Will Bitcoin Become a Global Reserve Currency?

In February 2022, Russia's invasion of Ukraine prompted the Western world to consider various sanctions as a means of punishment. One significant sanction involved the EU and USA jointly freezing approximately $300 billion of Russia's currency reserves. This action effectively deprived Russia of access to its assets, primarily in currency and bonds, virtually overnight.

One may have different opinions about this. It might have been an effective sanction, or maybe not. However, what the world learned is that international assets are not owned by oneself, but by the country where the asset is issued. This, in my opinion, has tremendous implications for the future development of the financial system and Bitcoin's role in it.

China, as is well-known, has a rather complex relationship with Taiwan. China claims that Taiwan is part of China, while almost every other country recognizes Taiwan as not being China - it's a democracy with its own military, culture, and political system, and the majority of its population votes for politicians skeptical of China.

Regardless of the Taiwanese population's view of China, it is a declared goal of Chinese President Xi Jinping to bring Taiwan "back to the motherland" during his tenure.

Unlike Russia, China doesn't have $300 billion in Western currency reserves, but over $3,000 billion.

Okay, China has learned that Western assets can be frozen if one does something that the Western world disapproves of. China wants to do something that the Western world disapprove of (take over Taiwan).

China will think twice before accumulating more Western assets. What's the alternative? Something neutral that can't be confiscated. Bitcoin, perhaps?

This also applies to countries currently on good terms with the West, even Western countries themselves.

What's the likelihood of Sweden's dollar-denominated currency reserves being frozen under President Biden? Virtually non-existent. Rounded to 0%.

What about under President Trump? Suppose he inexplicably gets into a disagreement with Sweden and starts threatening to freeze our currency reserves. Not a completely unlikely scenario. The probability is still very low, but not 0!

If the probability is no longer 0 that a large portion of Sweden's currency reserve could become worthless, is it reasonable to keep all our currency reserves in USD-denominated assets?

A portion of our currency reserves should reasonably be in something else. Chinese Renminbi? Maybe not, higher risk. Euro? Yes, some (which we already have today). In this situation, you want to own something neutral that cannot be confiscated. Something where ownership can be guaranteed. There are two options: Gold and Bitcoin. Both have their pros and cons:

• Gold needs nothing to exist, Bitcoin needs the internet and energy.
• Gold has a long history as a reliable store of value, Bitcoin does not.
• Self-storage with Bitcoin is easy, with gold it's complicated and expensive.
• Transactions with Bitcoin are cheap and easy, with gold they're expensive and risky.

Given that central banks are a bit risk-averse (which I believe they are) and want to diversify, I am convinced that currency reserves will consist of both. Bitcoin, mainly due to its superiority in storage and ease of transaction.

/Erik

Do you think I’m wrong or just want to discuss the topic? Send me an email at [email protected].