Key takeaways
- As of fall 2024, the US dollar is facing growing instability due to Federal Reserve policy shifts and global geopolitical changes.
- Cryptocurrencies like Bitcoin and altcoins may gain popularity as a hedge against inflation and dollar devaluation, but this could also attract increased regulatory scrutiny.
- Stablecoins pegged to the US dollar might lose appeal during a dollar crisis, while alternatives like euro-backed, gold-backed or inflation-proof flatcoins could gain traction.
- Although the US dollar has historically bounced back from crises, crypto’s high retention rates may lead to continued growth in adoption, even after the dollar stabilizes.
US dollar crisis 101
As of fall 2024, there are growing concerns about a looming “US dollar crisis.”
Looking at the figures, the United States dollar (usually paired with the euro to assess its relative strength) appears to be in more trouble than usual.
In September 2024, the US Federal Reserve initiated its first interest rate cut in years, slashing rates by 50 basis points, with analysts expecting more cuts by year’s end.
This shift led to a decline in the dollar’s value, likely brought on by reduced US Treasury yields, which make dollar-denominated assets less attractive to foreign investors.
This recent event is, unfortunately, just the beginning of bigger problems to come.
Of course, it’s not just monetary policy driving this instability.
Aside from the fallout from recent global supply chain disruptions and skyrocketing US debt, global geopolitical shifts are playing a major role in the development of this downward trend as well.
The BRICS alliance — Brazil, Russia, India, China and South Africa — has expanded, with member countries openly exploring alternatives to the dollar in global trade. In fact, there’s a notable push toward “de-dollarization,” as more nations look for ways to reduce their reliance on the greenback.
Inflation is another trigger — if prices in the US rise sharply, the purchasing power of the dollar falls, making it worth less globally. And, of course, when the Fed cuts interest rates, it reduces the appeal of dollar-denominated assets, further weakening demand.
On a larger scale, the US dollar holds its position as the world’s reserve currency. But as central banks around the world diversify their reserves, holding more euros, Chinese yuan or even gold, the dollar could potentially lose its dominance.
This all brings us to one of the most popular Google searches in our industry right now: Will dollar collapse affect crypto?
While many believe a weak dollar could send investors flocking to Bitcoin (BTC) and other cryptocurrencies as a hedge against inflation and devaluation, the reality is more complex. It’s that reality that we’ll be discussing today.
Did you know? The largest major US dollar crisis in history occurred in the 1970s when President Nixon ended the gold standard, a move known as the “Nixon Shock.” This led to the collapse of the Bretton Woods system, causing a sharp decline in the dollar’s value, double-digit inflation and significant economic instability throughout the decade.
How a dollar collapse could affect cryptocurrency markets
When the dollar weakens, investors often seek alternatives to protect their wealth. Traditionally, they’ve turned to assets like gold, real estate or foreign currencies. But now, Bitcoin and other cryptocurrencies have entered the mix as digital alternatives to store value.
This is exactly what happened during the COVID-19 pandemic in 2020. As the US government implemented massive stimulus measures and cut interest rates, concerns about dollar inflation grew.
The value of the dollar weakened, pushing investors toward alternative assets. During this period, demand for Bitcoin and other cryptocurrencies surged, with Bitcoin’s price skyrocketing from around $5,000 in March 2020 to over $60,000 by April 2021.
Moreover, if the dollar faces a crisis, traditional banks and financial systems could experience turbulence, leading to increased reliance on decentralized financial (DeFi) services. People might turn to DeFi platforms for loans, savings and yield farming as trust in conventional banks diminishes.
By injecting liquidity into DeFi protocols, the native cryptocurrencies of hosting networks — such as Ether (ETH), Solana (SOL) or Cardano (ADA) (commonly referred to as “altcoins”) — would likely rise in value, attracting even greater speculative attention and snowballing adoption.
It’s easy to imagine a runaway train scenario unfolding — one that would inevitably require state intervention. Unfortunately for crypto, this might manifest in stricter regulations on crypto financial instruments and decentralized systems. We could see limited access to certain services or heavy compliance burdens placed on platforms.
So, in short, a US dollar crisis would likely generate bullish sentiment in the crypto market in the short term. However, increased regulatory scrutiny could eventually slow down momentum.
