USD Losing Its Reserve Status? What It Means For Bitcoin

What does it mean for Bitcoin if the US dollar loses its reserve status? Is it even possible? In light of the dramatic political developments, a debate is currently raging about exactly that. Whether Bitcoin can be a beneficiary or even the salvation is heavily disputed.

USD Losing Its Reserve Status?

Even Tesla CEO Elon Musk is worried about it. In a response to a thread by Genevieve Roch-Decter, CEO of GRIT, in which she philosophized about whether the US dollar is losing its reserve currency status, Musk wrote:

Serious issue. US policy has been too heavy-handed, making countries want to ditch the dollar. Combined with excess government spending, which forces other countries to absorb a significant part of our inflation.

Serious issue. US policy has been too heavy-handed, making countries want to ditch the dollar.

— Elon Musk (@elonmusk) March 29, 2023

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In the mentioned thread, Roch-Decter states that 2014 marked a turning point, with Russia and China initiating “de-dollarization.” Both countries no longer wanted to rely on the US dollar for international trade and investment.

Globally, this trend is evident. As Roch-Decter noted, central banks bought more gold last year than in any year since 1987, yet China and Russia are the driving forces.

With the Russian central bank’s freeze of foreign reserves on the occasion of the Ukraine war, the United States has taken a step that has sent a wake-up call to other nations like China regarding their USD reserves. Since early 2022, the volume of Chinese-Russian trade in Yuan has skyrocketed.

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“Russia has turned to China’s yuan to reduce reliance on the US dollar. Other markets are shifting to the yuan as China becomes a more influential superpower,” writes Roch-Decter, who explains, however, that the dollar “is far from doomed.” The analysts at The Kobeissi Letter see a similar trend:

Over the last ~25 years, the use of the U.S. dollar for foreign exchange reserves has steadily declined from 72% to 59%. Meanwhile, Euro usage is up slightly from 19% to 21%. The most important part? Other currencies, including the Chinese Yuan, soared from 4% to 10%.

The chart below shows that the dollar still dominates foreign exchange reserves, but that lead is slowly being eroded.

Currency composition | Source: Twitter: @KobeissiLetter

The inflation and the collapse of the banking system are making people question the system, the analysts said, pointing to the many alternatives to the US dollar. Nations such as China, Brazil and Russia (generally the BRICS nations) are currently doing much to move away from the USD.

The list is long, as The Kobeissi Letter notes. In the last two weeks alone, it has been announced that Saudi Arabia is considering accepting the Chinese yuan for oil sales. China and France completed their first LNG trade in yuan.

Russia is also considering using the Chinese yuan as a reserve currency. Saudi Arabia is building a $12.2 billion refinery jointly with China. China and Brazil have agreed to use the Chinese yuan in cross-border transactions.

For Roch-Decter, however, it is clear: “There is still a strong demand for US dollars. But now, the dollar has some serious competition.”

Meanwhile, Monica Elizabeth Crowley, the former assistant secretary for public affairs for the US Department of the Treasury, noted the boundary of such competition in an interview that went viral on Fox News. If Saudi Arabia, Iran, Russia, China and other countries start trading oil in yuan, she predicts a collapse of the US dollar.

If that were to happen, there would be a complete implosion of the global economic system, but certainly the American economic system. You would be looking at sky-high inflation, just raging Weimar Republic kind of inflation.

Fared Zakaria (CNN) & Monica Crowley (FOX) this past weekend both ran segments discussing the end of the U.S. Dollar reserve currency status. The president of Kenya warned his country to “get rid of dollars” and Xi and Putin just said civilizational change is coming.

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— Dave Shuck