As Bitcoin Soars Over $300, A Question Arises: Could It Become A Global Reserve Currency?

Tyler Durden's picture




 

Having now tripled since August, Bitcoin's break above $300 ($324 highs) raises an important thought experiment - can a digital currency act as a global reserve currency?

 

 

It seems yesterday's CNBC discussion that Bitcoin is nothing but a beanie-baby fad just served to feed the beast... on heavy volume after Draghi's comments...

 

Charles Hugh-Smith, from OfTwoMinds blog, attempts an answer of just that question:

Could a non-state issued digital currency like Bitcoin become a global reserve currency? The idea came up in my recent conversation with Max Keiser on the Keiser Report during our discussion of reserve currencies.

The idea is intriguing on a number of levels. In terms of retaining value though thick and thin, the ultimate reserve currency cannot be printed (and thus devalued) with abandon by a government. Gold and silver have served as the ultimate reserve currency, as precious metals can be traded for commodities and services, provide collateral for debt and serve as reliable stores of value.

While many observers believe gold is still the only reliable reserve currency (or if you prefer, the only reliable backing for government-issued paper money), it's a worthy thought experiment to ask if a digital currency could also act as a reserve currency.

Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency's acceptance as money that can be used to buy commodities, goods, services and (the ultimate test) gold.

It follows that the first step in a non-state issued digital currency becoming a reserve currency is that it isn't created in quantities that dwarf demand. If the digital currency is issued with abandon, it cannot be scarce enough to gain any value. If I own one quatloo (our hypothetical digital currency) and a trillion new quatloos are issued tomorrow, the value of my one quatloo will decline to near-zero.

The second step is its widespread acceptance globally as money, i.e. a store of value and something which can be traded for goods and services.

There is a bit of a built-in conflict in these two requirements. To be useful in the $60 trillion global economy, the quatloo must be issued in size: there must be enough of it around to grease transactions large and small in all sorts of markets. Using the U.S. dollar as a guide (since the USD is the primary reserve currency), we can estimate that a minimum of $1 trillion in quatloos would be needed to become a practical global currency.

To act as a reserve currency, another trillion or two would be needed, as nations would hold these quatloos as reserves. (Nations hold an estimated $7 trillion in USD reserves, about $3 trillion euros and $1 trillion or so in yen, pounds and other currencies.)

But issuing quatloos in these quantities would remove any scarcity value. Thus the issuer of the quatloo would have to carefully issue more quatloos only when demand justified the need for more monetary "grease" for the global economy.

If on the other hand skyrocketing demand/scarcity drove the value to the stratosphere, holders of the quatloo would rejoice, but this volatility would present its own set of risks for those seeking to use the quatloo as a reserve against currency volatility in the home-country currency. If a digital currency can leap ten-fold in a short time, then might it not drop with equal volatility?

Volatility is the enemy of reserves; the holder of reserves needs a liquid (meaning it can easily be sold or traded in size) currency that predictably retains its value. A volatile currency poses risks, as do currencies that cannot be traded in size without drastically influencing the market value of the currency.

These conditions pose a steep challenge for any digital currency, but they are not insurmountable. Even as a niche currency, non-state issued digital currencies could play a role in the global economy, especially if government-issued fiat currencies destabilize/ devalue due to massive money creation by desperate central banks and state treasuries.

Is scarcity enough to back a non-state issued currency? Bitcoin offers a real-world experiment.

* * *

Meanwhile, in Russia if you pay with Bitcoin, you get a 10% discount:

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Thu, 11/07/2013 - 12:42 | 4131285 achmachat
achmachat's picture

no

Thu, 11/07/2013 - 12:43 | 4131291 NotApplicable
NotApplicable's picture

Yeah, you can be sure that between the IRS and Homeland Insecurity, this terrorist plot will be dealt with.

Otherwise it will be impossible to stop.

