Author: David Duong, CFA - Global Head of Research
Translated by: 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, market confidence in the U.S. dollar is continuously weakening, and the world may be facing a large-scale asset portfolio restructuring. In this context, Bitcoin, with its sovereign neutrality and lack of capital controls, is increasingly being viewed by many countries as a potential supranational reserve asset. According to the report's conservative estimate, if the global reserve system gradually incorporates Bitcoin, its total market value could potentially increase by approximately 1.2 trillion dollars.
The following is a translation and compilation of the report's key points.
Summary
Global capital flows are being reshaped due to intensifying trade protectionism, and the U.S. dollar's dominant position as a global reserve currency is being challenged. As the U.S. fiscal and trade deficits continue to expand and debt levels become unsustainable, market confidence in the dollar as a safe-haven asset is wavering. This trend could lead to a reversal of U.S. dollar capital inflows, prompting global major institutions to readjust asset allocations, and in the long term, the dollar may face continuous and significant selling pressure.
Notably, we believe that the volatility of the past few months has further accelerated the decade-long decline of the dollar's dominance. The upcoming changes could become a critical turning point for Bitcoin and the entire crypto market. The current changes in the dollar system make assets like gold and Bitcoin more attractive alternatives in the emerging monetary landscape. The fact that gold was upgraded from a Tier 3 to a Tier 1 asset under the Basel III Agreement is a typical example. Especially Bitcoin, with its sovereign neutrality and immunity to sanctions and capital controls, is poised to become a viable supranational accounting unit in international trade.
We believe that the decline in dollar demand may prompt more countries to advance international reserve diversification. Based on conservative estimates, this trend could bring about an increase of approximately 1.2 trillion dollars to Bitcoin's market value. This also partly explains why more countries are beginning to pay attention to strategic Bitcoin reserves, further highlighting Bitcoin's growing importance 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 like Milton Friedman challenged the Keynesian demand management theory, promoting the formation of the modern central banking system—a system fundamentally based on inflation targeting and the "natural rate of unemployment" theory. Since then, this framework has been institutionalized through central bank political independence, with central banks primarily using interest rate policies (and later some macroprudential tools) to regulate money supply and achieve economic stability.
Over the years, this framework has been facing continuous pressure from fiscal radicalism, including large-scale deficit spending and stimulus plans worth trillions of dollars. Although some expenditures were indeed necessary to address challenges like the global financial crisis and the COVID-19 pandemic, the U.S. debt-to-GDP ratio has soared from 63% in 2008 to about 122% currently, clearly on an unsustainable trajectory. Moreover, the Federal Reserve's aggressive interest rate hikes between 2022 and 2023 have significantly increased the U.S. government's borrowing costs, with a surge in related interest expenditures further exacerbating the fiscal deficit issue. See Figure 1.
In this context, the rise of trade protectionism may reshape the global capital flow landscape. The dollar's status as a safe-haven asset is being impacted, meaning 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 twenty years, in the approximately 33 trillion dollars of dollar asset exposure (including 14.6 trillion dollars in bonds and 18.4 trillion dollars in stocks), about half have not been systematically hedged (source: Reuters). We believe that in the coming months and years, a new round of large-scale asset portfolio adjustments may occur globally. See Figure 2.
This is not the first time the U.S. has experienced a reversal of dollar capital inflows due to "twin deficits" (simultaneous expansion of fiscal and trade deficits), but this occurrence coincides with profound changes in the global economic landscape. We believe the world is currently in the midst of a major transformation of the dollar system, a trend that could trigger a new round of large-scale dollar selling pressure.
Even if retaliatory tariffs are ultimately canceled, we still believe this trend is difficult to reverse. The reasons are: (1) the impact of the confidence shock has left a deep impression on many investors; (2) tariff reductions and tax cuts will weaken government fiscal revenues, further increasing deficit pressures. Of course, a weaker dollar to some extent helps reduce debt burden through "inflation" by lowering interest costs and may boost U.S. exports. However, the cost of this process is undermining the credibility of the dollar as a store of value and global reserve currency, accelerating the market's search for alternative assets.
When we discussed the theme of "de-dollarization" in December 2023, we noted that the dollar was at a critical turning point but believed this process might take "many generations" to truly materialize. However, a series of events in recent months seem to have significantly accelerated this process. In fact, the decline of dollar influence has long been observable—Harvard economist and cryptocurrency critic Kenneth Rogoff pointed out that the peak of dollar hegemony was around 2015, and this trend has further accelerated since the Russia-Ukraine war and the subsequent sanctions against Russia.
The Next Trend
The question is, what are the alternatives? When the monetary system undergoes fundamental transformation and the basis of monetary value is redefined, store of value assets like gold and Bitcoin, which have gained widespread attention in recent years, become particularly important. In fact, in recent weeks, Bitcoin's positioning as "digital gold" has become increasingly clear, especially against the backdrop of outperforming U.S. stocks on a risk-adjusted basis. Coinbase Asset Management noted in a recent report that the global store of value asset market may grow from the current 20 trillion dollars to 53 trillion dollars in the next decade, with an expected annual real return (inflation-adjusted) of 6%.
The logic is that incorporating assets like Bitcoin and gold into investment portfolios helps achieve risk diversification (as we have previously analyzed) and enhances the stability of returns during economic system transformations. Although Bitcoin is more volatile than gold, its higher potential returns can complement gold's stability, thus constructing a more balanced wealth preservation strategy.
