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Is Bitcoin’s recent good fortune due to a struggling dollar?

Photo of: Nathan VDH
by Nathan VDH

Bitcoin/USD remains strong after a small dip towards $11,000 earlier this week. The pair is climbing back towards $12,000 and does not seem to be heading back towards the $10,000 mark as some critics and pessimists had predicted.

Fed President Jerome Powell’s statements last week on inflation have given some support to safe-haven assets. The overall context of the global economy remains extremely favourable in both the short and long term to the king of cryptocurrency.

Bitcoin is not alone in the classic BTC/USD pair and the upward looking curve is both due to Bitcoin’s good health and USD’s failings. The weakness of the dollar has to be taken into account when anticipating the future trend. From this point of view, there is really a big advantage in favour of Bitcoin.

The head of A.G. Bisset’s forex division (foreign exchange market) believes that the US currency will plunge 36% against the euro in the coming year. If this prediction is true, this would weaken the currency to levels we haven’t seen in decades.

This is indeed just a theory but major banks that are very active in forex such as Goldman Sachs, UBS and Société Générale are also forecasting further declines. In fact, the dollar is at its lowest point in 27 months against the euro. It is also down 11% since the 2020 peak in January on the Dollar Index (a measure of the dollar’s exchange rate against a basket of currencies).

The general good health of the dollar in the last five years has been very beneficial for the US economy and the dollar is still the world’s most privileged currency so these theories should be taken with a grain of salt. It’s hard to believe that the dollar will lose its dominant position but it might well happen, especially depending on the results after the Presidential Elections in November.

Experts argue that the fall of the dollar is mostly due to very low interest rates and fear of inflationary tendencies due to the huge deficit of the US and several indications from key US economic policymakers, none more so than the recent speech of Jerome Powell, head of the Federal Reserve. Goldman Sachs estimate that by 2023, 1€ should be worth $1.30.

What is true for EUR/USD is also true for BTC/USD or the price of gold in dollars. Indeed, if inflation is higher than interest rates (interest on savings), what is the point of keeping fiat money? The remuneration of savings does not even compensate for inflation.

Gold has had a 115% rise since 2008 and Bitcoin’s meteoric rise in the same timeframe has shown that there is a strong demand for safe-haven assets, especially in troubled economic times.

The dollar’s position as the world’s currency has not been threatened this much since the end of the Cold War. There is very real discussion about what might replace it or at the very least complement it and while the yen is certainly an option, Bitcoin has a strong case in the future mix of currencies used around the world.