This is what dedollarization would do to Bitcoin

Dedollarization is a concept that has been around for a long time now but has only begun taking shape over the last few years. While Crypto was built to be a global currency, independent from other currencies, the devaluation of the US Dollar (USD) might play in its favor, making its aim a reality.

Dedollarization: What it is and how it matters

Dedollarization is the devaluation faced by the USD due to other currencies taking its place as the world’s reserve currency used for trading Oil and other commodities. The eroding trust in banks and the Federal Reserve is driving countries away from the US Dollar, pushing them to use their own currencies instead. This discussion is heating up more at the moment due to the recent macroeconomic developments.

USD is becoming weaker by the day as rising inflation and declining geopolitical relations have sent people looking into other options. Many countries, for the same reason, have pulled away from using the Dollar for bilateral trades and have shifted towards their own currencies. China is the biggest country when it comes to using its national currency for trade, as it already has agreements with Australia, Russia, Japan, Brazil, and Iran.

Recently BRICS member Russia’s Deputy Chairman of the State Duma Alexander Babakov also stated that the member countries could create their own currency backed not by gold but land and rare earth metals. Adding to the possibility, Babakov said,

“Most likely, this will be done…Neither the Euro nor the Dollar is backed by anything, and our countries can do what was destroyed by the Bretton Woods system.”

This could result in USD losing its presence from a major chunk of the global economic activity, further weakening its strength as the use of the likes of the Chinese Yuan could see an increase in settling transactions between countries.

However, apart from the Yuan, the weakening of the USD could also act as a boost for cryptocurrencies.

How Crypto stands to benefit from dedollarization

At the moment, the USD is the world’s major currency and dedollarization would lead to a reduced circulation of the currency, resulting in lower liquidity. Consequently, the stock market could note a bearish period which usually also impacts the crypto market.

This is because following the Covid-19 crash, Bitcoin and Crypto’s correlation with the stock market increased. The Nasdaq100 and S&P 500 dictated the digital asset’s path, which took away BTC’s inflation hedge status until the recent banking crisis.

With the Silicon Valley Bank, Silvergate bank and Signature bank failing, Bitcoin decoupled itself from the stock markets and rallied to its current trading price of $28,200. With faith in banks decreasing and the Federal Reserve suggesting higher interest rate hikes going forward the TradFi market could see some bearish effects.

Additionally, Bitcoin’s rising correlation with Gold is also rising by the day reaching 0.92 on April 3. Throughout 2022 this correlation stood far lower due to the volatility, but the current conditions strengthen the asset’s safe-haven status, which could drive hyperbitcoinization.

Beginning of hyperbitcoinization?

Hyperbitcoinization is known as the transition of Bitcoin into the world’s most dominant form of currency, which many predict is not too far. One of Bitcoin’s biggest supporters, former Coinbase Chief Technical Officer (CTO) Balaji Srinivasan, even went on to make a $1 million bet with pseudonymous Twitter speaker James Medlock on March 17 that BTC would be worth $1 million within the next 90 days.

Explaining this bet, Srinivasan noted that this million-Dollar bet was not about winning or rallying Bitcoin price but about settling the ideological discussion surrounding USD inflation. He explained his statement by saying,

“I believe Medlock will agree that this is an ideological bet, like the Simon-Ehrlich bet, which resolved a famous difference of opinion between libertarians and progressives.”

While many consider this to be just a publicity stunt, Balaji himself stated that his declining faith in banks and belief in Bitcoin is what drove him to make the bet in the first place.