Thu, 11/07/2013 - 12:45 | 4131296 malikai
malikai's picture

BTC Traders - We've just released QSN Risk Manager for Bitcoin. 

https://bitcointalk.org/index.php?topic=327027.0

Thu, 11/07/2013 - 12:48 | 4131314 EscapeKey
EscapeKey's picture

Very cool.

I have spoken to a couple of hedge funds who are opening their eyes to BTC, one of which already had an entire trading platform revolving around BTC.

 

Thu, 11/07/2013 - 12:50 | 4131344 gmrpeabody
gmrpeabody's picture

But..., I thought bitcoin died months ago...

Thu, 11/07/2013 - 13:07 | 4131443 Bunga Bunga
Bunga Bunga's picture

... and Bitcoin can be easily hacked. And it has a flaw, it will crash. And I can't hold it in my hands. 

Thu, 11/07/2013 - 13:18 | 4131500 Bindar Dundat
Bindar Dundat's picture

One BTC = one ounce of GOLD

Thu, 11/07/2013 - 13:28 | 4131557 SMG
SMG's picture

I think the plan is to introduce a global reserve new currency backed by gold and silver after the fiat blowup.  Maybe it will be like Bitcoin but backed by silver and gold. Like a Silver Bitcoin or something like that.  But in it's current version, no.

Maybe something you could load on an implantable chip too.

Sigh.

Thu, 11/07/2013 - 14:19 | 4131764 CH1
CH1's picture

I love Bitcoin, but there are a lot of steps between here and a global reserve currency. Let's not jump to extremes.

Thu, 11/07/2013 - 14:42 | 4131850 mmanvil74
mmanvil74's picture

The author attempts to imagine the use of Bitcoin as a world reserve currency by comparing it to the US Dollar.  But, for Bitcoin to be effective, it does not have to act as a reserve currency at all, it merely needs to be effective as the world's trading currency.  

The idea of a reserve currency, which requires trillions upon trillions of units in circulation, has been created to sustain the modern financial system, which is rooted in ridiculous quantities of money flowing around that are not being used to buy or sell anything, but exist only contractually, to make bets and hedges, and hedges and bets against those hedges and bets, up to infinity, if the FED will let them.  

We don't need a world reserve currency, apart from Earth's commodities as they currently exist, what we need is an alternative trading currency that is more useful and amenable to Earth's population at large.  Earth's commodities, including Gold, can be measured in Bitcoin.  Therefore, we don't need a currency so vast to sustain the world's current financial system, we only need enough to satisfy the buying and selling of goods and services by the population as a whole.

The requirement for a world's trading currency is much more modest than a world reserve currency, and, with each Bitcoin divisible by up to 8 decimal points, it is conceivable that there will be enough of them to do the job.  If not, competing virtual currencies could, and are being created so the market can decide which virtual currencies it wants to trade with, none of which are printed, governed or controlled by any central bank.  

If central banks want to hold on to the idea of a fiat currency being the world's reserve currency, they may do so, but if that currency is no longer favored by those of us who buy and sell real goods in every day life, that fiat currency will no longer serve any significant purpose.  Central banks might be wiser to accumulate gold as their reserve currency, or other commodities, as er, uh someone (China) we know is already moving strongly in that direction.  Earth is the world's reserve currency, what we need is a more effective, decentralized trading currency.

Thu, 11/07/2013 - 14:56 | 4131940 wintermute
wintermute's picture

The extreme volatility of Bitcoin/fiat fx rate will only persist during the exponential growth phase. Once "market saturation" is reached, it will plateau and prices in XBT will become very stable.

Gentle deflation should occur in a Bitcoin economy driven only by improving technology and real production efficiency. Just how an economic system should work.

 

Thu, 11/07/2013 - 16:17 | 4132246 Enslavethechild...
EnslavethechildrenforBen's picture

The NSA is not stopping the DOLLAR because it prints them. The NSA is not stopping the BITCOIN because it generates them. Bend over and grab your bootstraps. max Keiser can go fuck himself too.

