Currencies or other assets like gold and silver used for making payments internationally along with investments and different aspects of the worldwide economy are known as reserve assets. Now the US Dollar is one of the most well-known reserve currencies. Here you can check the IRS-approved cryptocurrencies for safe investment.
How does a reserve asset work?
- Institutions or countries hold reserve assets such as currencies, commodities, or some other capital as a safeguard against fluctuations in the global market due to external factors.
- Reserve assets have a vital role as they act as a cash reserve in various entities’ balance sheets.
- Market volatility will have no impact on them as they are an independent store of value.
- Earlier some precious metals such as gold or silver were used like universal commodities. People could use them to efficiently store value for all their labor.
- However their everyday usage was limited and so paper currencies started to get used as an abstraction layer that was supported by a portion of the gold that was stored in some safe location.
- With the end of World War II, leaders from different countries united for signing the agreement of Bretton Wood.
- The US dollar’s value got pegged to gold under this agreement.
- Also other currencies were pegged to the US dollar.
- But such a system started to fall apart with time.
- In 1971 it was abandoned after President Nixon put the US dollar off gold.
- From then, a simple model of fiat currency has been used by the international community.
- Government faith backs this currency.
- The value gets driven by the supply and demand of marketplace forces.
The issues with the present system
- The present system comes with its problems such as countries that wish to serve their fiat currencies as worldwide reserve assets must be running a constant trade deficit for providing sufficient for supply the demand worldwide.
- For meeting such a demand, the main economic powers’ central banks globally will be easily printing fiat money.
- This caused over 10,000 billion dollars to get injected into this system.
- This is one of the main reasons for inflation being so high in the US.
- Now the inflation of the US dollar is at its peak in 40 years.
- In January the CPI was showing an increase in price by 7.5 %.
- Combining this with the sanctions upon Russia along with the economic meltdown of its disagreement with Ukraine, could lead to a new path to some order of the new monetary world.
Can Bitcoin act as a reserve currency?
- These days, institutions are seen to face various threats to their stored reserve assets’ value.
- It includes inflation, international competition, and so on.
- Entities are searching for alternative reserve assets that may be scarce and no third-party force will impact them.
- Cryptocurrencies such as Bitcoin look promising because it is a decentralized systems to store transactional data.
- Any data storage is conducted on blocks on a database or public ledger.
- It means no centralized authority will control the changes or actions that happen in the database.
- Rather all transactional data in the blockchain of Bitcoin gets verified by a peer network holding the ledger or database’ copy.
- So any database change or action must be verified and also approved by every network node.
- Thus the structure of the Bitcoin blockchain will be secure, safe, and immutable.
- It will be removing all third parties’ elements that control the structure and thus essentially remove their currency influence.
- The creator of Bitcoin embedded some set limit of this crypto token that can easily get introduced in the blockchain.
- The limit was set at 21 million tokens.
- Due to limited supply Bitcoin is a scarce asset and is a perfect safeguard against inflation.
- The system is a fact as it removes central intermediaries in the process of the transaction.
- Also Bitcoin will offer a great anonymity level compared to fiat currencies as only wallet addresses are attached to any individual who takes part in the transaction.
As reserve assets, cryptocurrencies such as Bitcoin include substantial risks to the stability of macro-finance, financial integrity, environment, and consumer protection. However, we should never overlook the benefits of their underlying technology even the prospect of cheaper and highly inclusive financial services. Governments must be stepping up for providing such services and strengthening new digital money forms while they preserve stability, equality, and efficiency apart from environmental sustainability.
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