Moreover, we believe that Bitcoin is notably different from gold in that it is not subject to arbitrary government seizure and capital controls. A typical case is when Roosevelt signed the Gold Reserve Act in 1934, prohibiting private gold ownership and mandating its transfer to the U.S. Treasury. At the international level, gold, due to its reliance on traditional financial infrastructure and physical custody (such as banks and vaults), faces sanction risks when held in large quantities; whereas Bitcoin possesses the ability to be digitally self-managed by various income groups. In 2022, for example, over 2,000 tons of gold stored by Russia in friendly countries were frozen and could not be monetized. As for capital controls, previous Argentine governments not only restricted citizens' access to dollars but also banned gold sales to prevent capital outflow.
For this reason, we view Bitcoin as a supranational store of value asset and believe it has unique advantages in establishing monetary credit for international trade. Currently, over 80% of global international trade is still settled in U.S. dollars (see Figure 4), but as the world gradually moves towards a multipolar system, more countries are becoming uneasy about continuously relying on the dollar as an intermediary. However, the realistic alternative options remain very limited.
For instance, the circulation of currencies from current account surplus countries might be insufficient globally (this is the "Triffin Dilemma" proposed by economist Robert Triffin, who suggested establishing a new reserve currency unit to address this issue). Meanwhile, despite the euro being the second-largest global reserve currency, its influence remains far behind the dollar due to the highly decentralized fiscal policies of the Eurozone and numerous institutional constraints of the European Central Bank.
We believe that for politically sensitive trade relationships, especially for current account surplus countries, assets with anti-censorship and sovereign neutrality (i.e., supranational assets) will be more attractive. Of course, the choice of such assets is extremely limited, making Bitcoin potentially the most promising competitor. In the long term, this could create significant asymmetric upside potential for Bitcoin. However, it's important to note that its widespread adoption may still be constrained, as many countries are unwilling to relinquish control over their monetary policies. Of course, given that most commodities are still priced in dollars, the Federal Reserve is effectively influencing the policy direction of most central banks from a practical operational perspective.
Why Now?
This is precisely why we emphasize not conflating "store of value assets" with "inflation-resistant assets," although they are closely related. We define a "store of value asset" as an asset that can maintain its value over a long-term investment cycle, while an "inflation-resistant asset" is a tool used to counter short-term price shocks and protect purchasing power. An asset can be an excellent store of value but not necessarily an effective inflation hedge, and vice versa.
From this perspective, we believe the potential capital inflow into Bitcoin could be substantial, especially in 2025 when cryptocurrency is expected to truly enter the mainstream market. The surge in Bitcoin holdings (see Figure 5) is primarily due to the introduction of investment tools like spot Bitcoin ETFs, which significantly lower the investment threshold; simultaneously, market liquidity and depth have significantly improved over the past five years. Beyond Bitcoin, the crypto payment sector is also accelerating, with more institutional participants gradually recognizing the unique advantages of blockchain infrastructure in enhancing efficiency and controlling costs.
The continuous expansion of the Bitcoin investor base is progressing in sync with multiple countries (and some U.S. states) establishing strategic Bitcoin reserves (or digital asset reserves). In March 2025, the White House issued an executive order, officially establishing a strategic Bitcoin reserve using approximately 198,000 BTC seized by the U.S. government. Notably, China may be the world's second-largest national Bitcoin holder, estimated to hold around 190,000 BTC, primarily from seized assets, although it has not yet officially launched a Bitcoin reserve plan. Simultaneously, countries like the Czech Republic, Finland, Germany, Japan, Poland, and Switzerland are exploring the feasibility of incorporating Bitcoin into their national reserve systems.
In comparison, according to IMF and World Gold Council data, global above-ground gold reserves exceeded 216,000 tons by the end of 2024, with national central banks and sovereign fiscal departments holding approximately 17% (about $3.6 trillion) as reserves. On the other hand, affected by 2024 exchange rate fluctuations, global foreign exchange reserves decreased from $12.75 trillion to $12.36 trillion in the fourth quarter of 2024. This means gold holdings (not included in foreign exchange reserve statistics) currently account for about 23% of global comprehensive international reserves, compared to just 10% a decade ago. Additionally, Basel III will officially take effect on July 1, 2025, at which point gold will be reclassified from a Tier 3 asset to a Tier 1 "high-quality liquid asset," which may further promote the global de-dollarization asset allocation process.
As demand for the dollar weakens, we believe more countries will seek to diversify their foreign exchange reserves. By conservative estimates, if just 10% of global total international reserves are allocated to Bitcoin, its total market value could potentially increase by approximately $1.2 trillion in the long term.
Conclusion
The global monetary system is undergoing a significant transformation, characterized by increasing concerns about U.S. fiscal and trade policies and the gradual erosion of dollar dominance, creating unique development opportunities for alternative store of value assets. We believe Bitcoin, with its sovereign neutrality and immunity to international sanctions, and being increasingly viewed by more countries as a potential strategic reserve asset, is poised to significantly benefit from this trend. Simultaneously, Basel III's reclassification of gold asset categories and the slowing pace of gold purchases by some central banks further confirm this structural transformation. Overall, we believe the world is accelerating its departure from traditional dollar dependence, and Bitcoin could become a key component of the future global financial system.
