By Markus David
Director of Professional Services
Cryptocurrencies are volatile, but the flagship digital currency — bitcoin — is often perceived as more reliable than the rest. In fact, bitcoin is now being used as a reserve currency and collateral for other crypto coins. This raises the question ― could bitcoin replace the dollar as the world’s reserve currency?
The Bitcoin Standard
Terraform Labs, based in Seoul, has taken the bold pledge to buy up $10 billion in bitcoin to bolster its own stablecoin, TerraUSD, through its affiliate Luna Foundation Guard. So far, the exchange has purchased 40,000 bitcoins for $1.7 billion. Terraform founder Do Kwon said the move “will open up the new era of the bitcoin standard,” a reference to the establishment of the gold standard over a century ago.
The widespread embrace of bitcoin, culminating in its being hailed as a new currency standard, may have contributed to its rise to $48,000 in March. Perceptions of stability and value may well become a self-fulfilling prophecy, as bitcoin may become more broadly adopted and will inspire confidence.
Will Bitcoin Replace the Dollar as a Reserve Currency?
So does this mean that bitcoin will become “digital gold” or replace the dollar as the world’s reserve currency? In an interview with CNBC, St. Louis Federal Reserve Chair James Bullard insisted that digital currencies will not replace fiat currencies, at least when it comes to setting a standard.
“I just think for Fed policy, it’s going to be a dollar economy as far as the eye can see,” Bullard told CNBC. Crypto fans have declared that bitcoin can serve as a major hedge against deflation or the devaluation of fiat currencies. However, Bullard and others insist that, while bitcoin may be a tool to cope with financial headwinds, the dollar will still be the preferred currency.
Prior to the Civil War, banks issued their own notes, a situation Bullard compares to modern cryptocurrency. However, the difficulty arises when establishing an objective value to items, and multiple digital currencies without an external standard can only lead to consumer confusion.
“You don’t want to go to a non-uniform currency where you’re walking into Starbucks and maybe you’ll pay with Ripple, maybe you’ll pay with Ethereum, maybe you’ll pay with bitcoin, maybe you’ll pay with dollars.”
Another pitfall of relying only on digital currencies, or bitcoin to back up other cryptocurrencies is that volatility could be amplified, especially if there is a correction in bitcoin and other cryptocurrencies simultaneously. Even analysts bullish on crypto warn of a “death spiral” for investors and cryptocurrency holders if there is a major pullback in the value of cryptocurrencies.
Although there are concerns about digital currencies, there is little doubt that they are here to stay. With bitcoin’s new role as collateral for other crypto assets, this flagship digital currency should become more widely adopted and accepted.
It is important for consumers to become well-informed about how to buy, sell, and trade cryptocurrencies safely. This means watching out for financial crimes on the blockchain and crypto schemes.
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