Did you know? Decentralized lending allows users to borrow and lend cryptocurrencies without the need for traditional intermediaries like banks. Instead, smart contracts handle everything automatically, offering transparency, lower fees and access to global markets 24/7. In 2024 alone, decentralized finance (DeFi) platforms facilitated over $60 billion in loans.
The role of stablecoins during a dollar crisis
Many of the top-performing stablecoins are pegged to the dollar through various degrees of collateralization, offering a safe haven in the typically volatile crypto market. But during a dollar crisis, their foundation could crack. If the dollar plummets, stablecoins tied to it would follow, leaving investors scrambling for alternatives.
Stablecoins pegged to stronger fiat currencies, like the euro or yen, could gain traction during a dollar crisis. For instance, EUROe, a euro-backed stablecoin, and JPY Coin, tied to the yen, are seen as safer bets for investors looking to escape the volatility of the dollar. These fiat-backed alternatives offer a hedge by anchoring their value to stabler national currencies.
Additionally, commodity-backed stablecoins like Tether Gold (XAUT) or Meld Gold, which are tied to physical gold reserves, provide another option for those seeking assets less vulnerable to inflation or currency fluctuations.
Also, despite their controversial reputation, algorithmic stablecoins such as Frax (FRAX) or OlympusDAO (OHM) could become appealing alternatives. Unlike fiat-backed stablecoins, these rely on decentralized mechanisms to control supply and maintain stability.
Lastly, there are flatcoins, with Nuon being a notable example. These newer digital assets are designed to be inflation-proof. Instead of being pegged to a currency, flatcoins are tied to the cost of living or a basket of goods. In a dollar crisis, where inflation could run rampant, flatcoins might become an attractive option by tracking real-world inflation and aiming to keep purchasing power steady, even if traditional currencies lose theirs.
In short, US dollar-collateralized stablecoins may lose their shine during a dollar crisis, but the alternatives discussed here suggest that this isn’t necessarily a bad thing for the crypto market as a whole.
Did you know? Algorithmic stablecoins have had a hard time regaining community trust since the Terra crisis in 2022 wiped out over $40 billion in value when UST lost its dollar peg, causing a massive sell-off.
Could the dollar crisis trigger mass crypto adoption?
Historically, the US dollar has shown remarkable resilience, often bouncing back from periods of weakness once underlying issues are addressed. The current crisis, for example, is largely fueled by short-term factors such as the invasion of Ukraine, which disrupted global markets, increased geopolitical uncertainty, and sent energy prices soaring. Additionally, rising inflation and the Federal Reserve’s recent interest rate cuts have contributed to the dollar’s volatility. However, many of these issues are temporary, and as they stabilize, so too could the dollar.
There’s a strong argument that once these short-term factors subside, many investors will likely return to the dollar. The US dollar remains the world’s dominant reserve currency, held by central banks globally for its perceived stability. As inflation cools and geopolitical tensions ease, confidence in the dollar could rebound. This could lead some investors — particularly those who sought refuge in cryptocurrencies during the crisis — to revert to traditional investments.
Crypto investments, in this view, might be seen as a temporary hedge rather than a permanent shift. Once the US dollar stabilizes, many believe we’ll see a reallocation of capital back into dollar-denominated assets, and crypto investments may cool off as confidence in the dollar strengthens.
However, there’s a compelling counterargument: Once people enter the world of crypto, they tend to stay. Data shows that the drop-off rate of crypto users is low, meaning that once someone experiences the benefits of decentralized finance, easy global transactions and the ability to bypass traditional banking systems, they’re less likely to return to conventional financial tools.
For example, Coinbase’s Q1 2024 earnings report highlighted that the majority of users continued to hold crypto even during market downturns rather than cashing out completely. Additionally, in Gemini’s 2024 Global State of Crypto Report, over 70% of past investors indicated they plan to buy crypto again within the next year. This trend suggests that once individuals enter the crypto space, they often deepen their involvement, even during challenging times.
Even if the dollar rebounds, the speed, cost-efficiency and financial autonomy that cryptocurrency offers might keep many users invested in the space.
In short, while dollar crises aren’t permanent and investors may return to traditional markets, crypto is unique in its unprecedented retention rates.
Taken together with the trends discussed throughout this article, a dollar collapse could lead many on a one-way trip to crypto adoption, likely fueling a crypto bull run.