By market capitalization of the entire cryptocurrency market has reached $2.6 trillion. The Bitcoin dominance index rose to 44.7%. We don’t expect crypto to be an easy play going forward. Volatility spikes will be mainly instigated by government policies, or occasional cashouts by whales, like it happened last Wednesday, October 27, when nearly USD 500m in long positions were liquidated across the crypto market in just one hour. As a result, Bitcoin price fell below the psychologically important $60,000 level, and Ethereum briefly dropped below $4,000. After surviving China’s “twentieth crackdown on record on crypto mining” back in April, this time around everything pointed just to a technical correction, and it proved to be one.

The role of Bitcoin in the modern economic system is gradually becoming pivotal. The answer to the question of whether a flagship cryptocurrency could theoretically survive the disappearance of all fiat currencies is certainly one of the most intriguing now, but it is probably more interesting to focus instead on the role that Bitcoin can play in the current global economic and financial system. As we all know, the current economic system is heavily leveraged, meaning that consumers, companies, and governments are encouraged to borrow money to generate spending or investments that they cannot pay with their current funds. Has it always been that way? No, certainly not. Our fathers, mothers and grandparents can most likely tell you that modern spending habits featuring “tons of plastic cards” look perverted to them, as they learned to live within their means and spend only what they can earn and put in their pockets.

Why do we live in an extremely leveraged financial system, which was effectively created without a strong economic theory behind it? Much attention here should be paid to the role of the Federal Reserve after WWII. Of the roughly $230 billion increase in interest-bearing Treasury debt (or 216% of 1940:Q4 GNP) between 1940 and 1945, more than 70% (or $163 billion, or 153% of Q4 1940 GNP), was sold on the open market as marketable debt. World governments simply wanted their people to accept the government borrowings as a new normal back then. The emerging system of leveraging current expenses needed to replicate itself from top to bottom. That is how getting household and consumer loans became nearly the only way to live.

However, debt is sustainable only if the debtor can fully and timely repay it, but the real value of the monetary debt changes over time. Its face value always remains the same, even if it decreases as the debt is being repaid, but its real value changes all the time. Take for instance bonds. The lower the probability that the borrower is able to redeem its debt the deeper the price discount for its bonds, the higher the yields. In other words, our world is playing with odds of tens of thousand institutional debtors to default, monetizing such a weird probability.

Modern statistics show that as of September 2021, consumer debt in the U.S. alone was at $14.96 trillion, with the average American debt among consumers at $92,727. On top of that, the average American mortgage debt was almost $218,000 per household. There is no way to fix this burden since global household wealth has been permanently passed on to the financial system in the form of various borrowing fees, commissions and interest payments, and to governments – in the form of property taxes. People feel increasingly insecure about losing their jobs as personal bankruptcies become quite commonplace (something unheard of half of a century ago).

The Basel II accord reached in 2004 emphasized capital requirements as a safeguard against systemic risk as well as the need for global consistency in banking regulations so as not to competitively disadvantage banks operating internationally. In 2010, the Basel Committee revised the capital requirements in a set of enhancements to Basel II known as Basel III, which centered on a leverage ratio requirement aimed at restricting excessive leveraging by banks. In addition to strengthening the ratio, Basel III modified the formulas used to weight risk and compute the capital thresholds necessary to mitigate the risks of bank holdings, concluding the capital threshold should be set at 7% of the value of a bank’s risk-weighted assets.

In a heavily leveraged economic system, there is a need for inflationary currencies to pay off debts, while deflationary currencies tend not only to be unhelpful for reducing debt but risk even doing harm. However, they have other uses, debt-free, whose primary goal is to try to protect savings from the risks of hyperinflation and fiat currencies’ devaluations.

The purchasing power is actually the real value of the currency, so if it goes down, the real value also goes down. Inflationary fiat currencies tend to decrease their purchasing power and hence their real value, and this also applies to debt. Taking inflationary foreign currency debt helps to pay off it, especially in the case of high inflation.

So, not playing hardball against all fiat currencies helping deeply indebted people and nations to pay off their debts, we, nevertheless, emphasize the importance for all others to preserve their capitals and their purchasing power without turning to fiat currencies at all.

Bitcoin is explicitly a deflationary tool because its supply declaration becomes less and less expansionary until at some point the new coin issuance simply stops. Consequently, its value tends to increase over time, unlike one of the fiat currencies, so collecting debt in BTC runs the risk of being a bad idea. For example, those who borrowed 1 BTC four years ago when it was less than $7,000, if they returned it today, they would always have to return 1 BTC, but for almost $70,000.

Bottom line is that fiat currencies and most cryptos serve the opposite needs, and, hence, for governments Bitcoin, contrary to a very popular notion, does not present an existential threat. However, it does challenge the validity of the presently dominating leveraged finance model.

In fact, there is no need to use fiat currencies to make payments in Bitcoin. They are only needed for the first purchase on cryptocurrency exchanges, for example, if you do not have other cryptocurrencies. In a world where fiat currencies no longer exist, each of us will receive income directly in Bitcoin or cryptocurrencies, so in theory, we could do without using fiat currencies as long as we don’t aim to borrow money for large spendings like buying a house.

Meanwhile, sovereign Bitcoin and decentralized finance acceptance are underway. More nations that were hurt by weak national currencies and/or bearing the brunt of various regulatory restrictions and/or sanctions would, sooner or later, look closely to the opportunities the decentralized financial system offers, no matter what they say now.

Thus, according to Russian Deputy Finance Minister Alexei Moiseev, the Russian authorities changed their mind and now do not plan to prohibit citizens from buying cryptocurrencies on foreign exchanges. In the meantime, regulators will focus on banning the use of digital currencies as a means of payment domestically to avoid losing control over the money supply. In his recent public performance, Russian president Vladimir Putin spoke about cryptocurrencies. In response to a question about the use of digital assets in oil settlement, he stated:

“Cryptocurrency, of course, can be a unit of account, but it is very unstable. In order to transfer funds from one place to another, yes, but to trade, let alone trade in energy resources, in my opinion, is still premature. » At the same time, the Bank of Russia called citizens’ investments in Bitcoin “a potentially significant problem”.

Meanwhile, the largest global retail chain Walmart partnered up with CoinMe and Coinstar to install 200 Bitcoin ATMs in its stores across the U.S.. It plans to eventually install 8000 Bitcoin ATMs in total across the country.

U.S. Federal Deposit Insurance Corporation, recently announced that a team of US bank regulators is trying to provide a roadmap for banks to engage with cryptoassets, e.g., let banks hold crypto in custody, use them as collateral for loans, or even hold them on their balance sheets like more traditional assets.

In conclusion, we should not ask ourselves if Bitcoin can theoretically survive even without fiat currencies, because the answer is obvious but unrealistic, but we would better ask ourselves if fiat currencies are to be gradually phased out by Bitcoin. Only gradually, of course.