The movement to make Bitcoin a reserve digital currency keeps growing following Terraform Labs announcement to purchase a $10 billion reserve of Bitcoin.
On March 14, Do Kwon, the founder of Terraform Labs, announced that UST was going to be backed by a $10 billion reserve of bitcoin (BTC). Terraform Labs created the Terra protocol that issues the stablecoin terraUSD (UST).
Stablecoins are a group of cryptocurrencies that aim to lessen price changes and attempt to offer price stability. They are usually backed by a reserve asset.
While Terraform Labs is not exactly a bank, it is issuing its own digital cash to make paying for things easier and it’s about to be backed by bitcoin as a Reserve Currency.
Reserve Currencies are currencies or other capital held by institutions and countries as a hedge against global market fluctuations caused by external factors. They play an essential role as a cash reserve because they are expected to be an independent store of value that is not affected by market volatility. A reserve currency reduces exchange rate risk since there is no need for a country to exchange its currency for the reserve currency to do trade.
Bitcoin As A Reserve Currency
The nature of Bitcoin puts it at an advantage to function as a reserve currency because it has many of the attributes of money. Bitcoin is valuable, portable, divisible, indestructible, and has utility.
Today, institutions face many threats to the value of their stored reserve assets, including inflation, weakening purchasing power, international competition, and others. Fiat government money is bound to be inflationary as more can (and will) always be printed.
Countries like Zimbabwe, Venezuela, and Argentina have experienced hyperinflation due to the reckless printing of their money. Even the United States is now experiencing high levels of inflation due to excessive money printing.
Hence, the need to look for alternative reserve assets that are scarce and cannot be affected by third-party forces and this is where Cryptocurrencies like bitcoin shows a lot of promise because of its decentralized nature.
Bitcoin is a decentralised system of storing transactional data. Data storage is done on blocks on a public ledger/database. This means that there is no centralised authority controlling the changes and actions happening in the database.
Instead, the transactional data in the bitcoin blockchain is verified by a network of peers who all hold a copy of the database/ledger. This means any changes or actions in the database have to be verified and approved by all the nodes in the network. This makes the bitcoin blockchain structure secure and immutable.
Bitcoin as a reserve asset will remove the element of third parties controlling the structure, essentially removing their influence on the currency itself.
Moreover, when bitcoin was launched by its mysterious creator, Satoshi Nakamoto, he embedded a set limit of bitcoin tokens that can be introduced in the blockchain. This limit was set at 21 million tokens. A limited supply makes bitcoin a scarce asset and an excellent hedge against inflation.
Using a neutral currency like bitcoin as a global reserve would ensure that there is little room for manipulation, hence promoting a fairer and productive financial market for every nation. With only wallet addresses attached to a person taking part in transactions, bitcoin provides a better level of anonymity than fiat currencies as well.
Nevertheless, crypto analysts have time and again urged crypto participants to be aware of the coins’ movements and ensure that they are always updated with the investor sentiments and curate their investment strategies accordingly.