Original Article Title: Monthly Outlook: Dethroning the Dollar

Original Article Author: David Duong, CFA - Global Head of Research

Original Article Translation: Daisy, ChainCatcher

Editor's Note: This article is compiled from Coinbase's latest monthly outlook research report. The report points out that as the U.S. "twin deficits" continue to expand and trade protectionism intensifies, confidence in the U.S. dollar is weakening, potentially leading to a global-scale asset portfolio restructuring. In this context, Bitcoin is increasingly seen by more countries as a potential supranational reserve asset due to its characteristics of sovereign neutrality and lack of capital controls. Based on a conservative estimate in the report, if Bitcoin gradually integrates into the global reserve system, its total market value could increase by approximately $1.2 trillion. The following content is a compilation and summary of the key points of the report.

Summary

Global capital flows are being reshaped by escalating trade protectionism, challenging the U.S. dollar's dominant position as the global reserve currency. As the U.S. fiscal deficit and trade deficit continue to expand, debt levels are heading down an unsustainable path, eroding market confidence in the U.S. dollar as a safe haven asset. This trend may lead to a reversal of dollar fund inflows, prompting large global institutions to reallocate assets. In the long term, the U.S. dollar may face sustained and significant selling pressure.

It is worth noting that we believe the recent months of turbulence have further intensified the decade-long decline of the U.S. dollar's dominance. The forthcoming changes could serve as a crucial turning point for Bitcoin and the entire crypto market. The transformation of the current USD system has made store-of-value assets like gold and Bitcoin more attractive alternatives in the emerging currency landscape. The elevation of gold from Tier 3 to Tier 1 asset under Basel III is a typical example. Particularly for Bitcoin, with its characteristics of sovereign neutrality, immunity to sanctions, and lack of capital control influence, it has the potential to become a feasible supranational accounting unit in international trade.

We believe that the declining demand for the U.S. dollar may prompt more countries to advance international reserve diversification. According to conservative estimates, this trend could bring about approximately $1.2 trillion in incremental market value to Bitcoin. This partly explains why an increasing number of countries are beginning to focus on strategic Bitcoin reserves, further highlighting Bitcoin's increasingly important role in geopolitics.

Continuation of Perilous Times

Over the past half century, the United States' economic management model has undergone a profound transformation. Since the stagflation crisis of the 1970s, economists such as Milton Friedman have questioned Keynesian demand management theory, leading to the formation of the modern central banking system—a system that is built on the core principles of targeting stable inflation and the concept of the "natural rate of unemployment." Subsequently, this framework has been institutionalized through the political independence of central banks, with central banks primarily relying on interest rate policies (and later some macroprudential tools) to regulate the money supply and achieve economic stability.

Over the years, this framework has faced continued pressure from fiscal radicalism, including large-scale deficit spending and trillion-dollar stimulus plans. While some of the spending was indeed necessary to address challenges like the global financial crisis and the COVID-19 pandemic, the ratio of U.S. debt to GDP has skyrocketed from 63% in 2008 to around 122% currently, clearly signaling an unsustainable path. Furthermore, the Federal Reserve's aggressive rate hikes in 2022-2023 have significantly increased the U.S. government's borrowing costs, with the surge in interest expenses further exacerbating the fiscal deficit issue. See Figure 1.

Against this backdrop, the rise of trade protectionism may reshape the global capital flow landscape. The status of the dollar as a safe haven asset is under pressure, meaning that some large institutions (such as non-U.S. pension funds, life insurance companies, and sovereign wealth funds) may alter their investment strategies. Over the past two decades, around half of these institutions' $33 trillion in dollar assets (including $14.6 trillion in bonds and $18.4 trillion in stocks) have not been systematically hedged (source: Reuters). We believe that in the coming months and years, there may be a new wave of large-scale portfolio rebalancing globally. See Figure 2.