Thu, 11/07/2013 - 16:33 | 4132300 Jack Napier
Jack Napier's picture

BitCoin could only be as effective as a world reserve currency as any other non-metal backed currency. There's no intrinsic value. With fiat we have central banking management, or with BitCoin we would have speculative market management. Both are inferior and rooted in the sand as far as stability is concerned.

Thu, 11/07/2013 - 15:05 | 4131981 Simplifiedfrisbee
Simplifiedfrisbee's picture

So a worlds trading currency, by default of the current world reserve currency, would not be considered a world reserve currency? Hmm...Ultimately, the people are the reason why currencies and monies hold value, so if the current global reserve currency collapses(which it will), then wouldn't according to the paradigm established today reserve Bitcoin as the reserve currency of choice? Is not that the ideal situation for those who believe in Bitcoin? Another salivating over the amount of prosperity can be obtained by the demise of others.

Thu, 11/07/2013 - 15:58 | 4132189 fonestar
fonestar's picture

Short of installing high-end ALG's with deep packet inspection at every major ISP and banning encryption (you couldn't anyway) I dont' think Bitcoin can be stopped. 

There is nothing to stop the mighty Bitcoin from gaining critical mass at this point.  It will grow and grow until it causes panic throughout the globe.  The mass of a single Bitcoin will cause a tear in the fiat universe.  Every barrier is only a psychological barrier to be destroyed, utterly destroyed, ravaged, pissed on and left for dead.  I have no sympathy for those left holding fiat.

PM bugs take heart, your gains are only being temporarily masked by the massive crimes at the COMEX. 

 

 

Copper - The money of beggars

Silver - The money of gentlemen

Gold - The money of kings

Paper - The money of con men

Debt - The money of slaves

Bitcoin - The money of hackers

Thu, 11/07/2013 - 15:49 | 4132155 emersonreturn
emersonreturn's picture

mm74

 

great take, thanks for the insight

Thu, 11/07/2013 - 18:12 | 4132693 MrPoopypants
MrPoopypants's picture

The CFR is pushing this, anyway. Read Benn Steil on digital gold.

Thu, 11/07/2013 - 13:28 | 4131558 Bunga Bunga
Bunga Bunga's picture

As of now:

Wealth of the richest 0.1%: 40 trln

Bitcoin in circulation: 12 mln

Thu, 11/07/2013 - 19:45 | 4132993 TheHound73
TheHound73's picture

A bitcoin is an arbitrary unit that can be divided ad naseum.  A Bitcoin contains 1,000,000 base units, sometimes called Satoshis after the mythical inventor of Bitcoin.   $40 trln/12min BTC = $3.333mln/BTC or $3.33 per Satoshi.

Thu, 11/07/2013 - 13:52 | 4131665 TheCanadianAustrian
TheCanadianAustrian's picture

Actually, as a fraction of the overall currency supply, one BTC = approximately 310 ounces of gold.

(This is using Bitcoin's maximum supply of 21 million. By today's supply, it would be more than 500 ounces of gold.)

Thu, 11/07/2013 - 14:03 | 4131704 zaphod
zaphod's picture

And gold is significantly undervalued today compared to fiat because of the fractional games the central bankers can play.

Just two generations ago, gold based financial instruments represted around 30% of the world's wealth and this percentage was stable, this was before massive debt based fractionalization. Today gold represents around 0.1% of the world's wealth.

We were to move back to a sound money system based on gold, gold itself would rise ~300x in value.

If this sound money system were based on bitcoin that value would be your 1 BTC = 310 oz of gold * 300 to bring it to the true value in terms of dollars today

Thu, 11/07/2013 - 16:52 | 4132258 Kirk2NCC1701
Kirk2NCC1701's picture

As savers, investors or speculators, ALL we need to know is shown on http://www.oanda.com/currency/converter/

Select BTC vs. USD or BTC vs. XAU (gold), and you get the chart plots.  If you go to the Historical Rates tab, you can create custom charts.

