Executive Summary

Global capital flows are currently being reshaped by increasing trade protectionism, posing a challenge to the USD's long-standing position as reserve currency of the world. As the US confronts the implications of deteriorating twin deficits—fiscal and trade—and an unsustainable debt trajectory, we think investor confidence in the USD’s safe haven status may continue to be eroded. This raises the serious prospect of a reversal in dollar inflows and portfolio realignments by large institutions on a global scale, potentially leading to significant USD selling pressure over the long run.

Notably, we believe that the events of recent months have only intensified a decade-long trend of waning dominance for the dollar. What comes next could represent an inflection point for bitcoin specifically and crypto more broadly. That is, the current shift in the USD regime has made store-of-value assets like gold and bitcoin stand out as credible alternatives in the evolving monetary landscape. Gold’s reclassification from a Tier 3 to a Tier 1 asset under Basel III rules is one example of that. Bitcoin, in particular, offers a distinct value proposition as a sovereign-neutral asset immune to sanctions or capital controls, positioning itself as a viable supranational unit of account for international trade.

We believe that reduced USD demand might eventually lead more countries to diversify their international reserves, potentially adding $1.2T to bitcoin's market cap, based on our conservative assumptions. That may be part of why we are witnessing increasing interest in strategic bitcoin reserves among nation-states, underscoring the asset’s rising geopolitical significance.

Years of living dangerously

Over the past half-century, US economic management has undergone fundamental shifts. In the wake of 1970s stagflation, economists like Milton Friedman challenged Keynesian demand-management orthodoxy, leading to the modern central banking era – grounded in the ideas of a stable inflation targeting regime and a “natural” rate of unemployment. This was then institutionalized via the political independence of central banks, who focused on managing the money supply via interest rates (and later macroprudential measures) as a means of achieving economic equilibria.

For years, that framework has been coming under increasing pressure from fiscal activism in the form of large-scale deficit spending and trillion-dollar stimulus packages. Some of that was necessary due to problems as varied as the global financial crisis and the COVID-19 pandemic. Nevertheless, US debt-to-GDP levels have soared from 63% in 2008 to around 122% today, putting it on an unsustainable trajectory. Moreover, the Federal Reserve’s aggressive hikes in 2022-23 have meant that the cost of US government borrowing is not negligible. As a result, rising interest expense levels have made the US deficit harder to ignore. See Chart 1.

In the face of that, the rise of trade protectionism could reshape global capital flows. The threat to the USD’s safe haven status means that large institutions (like non-US pension funds, life insurance companies and sovereign wealth funds, among others) – who have systematically underhedged around half of the $33T ($14.6T in debt and 18.4T in stocks) in USD exposure over the past two decades (Reuters) – are likely to change their behavior going forward. That is, we believe that this could herald a potentially massive portfolio adjustment in the months and possibly years to come. See Chart 2.

This is not the first time we’ve seen the rising threat of twin deficits in the US (i.e. dual fiscal and trade deficits) lead to a reversal in USD inflows, but it comes on the back of a significant shift in the global economic order. That is, we think the world is currently witnessing a profound change in the USD regime, potentially translating into massive USD selling pressure.

Incidentally, we think that would be true even if retaliatory tariffs were to be unwound. That’s because (1) the magnitude of the confidence shock has left a lasting impression on many investors and (2) lower tariffs and tax cuts actually reduce the amount of money the government could collect in revenue, thereby exacerbating the pressure on deficits. Of course, a weaker USD can help inflate away growing debt liabilities by reducing interest costs and potentially help increase demand for US exports. But it comes at the expense of eroding investor confidence in the USD as a store-of-value and global reserve currency, potentially expediting the search for an alternative.

When we explored the theme of de-dollarization back in December 2023, we noted then that the dollar was at an inflection point but argued that de-dollarization would take “many, many generations” to unfold. That timeline now appears to be accelerated due to the events of recent months. Of course, the influence of the USD has been in decline for some time – perhaps for the better part of a decade, according to Harvard economist (and crypto skeptic) Kenneth Rogoff, who pegs the peak of dollar dominance at around 2015. This trend picked up after the start of the war in Ukraine, due to sanctions on Russia.

The next big thing

The question remains, however, what is the alternative? During times of fundamental changes in the monetary system – when the rules about what gives money its value are rewritten – store-of-value assets like gold and increasingly bitcoin become much more valuable. Indeed, in recent weeks, the case for bitcoin as a digital counterpart to gold has become increasingly clear, particularly with respect to its risk-adjusted outperformance to US stocks. In a recent report, Coinbase Asset Management argues that the market for store-of-value assets could expand from $20T to $53T over the next ten years with an estimated real (inflation-adjusted) return of 6%.

The rationale is that incorporating assets like bitcoin and gold into investment portfolios could offer diversification benefits (which we’ve previously covered here) potentially stabilizing returns during economic regime shifts. While bitcoin tends to be more volatile than gold, its potential for higher returns may complement the steadiness of gold, providing a balanced approach to preserving wealth.

