With the recent talk about de-dollarization, let's explore its potential implications on the global economy, and how it may affect Bitcoin and other cryptocurrencies.
If you've been on Crypto Twitter at all the last few weeks, you have definitely come across de-dollarization. The topic is everywhere now. And by everywhere, we mean even on Fox News with Tucker Carlson talking about it:
Arthur Hayes also dropped another must-read article talking about de-dollarization:
With everyone foaming at their mouths about "the dollar is going to zero!!!" now's the time to explain:
- What de-dollarization means.
- Whether de-dollarization is or isn't happening.
- What this means for crypto.
Strap in for another macro article. It's been a while.
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What Is De-Dollarization?
The easiest way to answer this is to consult your friendly neighborhood online encyclopedia:
"Dedollarisation is a process of substituting US dollar as the currency used for (i) trading oil and/ or other commodities (i.e. petrodollar), (ii) buying US dollars for the forex reserves, (iii) bilateral trade agreements, and (iv) dollar-denominated assets."
De-dollarization has become a major talking point that has made it to mainstream news thanks to headlines like:
- China-Russia yuan-denominated trade hitting record highs.
- Yuan's share of trade finance doubling since the start of the Ukraine War.
- China completing the first LNG trade with France in yuan.
You can easily spot the common denominator here: China currency good, green currency bad! That has even gotten the attention of a particular former US President:
In short, people are panicking at (or eagerly awaiting) the end of the dollar's dominance in those four points mentioned above.
Let's unpack whether that is actually happening.
Is De-Dollarization Happening? If Yes, How Much?
Here's where we have to get into the trenches of analyzing macroeconomic data. Good thing a couple of smart people have already done all the work.
The consensus among reputable experts is the following:
De-dollarization is happening at the margin, but the dollar's status as the world reserve currency is safe. For now.
Brent Donnelly, President of Spectra Markets, thinks "de-dollarization is not a thing." He cites three main reasons:
Firstly, fear mongering about the dollar's imminent demise has been around before and never materialized as badly as it sounds.
Second, the dollar maintains a stable share of global payments volume.
Third, the dollar's share of foreign exchange reserves is down from its peak value, but the meat of that move happened a decade ago and isn't a problem for the US anyway.
Those are some of the main themes that repeatedly come up about de-dollarization and whether it's really happening.
Michael Pettis, Carnegie Senior Fellow and professor of finance, also sees three main reasons why meaningful de-dollarization isn't happening anytime soon:
- Changing the system is difficult because the challenging currencies cannot credibly replace the USD.
- In any case, America would have to actively support de-dollarization for it to happen.
- A hypothetical commodity currency would be worse than the dollar because it would be pro-cyclical and more volatile. When commodity prices are low, the states backing this currency would sell it to prop up their economies. But that is exactly when its value is the lowest!
In other words, China doesn't really want the yuan to replace the dollar and neither is it strategically well-placed for that to happen. What China does want is to use its dollars in a way that benefits its national interests.
Imagine you are China. You receive dollars for selling phones to Americans. How can you use these dollars?
You can, for example, buy lots and lots of American assets:
One American asset that's easy to acquire is US government debt, aka US Treasuries. China has been recycling its massive dollar surpluses into Treasuries, which is where the "China holds a lot of American debt" headlines come from.
If China buys less US debt, that would count as a form of de-dollarization. And that's exactly what is happening, according to Luke Gromen:
Gromen argues that China does not want so much to move away from the dollar as the currency. But it does want to move away from holding claims on dollar-denominated debt. Ideally, China would want to re-monetize (read: pump) gold and use that as a reserve asset.
The reasoning?
Gold is harder to weaponize and sanction.
Economics blogger Noah Smith thinks this is not a threat to the dollar's hegemony. Even if you were to pump gold, the US and its allies hold more than 70% of gold reserves, making such a move by China ineffective.
Finally, we should ask:
Is the dollar as the reserve currency even the big deal it's made out to be?
The ever-knowledgeable Bitcoin expert Matthew Pines thinks that fears of de-dollarization are just a proxy for fears the US will lose its status as the world's hegemon.
And indeed, maybe a bit of de-dollarization could be good. Because, as Lyn Alden does, you can make the case that a powerful dollar is good for elites but not for the Average Joe:
Without getting into the economic nitty-gritty, having a bit less "global reserve currency" juice would probably help US manufacturing and thus, American blue-collar workers:
Let's conclude:
- The dollar isn't going anywhere for now.
- But other countries have less appetite for dollar debt and are looking for alternatives.
- And the US itself may welcome all of this.
Okay, great economic lesson, you say, but what does that even mean for me as a holder of crypto?
What Does That Mean For Crypto?
We've discussed the relationship between the dollar and crypto (specifically BTC) in many articles. Most recently so, in the relationship between Bretton Woods III and Crypto and the Dollar Milkshake Theory and Crypto.
The Bretton Woods III theory is essentially the "academic way" to argue for de-dollarization. Regarding crypto, here's what we concluded:
"On the one hand, crypto could become an alternative payment system or even a global reserve. Bitcoin, as a digital commodity, could become a marginal addition as a central bank reserve. Even a Harvard University research paper recommends Bitcoin. On the other hand, there are significant downsides for nation-states to adding Bitcoins to their reserves, as we explored in the Bitcoin Nation-State Theory. The more BTC is seen as a digital commodity and not a speculative asset, the less volatile it will be, and vice versa."
That has not changed. In fact, BTC recently hit $30K, so maybe it's starting to slowly make the transition to a safe haven asset?
Again, it's complicated. Yes, in theory, Bitcoin exhibits many desirable qualities as a reserve asset. It may not become the next world reserve currency, but it could at least rival analog gold as one alternative reserve asset.
But in practice, we have seen the US crack down hard on crypto in the first months of 2023. Even though industry leaders like Brian Armstrong warn that clear and correct regulation is a matter of national security, the current Presidential administration has (unfortunately) chosen to be on the warpath with the crypto industry.
Currently, and this could and hopefully will change, a de-dollarization push for a bigger role of crypto is likely to come from outside the US, if at all. For example, China is backtracking on its crypto ban, welcoming the industry back through the back door by welcoming exchanges and stablecoins in Hong Kong.
The pro-crypto argument for China is clear: maybe crypto cannot be easily controlled, but the upside is that it cannot be easily sanctioned as well either. It can be at least a useful tool, among others.
By design, de-dollarization means substituting the dollar for other currencies. Even if only a fraction of the liquidity is directed to cryptocurrencies, that could pump prices in the long run. But that is not guaranteed by any means.
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