The point is, "There's money in them there Bitcoin hills!"  In fact, BTC kicked Gold's ass.  Big Time!!!*  Which is why I'm re-balancing my portfolio to start buying BTC (after next Dip), rather than any more PM. 

* E.g., Say you bought AU in 10/1/2012 @ $1778.  You could've bought BTC @ $12.60.  YOU do the math, what ROI you got for XAU and for BTC. Let me make it Excel-easy on you:  If you had "invested" $100k in gold (listened to gold-bugs/shills on ZH), you now have ~ $75k.  Congrats, you must be proud of yourself.  If you had invested the same $100k into BTC, you'd be sitting on a cool $2.4 MILLION right now, and be telling your boss to go fuck himself.  Of course, if you sold your BTC now, you'd be buying gold at $1325 -- thus buying a LOT more from the $100k chump-change out of your $2.4M.

No wonder that those who make their living off gold are eating their livers in anger and frustration.  As someone who went through this EXACT scenario (different investment amount) and is sitting on "shitty gold" instead of a shitload of money, I can categorically say to the Gold SHILLS to go FUCK themselves!  Every time an article or blog gets excited about a rise in gold price (or tries to get others excited), I will gleefully remind them (and ZH readers) of the XAU vs. BTC performanceWelcome to Fight Club!

Thu, 11/07/2013 - 19:28 | 4132911 PaperWillBurn
PaperWillBurn's picture

@$55,000 an ounce.

 

Hold both

Thu, 11/07/2013 - 16:04 | 4132214 fonestar
fonestar's picture

Bitcoin cannot be hacked.  You people didn't understand Satoshi's brilliance at $3 BTC, you don't understand it at $300 BTC and you still will not understand it at $3,000 BTC.

 

And Satoshi said unto them, "the geek shall inherit the Earth!"

Thu, 11/07/2013 - 17:30 | 4132514 Being Free
Being Free's picture

http://www.wired.com/wiredenterprise/2013/11/inputs/

Here’s your digital currency lesson of the day, courtesy of a guy who calls himself TradeFortress: “I don’t recommend storing any bitcoins accessible on computers connected to the internet.”

Thu, 11/07/2013 - 13:23 | 4131524 Non Passaran
Non Passaran's picture

XenoFrog said so.

Where IS Xenofrog, by the way? I miss his insightful views on bitcoin!

Thu, 11/07/2013 - 13:45 | 4131638 XenoFrog
XenoFrog's picture

When China starts buying Bitcoin instead of Gold, it might have a chance at being a global reserve currency. Until then, I wouldn't get your hopes up reading bitcoin fanfiction.

Thu, 11/07/2013 - 14:02 | 4131701 unununium
unununium's picture

If China wants to keep up with its citizens, they ought to start diversifying now.

http://www.zerohedge.com/news/2013-10-19/bitcoin-climbs-highest-april-le...

Thu, 11/07/2013 - 17:03 | 4132401 Brand_New_Investor
Brand_New_Investor's picture

But isn't there a limited number of Bitcoins? What if China buys all the bit coins over time. Won't this ultimately undermine the system? Other governments won't have a way to balance "a la mutually assured financial destruction" if we can't print unlimited bitcoins ? Isn't it about control ?

Thu, 11/07/2013 - 18:32 | 4132746 shitco.in
shitco.in's picture

China invented Litecoin beacuse they were jealous the US developed Bitcoin.  Litecoin has 4x as many coins (84m) and 1/4 the block times (2.5 mins) and is widely considered the silver to btc being gold.

Thu, 11/07/2013 - 19:53 | 4133040 TheHound73
TheHound73's picture

China has been leading the charge into Bitcoin recently.  My question is when will India wake up?

Thu, 11/07/2013 - 12:51 | 4131347 New England Patriot
New England Patriot's picture

Why would central banks want to recognize a world reserve currency that cannot be easily inflated?

