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Digital world: could cryptocurrencies replace gold and the dollar entirely?

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The COVID-19 pandemic has accelerated the move to digitization and cryptocurrencies, sparking debate over whether traditional means of payment and security mechanisms will soon be a thing of the past.

Independent political risk analyst Eric Kraus evaluated whether bitcoin could replace gold and whether the digital yuan could topple the dollar.

On June 8, the World Bank suggested that the global recession related to COVID-19 would be the deepest since World War II with the most economies having seen declines in annual per capita gross domestic product (GDP) since 1870.

In these circumstances, investors look for ways to protect their assets from the economic storm. They might be expected to go for gold; however, the yellow metal is growing slowly and has not yet reached the prices it had in August 2011.

Meanwhile, cryptocurrencies appear to be gaining traction with macro-investors, such as Paul Tudor Jones, who buy bitcoins as “a hedge against inflation.” Even China, which has previously been slow to embrace cryptocurrencies, has duplicated testing and developing sovereign blockchain technology.

Could bitcoin replace gold?

The expert compares the current world monetary policy with casino capitalism and does not think that in the near future bitcoin can replace gold.

“It is an excellent example of today’s casino capitalism fueled by unprecedented monetary creation and the suicidal budget deficits of the G7 countries,” said Eric Kraus, political risk analyst and independent financial expert.

Kraus argued that “current cryptocurrencies are pure gambling assets.”

“They have no endorsement or use in trading or as a store of value – extremely volatile, to provide a fun game for small traders – they do not have a significant financial market,” he emphasized.

In his opinion, the price of cryptocurrencies is artificial.

“The relative weakness of gold and the strength of cryptocurrencies recall the rise in prices of Hertz and other bankrupt US companies, whose prices are driven by a new generation of small traders who, when professional sports were cancelled, have opted for betting on the stock market,” he says.

“When you buy US stocks, you are no longer betting on companies, but on what other investors will do, and above all, for how long the Federal Reserve can continue to flood the market with liquidity. In the same way, you can bet to ‘red’ or ‘black’ in roulette. What could go well?” he explained.

The financial expert denounces that in modern monetary theory there are no longer rules and “hundreds of years of economic practice are irrelevant, and one can pave the way to infinite riches.”

However, this point of view represents the failure of western governance, since “a robust political system must be able to accept a certain amount of pain”, according to him.

The expert highlighted the natural character of the periods of recession that ensure subsequent development.

“Economies are cyclical,” explained Kraus. “Recessions are an unfortunate fact of life, as they remove accumulated deadwood and allow for new growth, which is short-term pain for long-term gains.”

However, economic growth may be unstable because of politicians who do not care about long-term strategies. When governments “desperately focus on the next election cycle and fight only to keep their constituents happy until they can be re-elected” economic growth becomes precarious, he stressed.

The yuan goes digital: China has overcome the western system

Meanwhile, China runs against the clock developing its own crypto. According to some reports, the country is considering creating a regional stable coin pegged to the Japanese yen, the Chinese yuan, the Korean won, and the Hong Kong dollar.

However, Beijing’s eagerness to adopt sovereign digital currencies is driven by a different logic, the analyst noted.

“Although China is now the world’s largest economy (in real terms) and continues to outperform the West by 7-8% a year, it is still forced to work within a global financial system designed at a time when the US represented 48% of the World GDP, with Asia as a rounding error,” Kraus said, adding that China has overcome that system.

At the same time, the US is striving to curb China’s rise using its all-time favourite economic warfare tools, such as sanctions and, in particular, access to the dollar system.

In this way China “must find a way to do business with its own currency, but above all to free itself from the constant threat of North American blackmail,” stressed the financial expert.

One of the ways is payments in their digital currency protected from interference by Western regulators, he said.

“For now, creating a cryptocurrency actually backed by a hard asset – the yuan and possibly other Asian currencies – could ultimately do without the Belgium-domiciled SWIFT and the US banking sector,” he said.

At the same time, the development of the digital yuan backend was completed, Wang Zhongmin, the former vice-chairman of the National Council of the Social Security Fund of the People’s Bank of China during the Fintech Online Forum 2020, announced on June 20. 

According to Wang, China strives to create a payment infrastructure in which various cryptocurrencies can coexist with sovereign digital currencies.

Eric Kraus does not rule out that a mix of competing for regional currencies may one day replace the dollar-centric global financial system, stressing that neither the yuan nor the euro could do it alone.

“Given that China is now the world’s largest and fastest economy and the only one growing, the Asian bloc is likely to become the dominant one,” predicts Kraus.

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