and central bank holds foreign exchange reserves in U.S. dollars.
In other words: Whoever controls the dollar has significant control over the global economy – which is, of course, the U.S. government and the Fed. Though on the other hand it is also clear that this is not one-directional control, and the dollar’s status as the world’s main currency makes it particularly prone to disruptions in the world’s markets. Briefly put: The fate of the U.S. dollar and that of the global economy are intimately interwoven.
What are cryptocurrencies? Cryptocurrencies, like Bitcoin, are electronically stored units of information. What makes them special and fit for economic use is their digitally cryptographic nature: Processing cryptocurrencies, e.g. transacting them, is only possible within a specific information technological framework and infrastructure (electricity, the internet, blockchain technology, etc.). They cannot be created or manipulated at will, they can especially not be duplicated or increased in their nominal value.
Being countable, storable and unmanipulable allows cryptocurrencies to function as money and economic assets. Cryptocurrencies are used for payments, though still rarely. They are traded speculatively, and they are also used as a store of value (a function that is thwarted by their being used for speculation). Apart from their more legitimate uses, cryptocurrencies also play a growing role in money laundering thanks to their anonymity and ease of transfer.
But can cryptocurrencies actually replace the dollar? Bitcoin is often discussed as a possible candidate for this, being by far the largest cryptocurrency in terms of market capitalization (measured in U.S. dollars, of course), daily transaction volume, share of mining activities, and other key metrics. Still, it is difficult to imagine that Bitcoin or some other existing cryptocurrency could replace the dollar, and not solely for quantitative reasons.
There exists currently no single relevant cryptocurrency that models the monetary profile of the U.S. dollar. On the contrary, it is often said that this is precisely the great advantage of cryptocurrencies compared to the fiat money issued by central banks: Unlike the U.S. dollar or the Euro, Bitcoin and other cryptocurrencies are decentralized and structurally immune to inflation. This is indeed the case, though not necessarily with all cryptocurrencies.
A non-inflationary nature and absence of central control might be a good thing for a currency, but it should not be overlooked that this is the precise opposite of the U.S. dollar’s characteristics. The dollar is monopolized and inflatable – which might be detrimental in the long run, but it certainly allows for central planning-style economic control. It seems hard to conceive that Leviathan would renounce this power of controlling its national economy and citizens‘ property, as well as global markets (which is why crypto enthusiasts see cryptocurrencies as a bulwark against totalitarianism). After all, this is one of the most vital and central powers of modern states (which is why abolishing central banks is a prominent idea of 21st century libertarianism).
On a supranational level, though, the outlook might change. Cryptocurrencies can realize different economic characteristics, e.g. some being issued and controlled centrally, others being decentralized; some being hard capped, others allowing for inflationary growth; some being anonymous, others being identified. For example, some cryptocurrencies are inherently scarce in supply and come with increasing mining costs, thereby mimicking the economics of precious metals like gold. Interesting economic effects and uses might arise from the theoretically infinite fractionality of a cryptocurrency.
With their different profiles cryptocurrencies might function for different purposes – some to store value, others for transnational payments, some to price and trade commodities globally, some to hedge, some to mediate foreign exchange, some to stabilize national economies, some purely for speculation, and, no doubt, some for criminal activities.
We can, therefore, imagine a global scenario of a plurality of cryptocurrencies with different profiles displacing the U.S. dollar in some of its current domains. This might mean a replacement of the current global dollar system through a freer and less centralized global system of diverse cryptocurrencies with different roles, though without the dollar disappearing completely. Such a vision points towards a multi-currency world where classic and digital currencies coexist, competing and complementing each other in a global financial system.
The systemic success of cryptocurrencies ultimately depends on whether market players move further into this domain. We see this already with private speculators and investors, exchanges, and even some countries. Regarding U.S. policy, Trump has made appreciative remarks about cryptocurrencies and just recently even issued his own crypto coins, $Trump and $Melania.
It should not be overlooked, though, that cryptocurrencies come with a certain caveat thanks to their technological basis. Their use depends on the availability of information technological infrastructure, servers, secure data transmission and other factors – risks that, on the other hand, citizens have already taken, often unknowingly, by relying heavily on electronic payment systems. While hard cash and gold can still be used for payments in scenarios where information technology breaks down, the same cannot be said for cryptocurrencies or digital money in general. At any rate, cryptocurrencies should offer great opportunities for investors willing to take a risk.