Is it possible that Bitcoin will become a reserve currency one day, and how far could that day be away? This would be the crowning achievement of Bitcoin if it ever came to fruition. It's proof of (a store of) value would be undeniable, and it's an interesting concept to discuss, because all it would take is one country to trigger a (crypto) arms race.
The US Dollar makes up 64% of Reserve Currency worldwide, so it makes sense to start there. Bitcoin market cap is standing at 11.8bn today and is very transparent in that number. We know how many bitcoins exist (Just over 15.6m) and how many will ever exist (21m). The US dollar is more complicated.
Simply, the answer dependson how you define "money". For the narrowest definition, or what's called "M0", that includes only physical money, paper bills and metal coins that constitute currency. That figure is around 5 trillion dollars. The next step up is M1, which includes all the physical money, plus quickly accessed money like that in checking accounts, and comes in at $25 trillion. M2 includes M0 and M1, but also pulls in stuff like savings accounts and CDs under $100,000. That figure is around $60 trillion. And the last figure, the $75 trillion M3, is much more abstract and not often cited in official figures. It includes institutional money market funds, long term deposits, and other stuff rich people possess that can somehow be spent but confuses the rest of us. (source http://gizmodo.com/5995301/how-much-money-is-there-on-earth)
In addition to the above, US dollars in circulation will always increase in quantity at a fluctuating rate with no cap in place. So how big would Bitcoins market cap need to be to be considered a viable Reserve currency by current standards?
The fairest way to compare Bitcoin with other currencies would be M0 in my opinion. Bitcoin only has M0 by virtue of no central authority having the ability to alter supply. So Bitcoins market cap of $11.8 Billion compared to the US Dollar at $5000billion currently represents 0.236% (roughly) of the market cap of bitcoin. As a further comparison, the Swiss Franc represents 0.3% of foreign currency reserves worldwide and has a M0 market cap around $60bn putting Bitcoin at almost 20% of that size.
I believe these numbers, although I admit very rough and based on M0 money supply, show that Bitcoin isn't a million miles away from being a viable reserve currency, at least at the smallest end. This leads me to paste an extract from Vinny Lingham from an article... http://www.coindesk.com/2016%E2%80%8A-brought-bitcoin-awakening/
If bitcoin started to surge globally, it could become of strategic interest to a government, and therefore other governments. I believe this would trigger something akin to a digital commodity race. Imagine if China started buying up large amounts of bitcoin – would the rest of the world governments stand idly by and watch? I don’t think so – so my prediction here is that by 2017, governments will become the largest buyers of bitcoin, pushing the price up to new highs.
It’s always easy to make outlandish predictions. My goal for this post was to outline what I think the tailwinds are behind bitcoin. I don’t know if the price is going to $1,000 or $10,000 – but I do know that it is going up. If I was forced to predict, I would say that it would hit $1000+ in 2016 and $3000+ in 2017.
Thanks for posting this.
But how can bitcoin grow when all blocks are full and transaction times are getting longer every day?
If someone wants to pay on the internet or in a store, he/she can't wait an hour (or even ten minutes) till the payment is accepted.
What are your thoughts on this?
That is a great point, but I think there are a few reasons why that 'might' not matter moving forward. However completely agree with you that it's an issue that needs solving in order for Bitcoin to achieve it's full potential...
Would be great to hear your thoughts..
The Lightning Network implementation will soon be ready and merged into Bitcoin Core, which will scale to millions of instant transactions a day.
Also today, most on-chain payments are practically zero-conf. You can do certain heuristics in the network to anticipate double-spending attacks. Bitpay (a payment provider service) does it like that. Though it's not 100% secure (e.g. so-called Replace-by-fee attacks), it comes close.
Basically and all in all in the crypto-currency and blockchain world, we have several different consensus mechanisms today. One is not better than the other. They all have their specific advantages and drawbacks.