This is not the first time the U.S. has experienced a reversal of dollar inflows due to "twin deficits" (simultaneous expansion of fiscal and trade deficits), but this time it is happening amidst a profound shift in the global economic landscape. We believe that the world is currently undergoing a significant transformation of the dollar system, a trend that may trigger a new round of large-scale dollar selling pressure.

Even if retaliatory tariffs are eventually lifted, we still believe that the above trend will be challenging to reverse. The reasons are as follows: (1) the impact of confidence shock has left a deep impression on many investors; (2) tariff reductions and tax cuts will weaken government revenue, further intensifying deficit pressures. Of course, the depreciation of the dollar to some extent helps alleviate the debt burden through lowering interest costs in an "inflationary" manner, while potentially boosting U.S. exports. However, the cost of this process is the erosion of the dollar's credibility as a store of value and global reserve currency, accelerating the search for alternative assets in the market.

When we discussed the theme of "de-dollarization" in December 2023, it was pointed out that the US dollar was at a critical turning point, but at that time, it was believed that this process might take "many generations" to truly materialize. However, a series of events in recent months seems to have significantly accelerated this process. In fact, the decline of the dollar's influence has long been foreseeable—Kenneth Rogoff, a Harvard University economist and cryptocurrency critic, pointed out that the peak of dollar hegemony was around 2015, and since the outbreak of the Russia-Ukraine war, this trend has further accelerated due to sanctions against Russia.

The Next Trend

However, the question is, where are the alternatives? When the monetary system undergoes fundamental changes and the foundation of currency value is being redefined, store-of-value assets such as gold and Bitcoin, which have received widespread attention in recent years, often become particularly important. In fact, in recent weeks, Bitcoin's positioning as "digital gold" has become increasingly clear, especially against the backdrop of outperforming the US stock market on a risk-adjusted basis, highlighting its value proposition even more. In a recent report, Coinbase Asset Management company stated that over the next decade, the global store-of-value asset market may grow from the current $20 trillion to $53 trillion, with an expected average real return rate (adjusted for inflation) of up to 6% per year.

The logic behind this is that including assets like Bitcoin and gold in a portfolio helps achieve diversification (as we have previously analyzed) and enhances the stability of returns during a period of economic transformation. Despite Bitcoin's higher volatility compared to gold, its higher potential returns can complement the stability of gold, thus constructing a more balanced wealth preservation strategy.

Furthermore, we believe that Bitcoin is not subject to arbitrary confiscation by governments and capital controls, a significant difference from gold. A typical case is the signing of the Gold Reserve Act by Roosevelt in 1934, which prohibited private ownership of gold and mandated it to be held in custody by the US Treasury. At an international level, due to gold's reliance on traditional financial infrastructure and physical custody (such as banks and vaults), there is a risk of sanctions when held in large quantities; whereas Bitcoin possesses the ability for digital self-custody by various income groups. For example, in 2022, over 2,000 tons of gold deposited by Russia in friendly countries were frozen and unable to be liquidated. As for capital controls, previous Argentine governments not only restricted citizens from accessing dollars but also prohibited the sale of gold to prevent capital outflows.

For these reasons, we view Bitcoin as a supranational store-of-value asset and believe it has unique advantages in establishing currency credibility in international trade. Currently, over 80% of global trade is still settled in dollars (see Figure 4), but as the world gradually moves towards a multipolar system, more and more countries are becoming uneasy about the continuous reliance on the dollar as an intermediary in their balance of payments. However, the reality is that the available alternatives are still very limited.

For example, the currency of a country with a current account surplus may have insufficient global circulation (this is precisely the "Triffin Dilemma" proposed by economist Robert Triffin, who suggested addressing this issue by establishing a new reserve currency unit). At the same time, due to the highly decentralized nature of the euro area's fiscal policy and various institutional constraints on the European Central Bank, despite the euro being the world's second-largest reserve currency, its influence is still far below that of the dollar.

