The Dollar is Crippling Global Trade. Here’s how Bitcoin Can Help.
How the US Dollar Powers Global Trade
Although not everyone has heard of it, there is an economic engine outside of the USA that runs on a uniquely American fuel: the dollar. I’m talking of course about the Eurodollar which, despite the name, has nothing to do with the Euro.
The Eurodollar refers to offshore United States dollars (USD) and all of the investment, debt, and industrial activity that they support. Here’s a practical example.
Say that a Brazilian company manufacturing footballs (soccer balls) invents a new product. It’s a revolutionary design, but they’ll need some capital to grow the factory. A wealthy Thai investor is interested and would like to finance the expansion.
There’s a problem, though… What currency will they denominate the investment in? Both the Thai Baht and the Brazilian Real have a history of destabilization. Denominating the debt in either Baht or Real creates a risk that one party could benefit unfairly due to fluctuations in the exchange rate.
The solution? Use dollars! The dollar is the most trusted currency in the world and so both parties agree to use USD.
The Thai investor converts his Baht into dollars and sends them over to Brazil. The football manufacturer converts the dollars into Brazilian Real, which they uses to expand the factory. Everyone wins; go capitalism!
Most of the time, the Eurodollar system works OK, but occasionally it doesn’t. The problem for the Brazilian manufacturer is that they must pay back their debt in dollars. This makes them susceptible to a pair of problems: a strong dollar (meaning they need to expend more of their Brazilian Reals to get the same amount of dollars) and a lack of Eurodollar liquidity.
Thanks to the coronavirus pandemic, this is what happened in March of 2020.
Notice the chart below. At first, during the coronavirus market crash, the dollar tanked. What’s strange is that shortly after the initial crash, the dollar skyrocketed.
The cause: all of the companies and governments that use the Eurodollar were trying to get dollars to pay their debts. As there were fewer dollars to go around (thanks to a decrease in global trade, among other things), the dollar shot up in price–classic supply and demand.
An astute analyst might observe that after an initial run-up, the dollar lost some value and seemed to stabilize around the beginning of April. The reason for this is that the United States Federal Reserve began opening swap lines with various countries. In three sentences, here’s how a swap line works.
- Foreign central banks own treasuries (US government bonds) which they buy during times of prosperity in order to protect their currencies during downturns (China, for example, owns $1 trillion in US treasuries).
- The United States Federal Reserve takes foreign held treasuries as collateral and lends out dollars (to the foreign central banks).
- Foreign central banks now have an increased reserve of dollars which they can distribute to organizations and corporations in their country.
Those swap lines have helped to stabilize the dollar in the short term, but the problem is that they’re only a temporary solution. Ultimately for the Eurodollar system to work there needs to be global trade.
More to the point, America needs to keep buying trillions of dollars worth of goods and services each year with all of those dollars flowing to manufacturers, suppliers, shipping companies, dealers, banks, and governments.
In total, this offshore market in dollars totals $57 trillion, $12 trillion of which is non-bank debt like our football manufacturer in Brazil. This system can only work when dollars are flowing out of the USA and into the world.
That hasn’t been a problem for the last couple of decades as globalization has been popular. However, as Bob Dylan so beautifully put it, The Times They Are A-Changin'.
While global trade will recover somewhat in the coming months and years, in the long term, a mass de-globalization led by the United States is going to take dollars out of the system. As a result, the Eurodollar market is going to have to transition to something else, not so dependent on the dollar.
So what we need is both a short term solution to the dollar liquidity problem and a long term solution that will allow the world to (at least partially) use another currency in place of the dollar. In both cases, it looks like crypto might have some answers.
Stablecoins as a Solution
In the short term, stablecoins can offer some degree of relief in the Eurodollar market. Before we discuss how stablecoins can provide relief, it’s important to point out two glaring problems.
- Stablecoins are backed 1:1 by US dollars (at least the good ones are, looking at you Tether). That’s great for security, but it limits how large the stablecoin market can grow. Every dollar that’s backing a stablecoin is a dollar taken from somewhere else. So the net benefit in terms of liquidity is rather a zero-sum game.
- Stablecoins only represent a mere fraction of a percent of the total Eurodollar market. We’ve seen very encouraging growth in the Stablecoin market such that there is now $10 billion worth of these coins floating around the internet. As strong as that growth is, $10 billion is just a rounding error in the $57 trillion Eurodollar market.
Having thrown out the bearish news, let’s look at the brighter side of things. Perhaps the most apparent benefit of stablecoins is that they can be sent around the planet faster than USD via the traditional banking system.
