What If The Dollar Crashes

Feb 4, 2021

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2021 May Be The Year The Dollar Crashes

A global health crisis has triggered a global financial crisis. A lot of jobs have been lost, a lot of jobs are artificially surviving thanks to government subsidies or expenditures. This is happening all over the world. In the US the deficit increased 3.3% in the last quarter of 2020 and the US net savings rate plunged in the second and third quarter to reach a net -0.9% in the third quarter. On Jan.28th, 2021 the Washington Post published an article stating that the US economy shrunk by 3.5% in 2020.

In the past, the status of the US dollar as a reserve currency helped keep it stable in stormy times. Now several economists argue there are two potential alternatives: the euro and the renminbi.

A still-raging pandemic and an economy on the brink of a double-dip recession leave the Biden administration with no choice other than another round of massive fiscal relief. This outcome would have consequences for any economy. For savings-short America, it spells a weaker dollar. A weaker dollar means weaker reserves for many countries. There is a potential for both disappointing auctions of US Treasury bills and some countries selling their reserves, i.e. the US Bonds and Treasury Bills they own. For instance, the Treasury of the People’s Republic of China has the second-largest holdings of US Bonds and Treasury bills in the world. If they decide to move some of their holding to euros, the value of the dollar would collapse.

Global politics, the economy, and the measures to try to control the COVID-19 pandemic have all contributed to the high volatility of the stock market and are the main reason behind the forecast of a serious drop in the value of the US Dollar. Data suggest that a growing number of individual and institutional investors are moving into gold and silver for this very reason.

We might see this trend extend into cryptocurrency, especially now that more institutional investors are beginning to enter into the space.

Cryptocurrencies are a great diversifier, they can be part of a hedging strategy against a devaluation of the dollar. According to JP Morgan, Bitcoin has the potential to compete with gold and silver as an asset class. As crypto-assets have proven their recession-resilience, the next stock market crash might result in rising crypto demand.