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The Bitcoin-Fiat Relationship: De-Dollarization Remains Unlikely

Bitcoin won’t substitute USD on the global financial arena any time soon

Bitcoin's strive towards de-dollarization seemed to hit a snag in 2023, as the U.S. Dollar (USD) not only retained but strengthened its position in international transactions. Despite Bitcoin reaching a decade-high in international transactions last year, the unwavering appeal of the USD in the global market remained evident. This scenario has prompted a reevaluation of the expectations surrounding Bitcoin's role in shifting away from the USD's dominance as the global reserve currency. 

The persistent lead of the USD suggests that during economic uncertainties, investors' preference still leans heavily towards traditional assets like U.S. government bonds, challenging the cryptocurrency's quest to reshape global financial dynamics.

The USD dominance in 2023 and its impact on Bitcoin's global role

2023 marked a significant year for the U.S. Dollar, as it saw a surge in its share of international SWIFT transactions, reaching the highest level in over a decade. This uptick starkly contrasted with the decreasing shares of other major currencies like the Euro (EUR), Japanese Yen (JPY), and British Pound (GBP). According to Credit Agricole's G10 FX strategy team, this growing preference for the USD in international payments and transactions solidifies its position, potentially slowing down any momentum towards de-dollarization. 

For Bitcoin, this means facing an uphill battle in establishing itself as a haven asset. With the dollar likely to continue as the preferred choice during global economic stresses, assets like Bitcoin and stocks might see diminished inflows, as investors flock to the perceived safety of the USD.

The international picture: U.S. Treasury bonds and global demand

The role of the USD extends beyond mere transactions; its influence is also notable in the realm of U.S. Treasury bonds (USTs). Despite some fluctuations, the global demand for USTs remained remarkably stable in 2023. This stability is particularly noteworthy given the decline in holdings from major players like China, Hong Kong, and Japan. 

Credit Agricole's analysis reveals that this decrease was offset by increased demand from other international entities, maintaining a steady global tally. This trend underscores the enduring appeal of USTs as a secure investment, especially in volatile times, which in turn supports the dollar's supremacy. 

While Bitcoin proponents have long anticipated a shift away from U.S. dollar-denominated assets, these developments indicate that such a transition may be further off than expected, keeping the de-dollarization narrative at bay.

The unwavering strength of the dollar: implications for Bitcoin

As we delve deeper into the dynamics of 2023, the USD's unshakeable status in the global economy becomes increasingly apparent. Holding a steady 59% share in foreign exchange reserves as per the International Monetary Fund, the dollar's dominance is clear. This consistent demand for the USD, even amid global shifts and economic uncertainties, speaks volumes about its role as a safe haven. 

The scenario is particularly telling in light of China's gradual reduction in U.S. Treasury bond holdings, which, while fueling de-dollarization discussions, did not significantly dent the overall global demand. For Bitcoin, this presents a challenging environment. As nations like China diversify away from U.S. debt, Bitcoin's role in the global financial system remains in question, especially as the USD continues to be the go-to currency in times of stress.