Module 10: Stablecoins and Macro
The US Dollar and Crypto
Chapter 5 of 12 · about 5 minutes
5.1 Priced in dollars
Mint lived outside the United States, earned a local currency, and bought crypto through a local exchange. Yet nearly every chart, every stablecoin, and every price target Mint saw was in US dollars.
"Why is everything in crypto measured in dollars?" Mint asked. "Isn't crypto supposed to be global?"
"It is global," said Hash. "And the global financial system runs mostly on dollars. Crypto ended up running on dollars too, mostly through stablecoins. That means the dollar's strength or weakness affects crypto in ways many people don't notice."
5.2 The dollar's role
The US dollar is the world's main reserve currency.
| Role | Example |
|---|---|
| International trade | Many commodities, like oil, are priced in dollars |
| Global debt | A large share of international borrowing is in dollars |
| Central bank reserves | Many countries hold dollar assets as reserves |
| Savings in unstable economies | People hold dollars to protect against local inflation |
| Crypto | The large majority of stablecoins are dollar-pegged |
5.3 Measuring the dollar's strength
The US dollar index (DXY) measures the dollar's value against a basket of major currencies, mainly the euro, as well as the yen, pound, and others. When the DXY rises, the dollar is strengthening. When it falls, the dollar is weakening.
| What tends to strengthen the dollar | What tends to weaken the dollar |
|---|---|
| Higher US interest rates compared with other countries | Lower US interest rates |
| Global fear, as investors seek safety | Strong global growth and risk appetite |
| Strong US economy relative to others | Weak US economy relative to others |
5.4 The dollar and crypto
Historically, Bitcoin has often moved inversely to the dollar index: when the dollar strengthens, Bitcoin tends to weaken, and vice versa. The relationship isn't constant, but it appears frequently. There are several reasons:
Pricing effect. Bitcoin is priced in dollars. If the dollar strengthens against other currencies, it takes fewer dollars to buy the same thing, all else equal.
Global liquidity. A strong dollar tightens financial conditions worldwide, because so much global debt is in dollars. Borrowers outside the US find it harder to repay, and less money flows into risky assets (Chapter 4).
Risk appetite. The dollar tends to strengthen in times of fear, when crypto tends to weaken (Chapter 1).
| Dollar trend | Common effect on crypto |
|---|---|
| Strong, rising dollar | Often a headwind |
| Weak, falling dollar | Often supportive |
5.5 The local currency view
For readers outside the United States, the dollar affects crypto returns in another way. Your actual return depends on both the crypto's dollar price and your currency's exchange rate against the dollar.
Example. Mint buys BTC worth $10,000, using local currency, when 1 US dollar equals 80 units of local currency.
| At purchase | One year later | |
|---|---|---|
| BTC position in dollars | $10,000 | $11,000 (+10%) |
| Exchange rate (local units per dollar) | 80 | 88 (the dollar strengthened 10%; the local currency weakened about 9%) |
| Value in local currency | 800,000 | 968,000 |
| Return in local currency | +21% |
Mint's local currency weakened, which boosted the return in local terms. If the local currency had strengthened instead, the return in local terms would have been smaller than 10%.
"So for me, holding crypto is partly holding dollars," said Mint.
"In practice, yes," said Hash. "Especially if you hold dollar stablecoins. That can be good or bad depending on your currency."
5.6 Stablecoins as dollar exports
Dollar stablecoins have become one of the most widespread ways for people outside the United States to hold dollars. In countries with high inflation, capital controls, or limited access to dollar bank accounts, stablecoins offer a digital alternative (Chapter 11).
This has a macro implication. Stablecoin issuers hold reserves largely in US government bonds (Chapter 6). So global demand for dollar stablecoins also creates demand for US government debt. Some US policymakers have described stablecoins as a way to extend the dollar's global role, which helps explain growing regulatory attention to them.
Other countries and regions have responded differently. Some see dollar stablecoins as a threat to their own currencies' control, and have restricted them or encouraged stablecoins in their own currencies.
5.7 Other currencies in crypto
Stablecoins pegged to other currencies, such as the euro, exist but are much smaller. Some regions are encouraging local-currency stablecoins under new regulations (Module 1, Chapter 14). Several central banks are also exploring central bank digital currencies (CBDCs): digital versions of national currencies issued directly by central banks. CBDCs differ from stablecoins, because they're issued by governments, and they raise their own debates about privacy and control.
5.8 Try it yourself
Find a chart of the US dollar index (DXY) and Bitcoin's price over the past two years. Identify two periods where they moved in opposite directions and one where they didn't. Then calculate your own return on a hypothetical crypto purchase from a year ago in your local currency, accounting for the change in your currency's exchange rate against the dollar.
Key takeaways from this chapter
- The US dollar is the world's main reserve currency, and crypto is mostly priced and settled in dollars.
- The dollar index (DXY) measures the dollar's strength against major currencies.
- Bitcoin has often moved inversely to the dollar, through pricing, global liquidity, and risk appetite effects.
- For non-US investors, returns depend on both crypto's dollar price and the local exchange rate.
- Dollar stablecoins spread dollar access worldwide and create demand for US government debt.
- Some countries see dollar stablecoins as a threat, encouraging local-currency stablecoins or CBDCs.