Original title: Monthly Outlook: Dethroning the Dollar
Original author: David Duong, CFA - Global Head of Research
Original translation by: Daisy, ChainCatcher
Editor's Note: This article is based on the latest monthly outlook research report released by Coinbase. The report indicates that as the U.S. 'twin deficits' continue to expand and trade protectionism intensifies, market confidence in the dollar is continuously weakening, and a large-scale restructuring of asset portfolios may be on the horizon globally. In this context, Bitcoin, due to its sovereign neutrality and lack of capital controls, is increasingly being regarded by more and more countries as a potential supranational reserve asset. According to the report's conservative estimates, if the global reserve system gradually incorporates Bitcoin, its total market value is expected to increase by about $1.2 trillion. The following content is a compilation and translation of the report's key points.
Summary
Global capital flows are being reshaped due to intensified trade protectionism, and the dollar's dominant position as a global reserve currency is being challenged. As the U.S. fiscal deficit and trade deficit continue to expand, debt levels are heading towards an unsustainable path, and market confidence in the dollar as a safe-haven asset is wavering. This trend may lead to a reversal of dollar capital inflows, prompting large global institutions to readjust their asset allocations, and in the long run, the dollar may face sustained and significant selling pressure.
It is worth noting that we believe the turmoil of the past few months has further exacerbated the decline of the dollar's dominance over the past decade. The upcoming changes could become a key turning point for Bitcoin and even the entire cryptocurrency market. The current changes in the dollar system make store of value assets like gold and Bitcoin more attractive alternatives in the emerging monetary landscape. The elevation of gold from a Level 3 asset to a Level 1 asset under Basel III is a typical example. Especially Bitcoin, with its sovereign neutrality and lack of influence from sanctions and capital controls, is expected to become a viable supranational unit of account in international trade.
We believe that the decline in demand for the dollar may prompt more countries to advance the diversification of international reserves. According to conservative estimates, this trend is expected to bring about $1.2 trillion in incremental market value to Bitcoin. This also partly explains why an increasing number of countries are beginning to pay attention to strategic Bitcoin reserves, further highlighting Bitcoin's increasingly important position in geopolitics.
Continuation of Dangerous Times
Over the past half-century, the U.S. economic management model has undergone profound changes. Since the stagflation crisis of the 1970s, economists such as Milton Friedman have questioned Keynesian demand management theory, promoting the formation of the modern central banking system — which is based on stabilizing inflation targets and the theory of 'natural unemployment rate.' Subsequently, this framework has been institutionalized through the political independence of central banks, which primarily rely on interest rate policies (and later some macroprudential tools) to regulate money supply and achieve economic stability.
For years, this framework has been under continuous pressure from fiscal radicalism, including large-scale deficit spending and stimulus plans worth trillions of dollars. Although some spending is indeed necessary to respond to challenges such as the global financial crisis and the COVID-19 pandemic, the U.S. debt-to-GDP ratio has surged from 63% in 2008 to approximately 122% currently, clearly on an unsustainable track. Additionally, the aggressive interest rate hikes by the Federal Reserve during 2022 to 2023 have significantly raised the U.S. government's borrowing costs, and the surge in related interest expenses has further exacerbated the fiscal deficit issue. See Figure 1.
In this context, the rise of trade protectionism may reshape the global capital flow landscape. The status of the dollar as a safe-haven asset is being challenged, which means that some large institutions (such as non-U.S. pension funds, life insurance companies, and sovereign wealth funds) may change their previous investment strategies. Over the past two decades, these institutions have approximately $33 trillion in dollar asset exposure (including $14.6 trillion in bonds and $18.4 trillion in stocks), with about half of it not systematically hedged (source: Reuters). We believe that a new round of large-scale asset portfolio adjustments may emerge globally in the coming months and even years. See Figure 2.
This is not the first time the U.S. has seen a reversal of dollar capital inflows due to the 'twin deficits' (i.e., simultaneous expansion of fiscal and trade deficits), but this time it coincides with profound changes in the global economic landscape. We believe the world is currently undergoing a major transformation of the dollar system, and this trend may trigger a new round of large-scale dollar selling pressure.
Even if retaliatory tariffs are ultimately lifted, we still believe that the above trends are difficult to reverse. The reasons are: (1) The impact of confidence shocks has left a deep impression on many investors; (2) Reductions in tariffs and tax cuts will weaken government fiscal revenue, further increasing deficit pressure. Of course, the weakening of the dollar helps to reduce debt burdens through lower interest costs, thereby alleviating it in an 'inflationary' manner, while potentially boosting U.S. exports. However, the cost of this process is that it undermines the credibility of the dollar 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, we pointed out that the dollar was at a critical turning point, but at that time, we believed that this process could take 'many generations' to truly realize. However, a series of events in recent months seem to have significantly accelerated this process. In fact, the decline of the dollar's influence has long been traceable - Harvard economist and cryptocurrency critic Kenneth Rogoff noted that the peak of dollar hegemony occurred around 2015, and since the outbreak of the Russia-Ukraine war, this trend has further accelerated due to sanctions against Russia.
The next big opportunity
But the question is, where are the alternatives? When the monetary system undergoes fundamental changes and the basis of currency value is redefined, store of value assets such as gold and Bitcoin, which has received widespread attention in recent years, tend to become particularly important. In fact, in recent weeks, Bitcoin's positioning as 'digital gold' has become increasingly clear, especially in the context of its risk-adjusted performance exceeding that of U.S. stocks, further highlighting its value advantage. According to a recent report by Coinbase Asset Management, the global store of value asset market may grow from the current $20 trillion to $53 trillion over the next decade, with an expected average real return (adjusted for inflation) of up to 6%.
