Bitcoin’s De-Dollarization Dilemma: USD Dominates Global Transactions

• Decade High for Bitcoin in International Transactions
• Attempts at De-dollarization
• USD's Strong Hold
• USD and Foreign Exchange Reserves
• Foreign Investment Trends in U.S. Treasury Bonds
• Correlation Between Treasury Holdings Decline and Forex Reserves Drop

Decade High for Bitcoin in International Transactions

In 2023, Bitcoin$42,260 -0.64%'s participation in international transactions reached a ten-year high while foreign ownership of U.S. government bonds remained stable, according to a client note from Credit Agricole. The continuous dominance of the U.S. dollar indicates that investors might still rely on this currency during globally stressful economic periods.

Attempts at De-dollarization

Ever since the birth of Bitcoin (BTC) over ten years ago, cryptocurrency advocates have continually pushed for de-dollarization. This concept refers to the shift away from the role of the U.S. dollar (USD) as the global reserve currency. Momentum for this move increased last year amid instability in several regional U.S. banks and an unprecedented federal debt of $34 trillion. Despite these pressures, data suggests that the dollar remains the preferred currency in international transactions, with global demand for U.S. government bonds remaining strong.

USD's Strong Hold

The client note from Credit Agricole's G10 FX strategy team, led by Valentin Marinov, stated: USD's proportion in international SWIFT transactions soared in 2023, reaching its highest level in over a decade. On the other hand, the EUR share plummeted, and that of the JPY and GBP eased."

The team went on to argue that the growing reliance on the USD for global payments and transactions encourages both official and private investors to purchase the currency. This trend may slow down any movement towards de-dollarization. Hence, during periods of stress, the dollar is likely to remain the favored currency or haven asset, drawing funds away from other assets such as Bitcoin and stocks.

USD and Foreign Exchange Reserves

The note highlighted that the USD's share in the foreign exchange reserves maintained by worldwide central banks stayed steady at 59% in 2023, consistent with the previous three years. Credit Agricole cited data monitored by the International Monetary Fund. Meanwhile, the euro's share fell to its second-lowest level since 2017.

Foreign Investment Trends in U.S. Treasury Bonds

With regards to movements in foreign investment in U.S. Treasury bonds (USTs), the client note indicated that the reduction in holdings from China, Hong Kong, and Japan in 2023 was balanced by investment from non-Asian nations, maintaining the global count.

According to Credit Agricole, "While the UST holdings of China and Hong Kong (and to a lesser extent Japan) have been on a downtrend throughout 2023, demand for USTs from the rest of the world remained relatively strong." They also pointed out the robust UST holdings of Ireland and Belgium, considered proxies for custodial holdings of foreign investors such as China.

China's UST holdings, which totaled $769.6 billion in October, saw a seven-month consecutive drop and a ten month decrease of $97.5 billion, according to Global Times. This continued reduction in China's Treasury holdings added steam to the de-dollarization narrative.

Correlation Between Treasury Holdings Decline and Forex Reserves Drop

Credit Agricole noted a correlation between the reduction in Treasury holdings of some countries and the decrease in their respective foreign exchange reserves. For a long time, countries like China have been depositing reserves earned through trade surpluses in U.S. Treasury bonds, effectively financing American consumption.

Edited by Jonathan Stoker