Why Bitcoin Could Replace The Us Dollar As A Reserve Currency

Data & Research / 18.11.2020

What exactly is a reserve currency? Well, the simplest form of explanation to give will be a massive quantity of currency held by major financial institutions for purposes of both international and domestic transactions. It’s the usage of one currency by most countries globally to pay debts internationally and facilitate exchange rates.

The US dollar, which some people know as Greenback, is the most used global currency in the financial world. After world war 2, representatives from 44 nations founded a centralized bank with a regular monetary system. The dollar became the leading reserve currency due to its popularity in many countries. The US economy during the mid-nineties covered about 50% of the world’s GDP. With such a strong currency, it was inevitable that the US dollar stood firm as the global reserve currency.

Bitcoin, the first cryptocurrency, was invented in 2009 to take digital currencies to the next level. The purpose of Bitcoin’s development is to create a currency independent of government manipulation and purely digital. Thus this far, it is the most popular cryptocurrency to date.

How does Bitcoin work

Bitcoin uses blockchain technology, which is simply a series of transactions cryptographically encoded and recorded in a ledger called a blockchain. A blockchain is a system that involves several transactions that are date and time-sensitive distributed in several computers within a network.

One can access bitcoin by buying or mining it, the latter being more laborious than the former. To purchase bitcoin, one needs to create a cryptocurrency wallet, then use your credit card to acquire bitcoin.

Mining involves using computers with high processors to solve cryptic puzzles within a network that creates bitcoin and a key that generates a blockchain. The blockchain develops from complex mathematical equations and makes it secure enough to hold transactions. When bitcoin is sent or received, it is verified and recorded on the blockchain. Once the trade is complete, no alterations can be made.

Bitcoin vs. US Dollar

Bitcoin is currently valued at $18,152, although in 2017, it reached $20,000.00. Generally, when BTC is compared to fiat currencies, it usually is compared to the dollar. USD is a strong currency since most banking institutions in the world have large amounts of it.

As cryptocurrencies are slowly spreading in developing economies, 0.4% of the money worldwide is invested in Bitcoin. Developed countries such as China and the US have encouraged digital currencies, thus favoring BTC’s use. Countries like Saudi Arabia, where people use dollars to transact, have seen a substantial increase in the use of BTC. Bitcoin use is on the verge of limiting international US dollar transactions for the following reasons:

Providing a decentralized banking system

Everyone needs a stable financial system, a system that not only limits them to the amount of money they have. For transactions to occur, international trading rates from local currencies to USD is mostly required. Banking institutions and states having the US dollar as their principal currency can manipulate profits during the trade.

Bitcoin, a decentralized cryptocurrency, is not controlled by any government. Even when the dollar value rises locally, businesses operating trade in bitcoin are not affected. If a good is two bitcoins, one can purchase it with the same amount, contrary to someone having to add cash since the value of USD has increased or decreased.

Security

Fraud is ordinary in the digital world, as banks report cases of billions of dollars stolen in online theft. Not every neighborhood banking institution has state of the art firewalls on their networks to block hackers from stealing money. Since almost every bank has USD, it encourages more and more people in the cyber world to rig financial systems to their merit. Banks also holding hard cash in USD also face the threat of armed robbery, looting, and employee theft. Since USD is in high demand, the interest in fraud grows perpetually.

Bitcoin usage means waving goodbye to bulky USD notes. Bitcoin is engineered by blockchain technology, making it extremely difficult to hack since it uses cryptographic encoding. Therefore, banks and financial institutions don’t have to be the target and incur massive losses.

Low transactions fees

If exchanging local currencies was not a headache enough, for one to make international payments, he/she needs to pay extra fees. These fees are mostly dividends given to the intermediaries such as banks.

Peer to peer technology usage in bitcoin transactions ensures reliable transactions with minimal fees. No more middle-men asking for payments to oversee the transaction cross the border. It is a send and receives process. 

Efficiency and Speed

Sending USD via credit and debit cards is often slow and sometimes unreflective because the financial institution’s system might be down. When transactions are delayed daily, it limits the number of transactions for international trades. Subsequently, there will be slower economic growth; the fewer the transactions, the lower the number of businesses.

Cryptocurrency has high acclaim for its ability to carry out trades in record speeds of seconds. Institutions that use BTC can forget the hustle of swiping unresponsive credit cards and slow banking services in high demand. A trader from Africa can import goods from Asia, paying with BTC with no worries when the money will reflect placing the goods in transit.

Unaffected by inflation

Countries such as Columbia have faced massive inflation rates recording a 3.52% increase in 2019. Such areas have currencies that are invaluable, leading to people using US dollars to make settlements. The Value of goods and services in Columbia differs from other countries overseas. When a merchant from such a region wants to do exports or imports, it becomes quite costly. 

If bitcoin becomes a common currency, it will build a stable economy for residents to sell and import goods abroad. BTC’s purchasing power is steadier than the dollar, simply because the federal reserve periodically devalued currencies. International trade will be stress-free, with businesspersons not worrying about how low in value their cash is compared to the USD.

Conclusion

Before using Bitcoin advances to the global stage, the coverage of digital currencies needs to surpass traditional financial systems. The US dollar is still the most used global currency covering 60% of the money stocked up by financial institutions. However, BTC transactions are slowly creeping in economies. Speed, security, efficiency, and the ability to replace payments where banking systems have failed to have uplifted bitcoin’s uptake.

Intercontinental trade is encouraged for economic growth. Nonetheless, using the dollar as a reserve currency has loopholes like fraud and slow banking transactions. Bitcoin being contrary to that is the perfect solution to the shortcomings of the US dollar.

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.