Could Bitcoin Ever Replace the US Dollar?

There’s no doubt that cryptocurrencies represent a growth market in 2021, with the total crypto market cap value currently estimated at around $1.75 trillion.

Although this continues to fluctuate wildly on a daily basis, it’s Bitcoin (BTC) that continues to underpin wider growth in the crypto market, with the market capitalisation for this asset alone currently in excess of $1 trillion.

The irrepressible rise and exchange of crypto assets have caused some to predict that assets such as BTC will eventually supersede fiat currencies. But how likely is this, and how are digital assets likely to impact on the global financial sector as a whole?

The Rise and Rise of Bitcoin

In 2018, a famous futurologist made the bold prediction that cryptocurrencies would replace up to 25% of fiat currencies by 2030, while Morgan Creek Capital Management suggested that fiat currency would ultimately be superseded by digital currencies entirely in the future.

While these predictions have largely fallen on deaf ears, the relentless rise of BTC through 2020 has encouraged some to change their tune. More specifically, BTC’s latest bull run has been sustained over the course of the last 12 months overall, rising from $6,198.78 to a staggering $58,126.10 in the year ending March 21st, 2021.

Bitcoin even broke through the $60,000 barrier briefly earlier this month, while further exponential growth is forecast for the near and medium-term.

In fact, Morehead reported that BTC will remain firmly ahead of its own forecast through 2021, potentially reaching $115,000 before the summer draws to a close.

This is particularly interesting given BTC’s previous bull runs, which have typically petered out and precipitated a significant crash. For example, Bitcoin rose from $900 to $20,000 throughout 2017, before plunging back below the $8,000 mark by June 2018.

This reflects the more mature and stable nature of BTC, which has become increasingly secure and trusted over time. Also, it emerged as a relevant safe haven in 2020 against the backdrop of the coronavirus, as investors sought out assets that were relatively immune to socio and macroeconomic factors.

Could BTC Ever Replace Fiat Currencies?

But could BTC ever fully replace fiat alternatives? This seems relatively unlikely at present, particularly given the strong link that still exists between assets such as Bitcoin and fiat currencies.

For example, the value and market cap of crypto assets is taken in terms of fiat currencies, while it’s also fair to say that the latter (and the centralised structures that underpin them) are continuing to embrace digitisation.

Investors are also continuing to integrate crypto currencies into their CFDs and investment portfolios in the modern age, further blurring the lines between digital and fiat assets.

Given these points, it appears as though the extent to which assets such BTC become dominant will depend on fiat currencies themselves.

For example, if these entities continue to embrace digitisation and central banks also focus on leveraging the best of blockchain technology for the benefit of fiat currencies, it’s hard to imagine Bitcoin becoming the dominant currency any time soon.

However, the emergence of third-generation blockchains such as Cardano could alter the landscape considerably, as these entities are being designed to tackle the underlying issues with crypto assets (such as rising transaction fees and scalability).

Cardano has recently unveiled a protocol that could ultimately scale to process one million transactions per second, for example, which would supersede the capacity of Visa without introducing transaction fee hikes.

If this type of blockchain and crypto asset gains traction and benefits from increased adoption rates across a wide range of industries, the chances of fiat currencies eventually being superseded will increase markedly.