Thu, 11/07/2013 - 12:56 | 4131380 TheGardener
TheGardener's picture

Why not inflate ? Trade it hundreds of times the underlying "physical" and who is to know if those reserves are really
on that hard disk in your vault ? If someone asks for
delivery, claim it is so well encrypted it will take 7 years
to decipher and deliver...

Thu, 11/07/2013 - 13:01 | 4131409 strannick
strannick's picture

Smells like a G.S. pump and dump, with a side order of gold discreditation. 

Bitcoin is as good as its encryption. Im not buying it.

Thu, 11/07/2013 - 13:32 | 4131570 bob_stl
bob_stl's picture

Bubblecoin

Thu, 11/07/2013 - 16:21 | 4132260 Enslavethechild...
EnslavethechildrenforBen's picture

Coinopium.

Thu, 11/07/2013 - 14:25 | 4131794 aminorex
aminorex's picture

i prefer proofs to opinions

Thu, 11/07/2013 - 13:10 | 4131463 AgentZeroM
AgentZeroM's picture

It is trivial to securely sign an abitrary message from an offline system to prove ownership over a bitcoin account. Publish the signed message and anyone can trivially verify the signature and view the amount in the account.

Thu, 11/07/2013 - 14:15 | 4131744 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Write a post sometime when you have a vague clue what you're talking about. Til then please shut up.

Thu, 11/07/2013 - 14:34 | 4131821 TeMpTeK
TeMpTeK's picture

Robert Wagner - " Did u forget your bitcoin password, lose all your retirement savings and are in desperate need of cash ...find out if a reverse mortgage is right for you"

Thu, 11/07/2013 - 15:23 | 4132042 GoldMeUp
GoldMeUp's picture

Actually he's right and you're wrong.  If you own bitcoins, you can prove your ownership by signing a message using the public key that owns the coins.  This provides a way for banks to *provably* show that they own X bitcoins, in a secure way.

Thu, 11/07/2013 - 14:21 | 4131776 CH1
CH1's picture

Again, gross ignorance.

THERE IS NO SUCH THING AS A BITCOIN ACCOUNT.

Thu, 11/07/2013 - 20:15 | 4133071 TheHound73
TheHound73's picture

For all intents and purposes a public/private keypair and associated address can serve as a "Bitcoin Account".  The Blockchain is a public ledger of transactions between accounts. A person or entity can sign a message using their keypair proving they control the account.

Thu, 11/07/2013 - 13:06 | 4131434 Meat Hammer
Meat Hammer's picture

Why would central banks want to recognize a world reserve currency that cannot be easily inflated?

They wouldn't.  This would be a kill-shot for the banking cartel.

Thu, 11/07/2013 - 13:18 | 4131495 DoChenRollingBearing
DoChenRollingBearing's picture

Ohhh, yes!!  And that is why they, with some of the brightest minds on the planet (whether you all like it or not) will try very hard to destroy Bitcoin.

+ $55,000

 

EDIT:

This seems like a great time to be spending some BTC on Au...

Thu, 11/07/2013 - 13:25 | 4131535 Meat Hammer
Meat Hammer's picture

Wait a little longer, DoChen.  IMO in a couple weeks you will see Bitcoin higher and gold lower.

Or not.  Yeah, fuck it, good idea.

Thu, 11/07/2013 - 13:36 | 4131592 DoChenRollingBearing
DoChenRollingBearing's picture

You buy a bearing when it's needed.

You buy gold when you can.

Thu, 11/07/2013 - 21:59 | 4133507 TheHound73
TheHound73's picture

y, they will recognize it when PMs and Bitcoin are the only credible money instruments left standing.

Thu, 11/07/2013 - 13:10 | 4131459 Bunga Bunga
Bunga Bunga's picture

Why would a world hegemon favour a reserve currency which he cannot control?

Thu, 11/07/2013 - 22:00 | 4133513 TheHound73
TheHound73's picture

When he loses control of everything else Bitcoin will be there waiting patiently.

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