Moreover, bitcoin’s immunity to indiscriminate government seizure and capital controls sets it apart from gold, in our view. A good example of the former is the 1934 Gold Act (signed by Franklin D. Roosevelt), which prohibited private ownership of gold and forced people to transfer their holdings to the US Treasury. Internationally, sanctions risk is also enabled by the traditional infrastructure and physical custody often required of gold (at scale) such as banks and vaults, whereas bitcoin can be digitally self-custodied across the income spectrum. In 2022, Russia’s access to over 2,000 metric tons of gold stored in allied countries was effectively blocked and could not be liquidated. With respect to capital controls, previous administrations in Argentina not only made it difficult for citizens to access USD but restricted sales of gold to prevent capital flight.

This is why we characterize bitcoin as a supranational store-of-value and believe that it is in a unique position to build monetary credibility from an international trade perspective. Currently, more than 80% of all international trade is settled in USD (see Chart 4), but the transition towards a multipolar system suggests more countries are becoming uncomfortable relying on the USD as an intermediary in their balance of payments. However, the alternatives have been few and far between.

For example, current account surplus currencies may not have enough circulation globally (per the dilemma posed by economist Robert Triffin– to which he proposed the creation of new reserve units). Meanwhile, the EUR remains far behind the USD as the second largest reserve currency because of the eurozone’s fragmented fiscal policy and the ECB’s institutional limitations.

We think that makes a censorship-resistant asset with sovereign neutrality (i.e. a supranational asset) more appealing for politically sensitive trade relationships in general and for current account surplus economies in particular. Of course, the options here are fairly limited, which leaves bitcoin as perhaps the most serious contender to assume this mantle, in our view. That could potentially leave bitcoin with very large asymmetric upside over the long run, though we need to remember that adoption may be constrained by the fact that many states will be reluctant to relinquish control over their monetary policy. Of course, with most goods principally traded in USD today, the Federal Reserve already tends to set the direction for many central banks globally in practical terms.

Why now?

Incidentally, this is why it's important not to conflate the concepts of being a “store-of-value" with being an “inflation hedge" – although the terms are related. We define a store-of-value as an asset that maintains its value over a long-term investment horizon, whereas an inflation hedge protects investors against the loss of purchasing power in the short-term due to price shocks. Being a good store-of-value doesn’t necessarily make an asset an effective inflation hedge and vice versa.

From that perspective, we think the potential capital flows into bitcoin could be massive, particularly as 2025 may go down as the year that cryptocurrencies truly went mainstream. Bitcoin ownership has surged (see Chart 5) precisely because spot bitcoin ETFs and other vehicles have made the token easier to buy, while liquidity and market depth have improved sharply over the last five years. Away from bitcoin, the crypto payments space has started to take off as institutional players are recognizing the efficiency and effectiveness of blockchain rails.

The broadening of bitcoin’s investor base is coincident with efforts to create strategic bitcoin reserves (or digital asset stockpiles) across multiple countries (and some US states). The White House formally created a strategic bitcoin reserve in March 2025 via executive order using the existing US stock of seized bitcoin, amounting to around 198k BTC. Note that China may be the second largest sovereign bitcoin holder in the world with an estimated 190k BTC also primarily resulting from asset seizures, though it does not have an official bitcoin reserve initiative in place. Meanwhile, countries as diverse as the Czech Republic, Finland, Germany, Japan, Poland and Switzerland are all studying the potential integration of bitcoin into their national reserves.

By comparison, there were over 216k metric tons of above ground gold stocks at the end of 2024, of which central banks and sovereign treasuries held around 17% ($3.6T) for their reserves, according to the IMF and World Gold Council. Separately, currency fluctuations in 2024 led global foreign exchange reserves to fall from $12.75T to $12.36T in 4Q24. That means gold holdings (separately reported from FX reserves) currently represent around 23% of combined international reserves – up from 10% a decade ago.

Under Basel III regulations, physical gold (held in a bank’s own vault) was reclassified from a Tier 3 to a Tier 1  asset by many countries in 2019 (and will be implemented by US banks on July 1, 2025). Over time, this has supported efforts to diversify away from USD denominated assets. As USD demand wanes, we think more countries could eventually seek to diversify some of their FX reserve holdings. Conservatively, if we assumed that just 10% of total international reserves were to be supplemented by bitcoin, that would equate to adding $1.2T in value to bitcoin’s total market capitalization over the long run.

Conclusions

The shifting dynamics of the global monetary system, characterized by growing concerns around US fiscal and trade policy and declining USD dominance, are creating a unique opportunity for alternative store-of-value assets. Bitcoin, with its sovereign neutrality, immunity to international sanctions, and increasing recognition by nations as a potential strategic reserve asset, stands to benefit, in our view. The reclassification of gold under Basel III in 2019, coupled with declining gold accumulation by some central banks, further underscores this shift. Ultimately, we think the move away from traditional USD reliance may be accelerating, potentially positioning bitcoin as a critical component of the future global financial landscape.