The economic and geopolitical importance of the US dollar has been unchallenged for decades. However, the US is facing a significant challenge: the national debt has risen massively in recent years and a large portion of it will need to be refinanced in the next four years. At the same time, interest rates are at a high level, which is driving up refinancing costs enormously. To counteract this problem, the U.S. is developing a strategy that relies on the global expansion of the dollar. Stablecoins play a crucial role in this. This article takes a detailed look at this plan and shows why it represents a significant development for Bitcoin.
The U.S. Debt Problem
The U.S. currently has a national debt of over $34 trillion. A large portion of this debt will need to be refinanced within the next four years as existing bonds mature. This means that the government will have to take on new debt in order to pay off the old debt. The problem with this is that interest rates are so high that the cost of the new debt is enormous. In recent years, countries such as China have already significantly reduced their holdings of US government bonds. China’s holdings of US Treasuries fell from $1 trillion to $700 billion – a 30% decline in just two years. This shows that major international buyers are withdrawing from the market, forcing the US to find new buyers for its debt.
Stablecoins as a Vehicle for Exporting the Dollar
One potential solution to this problem is to export the US dollar around the world through stablecoins. Stablecoins are digital currencies that are typically backed 1:1 by the US dollar or US Treasuries. The advantage of this technology is its global accessibility: almost everyone in the world owns a smartphone, which allows them to use stablecoins without traditional banking infrastructure.
Stablecoins create a new market for US Treasuries, as the companies issuing these currencies are obliged to hold corresponding reserves. In many cases, these stablecoins are backed by US Treasuries, increasing demand for these bonds. It is estimated that the current market volume of stablecoins is around $200 billion, but this market could grow to as much as $10 or even $20 trillion in the coming years. If this happens, it would create a huge demand for US Treasuries, which could dramatically reduce the US’s refinancing costs.
Stablecoin market capitalization (Image: DefiLama)
A specific example of this model is Tether (USDT), the largest stablecoin provider in the world. Tether already owns over $100 billion in US government bonds, making it one of the top 20 holders of US government bonds worldwide. If regulations are created that allow more companies to issue stablecoins, this effect could be further amplified.
The Link between Stablecoins and Bitcoin
The expansion of the stablecoin market has a direct impact on Bitcoin. Historical data shows a clear correlation between the market capitalization of stablecoins and the growth of the Bitcoin market. This is because stablecoins are the most liquid trading pair for Bitcoin. The majority of Bitcoin purchases are not made in fiat currencies, but via stablecoins such as USDT or USDC.
Another important argument is that many countries with weak currencies do not have easy access to Bitcoin. However, if stablecoins are distributed worldwide, this could greatly facilitate access to Bitcoin. People who previously had no easy access to stable currencies or investment opportunities could easily buy Bitcoin via stablecoins. This creates a massive potential capital that could flow into Bitcoin.
Why Bitcoin could Benefit
Three key factors suggest that Bitcoin will benefit from this strategy:
Increased liquidity: If the amount of stablecoins grows from the current $200 billion to several trillion, the Bitcoin ecosystem will benefit enormously. Historical data shows that Bitcoin also grows strongly during periods of increased stablecoin liquidity.
Lack of investment in many countries: In many emerging markets, there are hardly any investment opportunities. Real estate is often unsafe, stock markets do not exist or are difficult to access. Bitcoin could offer an attractive alternative here, especially for people who want to protect their assets from inflation.
Stablecoin providers could hold Bitcoin reserves: Tether already holds 15% of its profits in Bitcoin. The company now owns over 85,000 BTC. If this model were to be adopted by other stablecoin providers, it could lead to additional and constant demand for Bitcoin.
The Challenge of Long-term Government Bonds
A major goal of the US government is to make not only short-term but also long-term government bonds more attractive. Currently, stablecoin providers prefer short-term government bonds because they have lower liquidity risk. The price of long-term government bonds can fluctuate significantly, and in the event of a sudden market downturn, there is a risk that these bonds will have to be sold at a low price. This was the exact problem that led to the collapse of Silicon Valley Bank.
To make long-term government bonds more attractive to stablecoin providers, regulatory measures could be introduced. One possible measure would be to require stablecoin issuers to hold a portion of their reserves in long-term bonds. However, this would increase the risk of bank runs if investors suddenly wanted to redeem their stablecoins in large quantities. Another scenario would be for the US Federal Reserve to act as a backstop and provide liquidity in times of crisis.
Conclusion
The US strategy of spreading the US dollar globally through stablecoins is a logical step towards stabilizing the national debt. The use of stablecoins can attract new buyers for US Treasuries, thereby facilitating the refinancing of the debt. At the same time, Bitcoin and the crypto market benefit from this expansion, as stablecoins are the main bridge to the Bitcoin ecosystem. Furthermore, if the trend of stablecoin providers holding some of their reserves in Bitcoin continues, this could create an additional source of demand for Bitcoin.
Future regulatory developments will show exactly how this strategy is implemented. But the signs indicate that the global financial landscape is on the verge of a profound change – with direct implications for the US dollar, stablecoins and Bitcoin.
Author
Ed Prinz serves as chairman of https://dltaustria.com, the most prestigious non-profit organization in Austria specializing in blockchain technology. DLT Austria is actively involved in educating and promoting the added value and possible applications of distributed ledger technology. This is done through educational events, meetups, workshops and open discussion groups, all in volunteer collaboration with leading industry players.
Disclaimer
This is my personal opinion and not financial advice.
Therefore, I cannot guarantee the accuracy of the information in this article. If you are unsure, you should consult a qualified advisor you trust. No guarantees or promises of profits are made in this article. All statements in this and other articles are my personal opinions.
https://blockzeit.com/the-trump-plan-for-the-usa-and-its-impact-on-bitcoin