We believe that for politically sensitive trade relations, especially for countries with current account surpluses, assets that possess censorship resistance and sovereign neutrality (i.e., supranational assets) will be more attractive. Of course, the choices of such assets are very limited, so Bitcoin may currently be the most promising competitor. In the long term, this could bring significant asymmetric upside potential to Bitcoin. However, it should be noted that its widespread adoption may still be limited, as many countries are unwilling to relinquish control over their domestic monetary policies. Of course, considering that most commodities are still priced in dollars, from a practical standpoint, the Federal Reserve actually largely influences the policy direction of most central banks worldwide.

Why Now?

This is also why we emphasize not to confuse "store of value assets" with "inflation-resistant assets," although the two are closely related. We define "store of value assets" as assets that can maintain their value over a long-term investment horizon, while "inflation-resistant assets" are tools used to cope with short-term price shocks and protect purchasing power. An asset, even if it is a high-quality store of value, may not necessarily be an effective means of hedging against inflation, and vice versa.

From this perspective, we believe that the potential scale of capital inflows into Bitcoin could be very substantial, especially by 2025, when cryptocurrencies are expected to truly enter the mainstream market. The amount of Bitcoin held has surged (see Figure 5), mainly due to the launch of various investment tools such as spot Bitcoin ETFs, significantly lowering the investment threshold; at the same time, market liquidity and depth have also significantly increased over the past five years. In addition to Bitcoin, the field of crypto payments is also accelerating, with more and more institutional participants gradually recognizing the unique advantages of blockchain infrastructure in improving efficiency and cost control.

As the base of Bitcoin investors continues to expand, strategic initiatives to establish Bitcoin reserves (or digital asset reserves) are progressing in sync with multiple countries (and some states in the United States). In March 2025, the White House officially established a strategic Bitcoin reserve through an executive order, using Bitcoin seized by the U.S. government, with a total amount of approximately 198,000 BTC. It is noteworthy that China may be the world's second-largest national Bitcoin holder, estimated to hold around 190,000 BTC, primarily from seized assets, although an official Bitcoin reserve plan has not yet been formally launched. Meanwhile, countries such as the Czech Republic, Finland, Germany, Japan, Poland, and Switzerland are also studying the feasibility of integrating Bitcoin into their national reserve systems.

In contrast, according to data from the International Monetary Fund (IMF) and the World Gold Council, as of the end of 2024, global above-ground gold reserves exceeded 216,000 tons. Central banks and sovereign wealth funds held about 17% (approximately $3.6 trillion) as reserves. On the other hand, due to exchange rate fluctuations in 2024, global foreign exchange reserves decreased from $12.75 trillion in the fourth quarter of 2024 to $12.36 trillion. This means that the amount of gold held (excluding foreign exchange reserves) currently accounts for approximately 23% of global comprehensive international reserves, compared to just 10% a decade ago. Furthermore, with the formal implementation of "Basel III" on July 1, 2025, gold will be reclassified from a Tier 3 asset to a Tier 1 "high-quality liquid asset." This may further drive the global de-dollarization asset allocation process.

As the demand for the U.S. dollar weakens, we believe that more countries will seek to diversify their foreign exchange reserve holdings. Conservatively estimated, if only 10% of the total global international reserves were allocated to Bitcoin, the long-term market capitalization of Bitcoin could increase by approximately $1.2 trillion as a result.

Conclusion

The global monetary system is undergoing a significant transformation, manifested by growing concerns about U.S. fiscal and trade policies and the gradual erosion of the U.S. dollar's dominance, creating a unique development opportunity for alternative store-of-value assets. We believe that Bitcoin, due to its sovereignty neutrality and resilience to international sanctions, is increasingly being viewed by more countries as a potential strategic reserve asset and is poised to significantly benefit from this trend in the future. Meanwhile, the reclassification of the gold asset class under "Basel III" and the slowdown in the pace of gold accumulation by some central banks further validate this structural shift. Taken together, we believe that the world is accelerating its move away from traditional reliance on the U.S. dollar, and Bitcoin could become a key part of the future global financial system.

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