The logic is that incorporating assets such as Bitcoin and gold into investment portfolios helps achieve risk diversification (we have previously analyzed this), and enhances the stability of returns during the transition of the economic system. Although Bitcoin's volatility is higher than that of gold, its higher potential returns can complement the stability of gold, thus constructing a more balanced wealth preservation strategy.
Moreover, we believe that Bitcoin is not subject to arbitrary confiscation by the government and capital controls, which significantly distinguishes it from gold. A typical case is the Gold Reserve Act signed by Roosevelt in 1934, which prohibited private ownership of gold and mandated that it be handed over to the U.S. Treasury. On the international level, due to gold's reliance on traditional financial infrastructure and physical custody (such as banks and vaults), it faces risks of sanctions when held on a large scale; whereas Bitcoin possesses the capability for digital self-management by various income groups. For example, in 2022, over 2,000 tons of gold held in friendly countries by Russia was frozen and could not be liquidated. As for capital controls, previous Argentine governments not only restricted citizens from obtaining dollars but also prohibited the sale of gold to prevent capital flight.
For this reason, we view Bitcoin as a supranational store of value asset and believe it has a unique advantage in building monetary credibility in international trade. Currently, over 80% of global international trade is still settled in dollars (see Figure 4), but as the world gradually moves towards a multipolar system, more and more countries feel uneasy about their continued reliance on the dollar as an intermediary in international balances. However, the reality is that the available alternatives are still very limited.
For example, the circulation of currencies from current account surplus countries may be inadequate globally (this is precisely the 'Triffin Dilemma' proposed by economist Robert Triffin, who suggested establishing a new reserve currency unit to address this issue). Meanwhile, due to the highly decentralized fiscal policy of the Eurozone and various institutional limitations on the European Central Bank, although the euro is the world's second-largest reserve currency, its influence is still far less than that of the dollar.
We believe that for politically sensitive trade relations, especially for countries with a current account surplus, assets that possess resilience to censorship and sovereign neutrality (i.e., supranational assets) will be more attractive. Of course, the selection of such assets is very limited, so Bitcoin may be the most promising competitor at present. In the long run, this could bring huge asymmetric upside potential for Bitcoin. However, it should be noted that its widespread adoption may still be restricted, as many countries are reluctant to give up control over their monetary policy. Of course, given that most commodities are still priced in dollars, from a practical operational perspective, the Federal Reserve has largely influenced the policy direction of most central banks globally.
Why now?
This is also why we emphasize not to confuse 'store of value assets' with 'anti-inflation assets,' even though the two are closely related. We define 'store of value assets' as those that can maintain their value over the long investment cycle, while 'anti-inflation assets' are tools used to respond to price shocks and protect purchasing power in the short term. An asset, even if it is a high-quality store of value tool, is not necessarily an effective anti-inflation measure, and vice versa.
From this perspective, we believe that the potential capital inflows into Bitcoin could be very substantial, especially in 2025, when cryptocurrencies are expected to truly enter the mainstream market. The surge in Bitcoin holdings (see Figure 5) is mainly attributable to the launch of investment tools such as spot Bitcoin ETFs, which have significantly lowered the investment threshold; at the same time, market liquidity and depth have also significantly improved over the past five years. In addition to Bitcoin, the crypto payment sector is also beginning to accelerate, and more institutional participants are gradually recognizing the unique advantages of blockchain infrastructure in enhancing efficiency and controlling costs.
The continuous expansion of the Bitcoin investor base is synchronously advancing with the strategic establishment of Bitcoin reserves (or digital asset reserves) by multiple countries (and some U.S. states). In March 2025, the White House officially established a strategic Bitcoin reserve through an executive order, using Bitcoin confiscated by the U.S. government, totaling about 198,000 BTC. Notably, China may be the world's second-largest national-level Bitcoin holder, estimated to hold about 190,000 BTC, mainly from confiscated assets, although it has not yet officially launched a Bitcoin reserve plan. Meanwhile, countries such as the Czech Republic, Finland, Germany, Japan, Poland, and Switzerland are also exploring the feasibility of incorporating 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 have exceeded 216,000 tons, with national central banks and sovereign finance departments holding about 17% (approximately $3.6 trillion) as reserves. On the other hand, due to exchange rate fluctuations in 2024, global foreign exchange reserves fell from $12.75 trillion in the fourth quarter of 2024 to $12.36 trillion. This means that gold holdings (excluding foreign exchange reserve statistics) currently account for approximately 23% of global comprehensive international reserves, compared to only 10% a decade ago. Additionally, Basel III will officially take effect on July 1, 2025, at which point gold will be reclassified from a Level 3 asset to a Level 1 'high-quality liquid asset,' which may further push the asset allocation process of de-dollarization globally.
As demand for the dollar weakens, we believe that more countries will seek to diversify their foreign exchange reserves. Conservative estimates suggest that if only 10% of global total international reserves are allocated to Bitcoin, its total market capitalization could increase by about $1.2 trillion in the long run.
Conclusion
The global monetary system is undergoing a significant transformation, characterized by increasing concerns over U.S. fiscal and trade policies and the gradual weakening of the dollar's dominant position, which creates unique development opportunities for alternative store of value assets. We believe that Bitcoin, due to its sovereign neutrality and lack of influence from international sanctions, is increasingly being regarded by more and more countries as a potential strategic reserve asset and is expected to benefit significantly from this trend in the future. At the same time, the reclassification of gold asset categories under Basel III and the slowdown of some central banks' gold accumulation also further confirm this structural shift. Overall, we believe the world is accelerating its move away from traditional reliance on the dollar, and Bitcoin could become a key component of the future global financial system.
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