What is a reserve currency? This is the currency in which all other currencies are standardized against, and this measure is used for global trade, asset valuation, and account settlement. The current reserve currency is the U.S. dollar since it was the strongest currency after World War 2. The strength of the currency was based on its trade position, political influence, military might, resources available and liquidity/recognition in the investment world.
In the cryptocurrency world, Bitcoin serves this function as other cryptocurrencies are converted into Bitcoin to access most exchanges. Since Bitcoin has the brand recognition of being the first known cryptocurrency, it has the advantage of breaking milestones first.
Bitcoin was the largest cryptocurrency by market cap at the time of writing (January 2018), the first coin to be created in 2009 and the first currency to be utilized for futures trading around the world. Bitcoin is also the first decentralized currency in recent time, as there have been digital and electronic currencies created before and after Bitcoin that are not decentralized.
Do all of these “firsts” mean that Bitcoin can be called a reserve cryptocurrency? The short answer is not really, but treating Bitcoin as a reserve currency is very educational in showing its role in the alternate coin space. People say that Bitcoin has no value, its earnings are not measurable and therefore it is a Ponzi scheme or a fraud. The key to Bitcoin versus other coins is the access that it has to exchanges, fiat currencies, and payment systems. It is too early to tell whether Bitcoin will retain this status as an access currency, or whether it will be replaced by a coin with better technology, marketing or usefulness.
Some alternate coins can have value derived from what uses they have and how much money they can save in business dealings – like smart contracts, cheaper payment systems or making processes more efficient. The savings translate into value by needing to use the coin or its network in order to achieve the savings. An example would be if you use a paper-based accounting system which costs $5 to collect money from each customer – whereas an online solution might cost $2 per customer.
In order to realize the $3 savings, you would need to have access to the internet, which means the internet provider may obtain the savings as their profit. Multiply $3 per person by 1 million customers and you get $3 million in value. In the case of a cryptocurrency, you would divide this value created by the number of coins available, and you would get a price per coin. If there are 500,000 coins in supply, this translates into a value of $6 per coin.
How does this relate to a reserve cryptocurrency? Does this make any sense? In the case of a reserve currency, even if 2 countries engage in trade that has nothing to do with this currency, they have to use the reserve currency to settle their trade. If South Africa is buying oil from Iran, they would do this deal in US dollars even though the US is not involved in it. If you were to issue a coin that buys and sells ebooks, it would be translated into Bitcoin for the coin to be useful for the masses.
Time will tell whether Bitcoin will keep the role of reserve cryptocurrency in the future, but in the present, it seems to be playing out.
Have questions? Contact Joe Barbieri.
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