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Will Crypto Replace the Dollar?

For Bitvo by Tristram Waye | Sep 15, 2022

Dollar chart - Will Crypto Replace the Dollar?

Crypto is no longer a financial island

  • Early days:  It was easy to think about crypto as an island back before 2020. Bitcoin did its own thing, and the growing number of projects had a unique early startup stage audience to support them. The trading in BTC, ETH, and other crypto assets reflected the community built around them. It also reflected an evolving narrative around what crypto was and could be.
    • One of these narratives was that crypto was a hedge.
    • Another is that it is sound money. Or, put another way, it represents a form of incorruptible value exchange. And the idea here was that this new form of sound money would replace the current system.

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  • Adoption curve: Like much of technology, it has followed the adoption curve through the various stages of growth. And as the participants changed, the trading changed.
    • Crypto has moved from an island to a loose part of a wider global asset mix. This is similar to the way John Murphy describes how the financial system was analyzed by technical analysts in the 80s. It was siloed. And one day he started to look at intermarket relationships between various financial assets. And that changed everything.

Crypto has evolved as the participants have changed

  • Leverage and hedging:  As the participation broadened, so too did the influence of other market elements. There is the influence of leverage. There is the use of hedging through derivatives like futures and options products developed around BTC and now ETH.
  • Tech index-like:  As larger, more traditional players entered the market they built a shorthand story around the asset. The asset trades, at this time, more like a tech index as a result. And as we have seen recently, tech is affected in a big way by changes in interest rates and economic conditions. And we know that economic conditions are a reflection of the interplay between the dollar, commodities, the cost of capital, and capital formation.

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  • Impact of rising rates: The Fed is raising rates into a recession. The increase in rates is driving down activity much more quickly than many thought possible. The rate increase is adding upward pressure to the dollar, which is a problem for all the dollar-denominated debt that exists around the world.
    • And there is a lot of dollar-denominated debt now being paid back with local currencies falling in value.
    • As the dollar rises, it creates a massive global short squeeze.
  • Dollar may fail higher:  So one thought out there is that we are at the end of the current monetary environment. And the dollar is likely to fail, but it will not fail lower, but instead, it may fail higher by destroying the entire system it supports. So if you are thinking about bitcoin as a replacement for the dollar, you are going to have to think about a much bigger playing field.
  • Intermarket analysis can be as simple or complex as you want. But if you think about an economic cycle, that will mean following the dollar, commodities, bonds, and stocks. Even if the cycle is changed or distorted, there will be rich information in looking at the totality of market assets together.
  • Euro:  And you may want to keep an eye on European markets and the Euro this winter, where policy decisions may drive a flight to safety into the US dollar, taking it even higher. But you already know the trading environment ahead will be rich with catalysts.
  • Mini vs global financial systems: We have watched how various crypto businesses have failed recently. A couple of these were like mini-financial ecosystems. Now think about these issues on a global scale, and the potential outcomes start to become unimaginable.

Will bitcoin replace the dollar?  (Nobody knows the answer)

  • I don’t know. I don’t think anyone does, including the biggest prognosticators of this idea. There are a lot of people romanticizing the end of the dollar because it will make something they own go higher.

See:  BIS Limits Banks to Hold 1% of Reserves in Bitcoin –> “Banks Won’t HOLDL”

  • But thinking about this bitcoin/dollar narrative while realizing the implications of it should induce some queasiness.  Because a change like this is never that simple or clean.
  • So if you aren’t getting prepared, now is the time. Keep an eye on those other indicators and get ready for the unexpected.

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