As in our example, sending dollars from Brazil to Thailand is a slow, multi-day process. Sending USDC from Brazil to Thailand takes 15 seconds or less. A tremendous improvement! This transfer speed actually means that less dollars are needed overall as the velocity of money improves.
With 5 days using the legacy SWIFT system you can,
- Send $1 million from Brazil to Thailand
With 5 days using the USDC (or any other) stablecoin you can,
- Send $1 million from Brazil to Thailand
- The Thai investor can buy a new car
- The car dealership can pay its supplier in China
- The Chinese supplier can pay a debt in America
- The American investor can convert that USDC to USD and withdraw it to their bank account
So there is a bullish case for stablecoins to provide some liquidity in the Eurodollar market. Although the total market cap of stablecoins is still low, going from $10 billion to $100 billion could easily happen in the same amount of time (or less) than it took to go from nothing to $10 billion.
The real long term solution is to have a secure digital currency that’s not backed by anything other than confidence in proven math, a huge network, and a dedicated cadre of hard money believers. If only there was such a thing…
Bitcoin is not restrained by dollars. Bitcoin is valuable because it’s transparent, immutable, scarce, and secured by a multi-billion dollar network of miners. That means that Bitcoin can grow to whatever size it needs in order to fulfill its role as a global currency.
Mark Yusko believes Bitcoin will reach gold’s market cap (and stay there) while more exuberant Bitcoin maximalists believe Bitcoin could go much higher. Provided that Bitcoin does succeed (still a big if) it would appear that its ultimate value will fall somewhere between a market cap of $10 to $100 trillion.
Either number, and anywhere in between, will go a long way toward reducing debt denominated in Eurodollars as people begin using Bitcoin instead of dollars.
Many corporations and governments which now denominate their debt in dollars actually would prefer not to. Does a Russian or Chinese company really want to use USD? Would the Brazilian manufacturer choose USD if there was another option available?
US Dollars get used because there isn’t a viable alternative. The Pound Sterling is too small, the Euro is too unstable and the Chinese Renminbi is trapped in China.
So for Bitcoin to dethrone the dollar seems a natural result, but first, we need price stability. Recently, Bitcoin crashed 50% in 24 hours. More broadly, Bitcoin regularly experiences boom and bust cycles where as much as 85% of its value evaporates into a glaucous cloud of sad memes and dashed dreams.
Such a volatile asset simply will not work since using Bitcoin would defeat the purpose of denominating debt in dollars in the first place!
How long before Bitcoin achieves stability? Who can say? Probably a decade, maybe two. A million-dollar Bitcoin would probably do it although it could be more or less. Perhaps a better way to measure progress is by looking at network effect.
The above chart shows how the number of internet users has grown over time. Notice the fast growth around the turn of the century. An increase from 24 to 31 users (per 100 in the country) in 2000 for the developed world. From 36 to 42 around 2002 and so forth.
Something similar needs to happen to Bitcoin.
As people, institutions, governments, etc. buy Bitcoin the price volatility will continue to be massive. There will be pumps to prices few imagined and then, as we’ve seen time and again, the nerve racking dumps that always seem to go lower than anyone thinks.
Throughout it all, however, usage will rise and some percentage will hold on no matter what the price does. Eventually, prices will stabilize to the point that if some other central bank or some other massive hedge fund buys into Bitcoin, the price might go up a percent or two, but that’s it.
This is what needs to happen for Bitcoin to replace the Eurodollar as the dominant global currency. The day cannot come soon enough. People around the worldwide are sick of using the dollar (especially as the Fed debases it) and the United States is growing weary of globalism.
In the coming decades, global trade is going to be curtailed, the dollar will come back inside of the United States, and with any luck, the void that it leaves will be filled by Bitcoin.
The Brazilian manufacturer will make his footballs and pay back the Thai investor in sats instead of USD. Ukraine will mine Bitcoin with its excess nuclear energy and use the proceeds to buy oil from Russia. Multinational conglomerates will pay their international workforce in sats.
You don’t have to be a Bitcoin maximalist to believe this will happen. Bitcoin doesn’t have to be the only game in town, but even if it only ends up playing a small role in the global economy, that’s still pretty impressive given that a minor role equates to trillions of dollars in value transacted. Today we have the Eurodollar; tomorrow we have options.
If you’d like to learn more about the Eurodollar market and how it works, Lyn Alden does an excellent job explaining the intricacies of this baroque system, especially regarding how it creates a strong dollar. Max Bronstein’s piece, Crypto Dollars and the Evolution of Eurodollar Banking, covers many of the topics we’ve brought up here, albeit from a different angle.
Information provided is for informational purposes only and should not be considered financial advice. Investing in crypto assets is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Past performance is not indicative of future results.