Can cryptocurrency replace the US dollar?

Like many other cryptocurrencies, Bitcoin was created with the intention of being a global digital currency that is independent of any government or middleman. Naturally, many people believe this means that Bitcoin and other cryptocurrencies have the potential to replace the dollar as the global standard. Let’s take a look at how likely this is.

At first glance, the most obvious choice to replace the dollar would be Bitcoin, as it is the largest and most widely known cryptocurrency. However, this is unlikely to happen for a number of reasons related to the economics of Bitcoin and some of its characteristics. For context, the U.S. dollar is a fiat currency issued by the United States, meaning it is fully backed by the U.S. government and not by a reserve asset like gold. Additionally, it is inflationary, meaning that its purchasing power decreases over time at a rate of 2% per year. While this may seem predatory because it reduces the purchasing power of those who hold dollars, it is important for stimulating the economy because it incentivizes people to spend rather than hold dollars indefinitely.

Bitcoin, on the other hand, is completely different, as it is currently inflationary but could one day become deflationary. Every 10 minutes, the Bitcoin blockchain issues 6.25 BTC to miners, which helps incentivize the mining process. However, only 21 million BTC will ever be minted. There are currently around 19 million Bitcoins in circulation, and all 21 million will be in circulation around 2139. Once this cap is reached, Bitcoin will actually become deflationary, as it can be assumed that people will lose Bitcoins or misplace their private keys over time, lowering the overall supply. In fact, this has already happened, and some estimate that over a million Bitcoins have been lost forever.

As supply decreases, and assuming demand persists or increases, there is little incentive for anyone to spend their Bitcoin, so it will never become a medium of exchange to rival the U.S. dollar. This is already seen today, as Bitcoin transactions are extremely rare in the real world, even for the most hardcore crypto fans.

While Bitcoin may never become a widely used digital currency, it still has a chance to become a global reserve currency similar to gold. Over the past few years, companies such as Tesla and MicroStrategy have begun adding Bitcoin to their balance sheets as a hedge against inflation and fiat currencies. As more companies and individuals begin to view Bitcoin as a legitimate asset that can bring stability or diversity to their portfolios, the more Bitcoin's use cases will increase. Some experts expect Bitcoin to surpass the market value of gold at some point in the future, however, when or if this will happen remains uncertain.

A more likely option for a global digital currency is one with low inflation, unlimited supply, and cheap and fast transactions. What this cryptocurrency might be is unclear, as there are many potential candidates, but none have really caught on yet.

The problem of creating a cryptocurrency that can serve as a global medium of exchange is complex and likely won’t be solved without the intervention of corporations and other large backers. That being said, Bitcoin is well on its way to becoming digital gold, and many already believe it is.