The Ukraine-Russia war has given rise to all manner of speculations. Experts are even predicting the entry of a new monetary order. This order would supposedly impact both, real-life currencies, and digital currencies. Additionally, Bitcoin would be a huge beneficiary in the Crypto Wallet arena. The benefit would come in the form of it playing the role of a reserve asset. For crypto trading and investment log onto Bitcoin smart.
A Brief about Reserve Assets
Global marketplaces do not remain the same. Fluctuations take place due to external factors, such as financial crashes, political instability, etc. Therefore, nations need to have a hedge in place against the adverse effects of marketplace volatility. The hedge is in the form of currencies, commodities, or excess capital. They are categorized as reserve assets.
Reserve assets are displayed as cash reserves on the balance sheets of diverse entities. Each possesses its own store of value.
The reserve assets were in the form of gold and silver in earlier centuries. Today, paper currencies have taken their place, along with a portion of gold stored in a secure place. Every nation’s currency receives the backing of the concerned government. The balance of supply and demand decides its value.
Faults with the Reserve Assets System
On the surface, the reserve assets system seems to be an excellent solution to economic downturns. After all, it represents the fiat currencies of diverse nations. However, these assets are not for local purposes only. They must serve as global reserve assets too. Therefore, the reserve assets must function in alignment with an ongoing trade deficit. Only then, will the concerned nation have enough stock of its currency to meet the global demand?
Another problem is the way that the important economic powers across the globe, treat their money. They have central banks, which do not mind printing large quantities of fiat currencies on demand. To illustrate, the USA has managed to manufacture over 10,000 billion dollars seemingly out of thin air, over the years.
Going beyond limits is what leads to inflation. Even today, economic experts in the U.S. are worried that the inflation of the U.S. dollar has touched an all-time high. They lament that it is the highest that they have witnessed over the last 40 years. On top of it, the U.S. has imposed economic sanctions against Russia, which is at war with Ukraine. It is possible, therefore, that a new monetary order may make an entry into the world, in the very near future.
Can Bitcoin Become a Reserve Asset?
Many aspects are working in favor of Bitcoin, which is prompting nations to seriously consider it as a reserve asset.
To begin with, Satoshi Nakamoto, the mysterious founder of Bitcoin, set a limit on the mining of Bitcoin. This limit is embedded into the blockchain. It stands at 21 million tokens. When a cryptocurrency is limited in supply, it becomes a scarce asset. In turn, it proves to be a marvelous hedge against inflation. In contrast, fiat currencies may become victims of excessive printing, thereby widening economic imbalances.
Apart from inflation, institutions find other factors affecting the value of their reserve assets. They include international competition, the weakening of purchasing power, limited supply, central banks’ control, etc. Bitcoin is a decentralized blockchain. Therefore, no third-party intermediaries may interfere in its operations. With the loss of centralized powers, the other threats will also lessen in importance.
Despite being decentralized, Bitcoin is extremely careful about recording and storing data about monetary dealings. The data goes into ‘block’ storage. The block is part of a public database/ledger. Therefore, there is transparency in all dealings. No centralized authority is present to take charge of the actions and changes taking place on the Bitcoin blockchain.
Every transaction undergoes verification before recording. Once recorded, it is immutable.
Regardless of all the advantages of adopting Bitcoin as a reserve asset, however, experts express a major concern. For instance, Bitcoin transactions are notoriously slow. Today’s global marketplaces, where business deals may break or succeed within seconds, find it a major disadvantage. Bitcoin knows this too. Therefore, it is bringing about major changes in its protocol via advanced technologies. Thus, the possibility of Bitcoin becoming a reserve asset is still possible.