Control over the money supply is one of the pillars of state power. The strength of a nation depends on the strength of its armed forces and financial system. Until the end of World War II, the British pound served as the world’s reserve currency, but in 1945 it was replaced by the US dollar.
Since then, the dollar has remained an instrument of international settlements and an important component of the monetary reserves of many countries. The credibility of it is explained by the economic and political stability of the United States.
Meanwhile, in the early 1970s (when President Richard Nixon abolished the gold standard), the dollar became an unsecured currency. Since then, the value of the dollar as a means of payment depends only on the credibility of the United States.
In 2008, the blockchain technology and the bitcoin cryptocurrency based on it were presented to the general public, which marked the beginning of a technological revolution in the financial sector. As the value of the leading cryptocurrencies grew, more and more altcoins came on the scene, igniting the flames of speculative madness.
However, over the past years, confidence in the US dollar and other fiat currencies has been falling. The year 2022 may turn out to be a turning point in the fate of the dollar, which will allow alternative exchange instruments, including cryptocurrencies, to come to the fore.
Will February 4, 2022 go down in history?
The agreement between the leader of the People’s Republic of China and the President of the Russian Federation is not limited to a $117 billion trade agreement. Much more important is the promise of “unlimited” support, which divided the globe into two camps. The agreement paved the way for the outbreak of hostilities on the territory of Ukraine and may become a prelude to the reunification of China and Taiwan.
In recent years, the world has been moving towards globalism in the financial system, but anti-Russian sanctions have changed the economic landscape. For more than a decade, globalism has supported the growth of cryptocurrencies, but it is the ideological differences of the world’s elites that can give them a new impetus.
Bitcoin, ether and other cryptocurrencies are essentially universal means of exchange, not limited to individual jurisdictions. An ideological split may increase the demand for currencies free from government control.
The authorities can pursue political goals by manipulating the money supply. Cryptocurrencies are designed to return power over the system to end users, since their value is determined solely by the balance of supply and demand. Cryptocurrencies are the embodiment of a libertarian approach in the financial sphere.
The dollar remains the world’s reserve currency
Since the end of World War II, the US dollar has remained the world’s reserve currency, being the richest country in the world with the most stable political system.
Countries use reserve currencies to settle international transactions and accumulate savings. Another advantage of the dollar is its free convertibility. While China is on the heels of the United States as the second largest economy on the planet, the yuan is limited by China’s political ideology and cannot be freely converted into other currency instruments.
One of China’s trump cards in this confrontation was the digital yuan. But, although China is significantly ahead of the United States in creating a “digital currency”, the problems of convertibility and politicization of the yuan remain. Time will tell whether China will be able to make its currency freely convertible.
Three signs that the dollar is losing ground
While the role of the yuan in the global financial system is increasing, the US dollar is gradually losing ground. Now the dollar as the world reserve currency is threatened by three things:
- The deal between Russia and China eliminated the dollar from the equation. Russia is redistributing its reserves in favor of the euro and gold, while China is increasing its own gold production to form additional reserves to the detriment of the US currency.
- Saudi Arabia and Nigeria (the world’s leading oil suppliers) are negotiating with China to pay for oil in yuan. For many years, oil prices (as well as other raw materials) have been denominated in dollars. Moreover, Russia recently introduced a mechanism for paying for energy in rubles, which will be applied to “unfriendly” countries, which supported the ruble. The decoupling of commodity prices from the dollar reduces its importance to the system.
- Inflation in the US has soared to 40-year highs, undermining the purchasing power of the dollar. At the same time, the split in the American establishment has deepened in recent years. Abraham Lincoln said: “A house divided in half will not be able to withstand the storm.” The state of the economy and political differences affect the value of the dollar.
The US dollar is losing its purchasing power, and its status as the world’s reserve currency is under threat.
The emergence of alternatives
The decline of the US dollar opens the door to other exchange instruments. Cryptocurrencies embody the fintech revolution, and they are able to take advantage of the weakness of the USD. Moreover, the rise in the value of digital currencies attracts speculators, further heating up prices.
On November 10, 2021, bitcoin and ether, leading the cryptocurrency sector, reached record highs, followed by a sell-off to the lows of January 24, 2022.
Upward breakdown of Bitcoin and Ether
Over the past two months, bitcoin and ether have been consolidating, recovering from the November-January sell-off.
BTC – weekly timeframe BTC – weekly timeframe
Source: CQG
A fresh pattern of descending highs and rising lows can be traced on the chart. This wedge was broken last week, which allowed BTC to reach a local peak of $48,475 and finish the week above the $46,000 mark.
ETH – weekly timeframe – weekly timeframe
Source: CQG
Ether demonstrated similar dynamics, breaking out of the converging triangle and reaching a maximum of $3506 last week. Friday’s trading ended at $3,450.
Time will tell whether the leading currencies will continue to grow after the technical breakdown of the nearest resistance levels. The dollar will not lose its status as the world’s reserve currency overnight, but the trend has emerged. Cryptocurrencies are likely to benefit from this dynamic, and new highs may loom on the horizon.
Fiat currencies rely on full trust in their issuers. Many opponents of digital currencies argue that the growing asset class has no tangible support, but in fact they are no different from traditional payment instruments. Moreover, a decrease in the degree of trust in governments can play into the hands of cryptocurrencies.