One of the prevailing narratives surrounding Bitcoin suggests that it could serve as a gateway to an alternative global economy that might challenge the dominance of the US dollar. After all, Bitcoin emerged as a response to the 2008 US financial crisis, positioning itself as a digital advocate for free markets and sound money.
However, Bitcoin as an asset maintains strong ties to the US economy. Factors such as the prevalence of dollar-pegged stablecoins, US regulatory influence, and the significant presence of US financial institutions continue to tether the cryptocurrency to the US dollar.
Will this connection persist in an increasingly multipolar world? The straightforward answer is “yes, for the time being.” But is this the outcome we should anticipate in the long run? That would be a resounding “no.”
What Constrains Bitcoin’s Autonomy
Three key factors are tethering Bitcoin to the dollar, impeding its full autonomy as a global currency:
- Dollar-pegged stablecoins
Stablecoins like USDT and USDC have significantly intensified the cryptocurrency market’s reliance on the US economic framework. Bitcoin primarily trades against the US dollar across numerous crypto platforms, often through indirect means involving stablecoins.
Tether, the contentious issuer of USDT, recently released its Q2 attestation report, indicating a substantial growth to a $71 billion market capitalization, which has likely expanded further since then. In total, stablecoins constitute a $124 billion market, exerting significant influence over Bitcoin’s own market capitalization, which stands at around $500 billion.
When one asset comprises approximately 25% of another’s market capitalization, it underscores a notable correlation between the two.
Given Bitcoin’s close interconnection with the US economy, users of Bitcoin worldwide remain susceptible to any instability the currency encounters, highlighting that it has not yet achieved full autonomy in a genuinely free market.
The regulatory environment in the United States wields considerable influence over market sentiment in the Bitcoin arena. Any positive or negative developments related to policies can send shockwaves throughout the entire cryptocurrency market, including Bitcoin.
On a global scale, the legal status and mainstream acceptance of cryptocurrencies hang in the balance. The United States holds sway over international cryptocurrency regulations, primarily through the guidance provided by the Financial Action Task Force (FATF) in its 2021 directives. Moreover, owing to its significant stature, the United States plays a pivotal role in shaping FATF’s recommendations.
Legislative actions in the United States also mold the inclinations of institutional investors. The ongoing saga of the potential Bitcoin Exchange-Traded Fund (ETF) serves as a prominent example, with entities such as BlackRock and Fidelity patiently awaiting the verdict of the Securities and Exchange Commission (SEC). The recent success of Grayscale is a clear indicator that institutional adoption is not merely a concept but a tangible reality.
The increasing institutional adoption of Bitcoin in the United States has deepened its connection with the nation’s economy. Irrespective of the ETF results, prominent financial institutions now incorporate Bitcoin into their asset portfolios, thereby linking its value to US market sentiments.
Consequently, individuals utilizing Bitcoin as an alternative investment remain subject to the influence of US corporations. It’s worth recalling the substantial market impact created by Tesla’s acquisition of $1.5 billion worth of Bitcoin.
The Journey Toward Decoupling
Many investors turn to Bitcoin as a safeguard against the depreciation of the US dollar during uncertain economic periods. However, if the current trends persist, Bitcoin might start mirroring traditional US investment options such as equities.
This potential scenario is indeed problematic. In an ideal free market, dependence on the US economic climate, legislative environment, or the decisions of major American corporations shouldn’t be a factor. Bitcoin was conceived to counter precisely this type of reliance.
The good news is that the link between Bitcoin, the United States, and the broader American economy is not unbreakable. As the cryptocurrency space matures, several factors can contribute to Bitcoin evolving into a genuinely global asset that is less correlated with any single nation.
The emergence of stablecoins with various denominations has the potential to shift the focus away from USD-dominated tokens. Advocates propose stablecoins tied to different currencies to reduce dependence on the US dollar, fostering a more diversified crypto market.
Other fiat currencies like the Japanese yen or Chinese yuan could become prominent trading pairs for Bitcoin. European legislation, such as MiCA, may encourage the development of EUR-denominated stablecoins. However, this transition will likely take several years to fully materialize.
There is also a noticeable push to boost Bitcoin’s global adoption and decrease reliance on the US market. These efforts encompass regional partnerships, educational initiatives, and the creation of use cases tailored to regions like Africa and Latin America, where Bitcoin’s appeal as a sovereign currency is particularly strong.
Crypto advocates are actively engaging with regulators worldwide to establish balanced regulations that foster innovation without undue US influence. This regulatory diversity presents challenges in regions that are hesitant to embrace Bitcoin and other cryptocurrencies.
Technological advancements are expanding Bitcoin’s reach and utility, making it more suitable for everyday global transactions. Widespread adoption for purposes beyond serving as a store of value could insulate Bitcoin from the volatilities of a single economy.
Contemplating the Future
Bitcoin’s inherent capacity to nurture free markets has remained consistent since its inception in 2009. Nearly fifteen years later, stakeholders from various corners, whether within or beyond the borders of the United States, are still exploring the limitless potential it offers.
In this unfolding narrative, the role of the US dollar, the US economy, and the nation’s geopolitical influence continues to be crucial in shaping the cryptocurrency’s journey. However, as Bitcoin and its ecosystem undergo further evolution, there is an opportunity for its dependence on the US dollar to wane, paving the way for a more equitable global economic terrain.