Section 1: How Offshore Dollar Credit Works

When most people think about Bitcoin’s price movements, they look to headlines—halvings, ETFs, or tech adoption. But the real undercurrent lies deeper. It lies in global dollar liquidity: the amount of credit and leverage available in the world’s dominant currency. To understand Bitcoin’s major cycles, we must first understand how offshore dollar credit operates—the invisible plumbing that connects Wall Street, foreign banks, and even crypto exchanges into a single liquidity network.

The Dollar’s Global Reach

The U.S. dollar is far more than a domestic medium of exchange. It is the central nervous system of global finance—the unit in which commodities are priced, international debts are settled, and reserves are stored. Although the Federal Reserve issues and controls base money within the United States, the majority of dollar-denominated credit exists outside its borders. This offshore layer of dollar creation has come to define modern global finance (Murau, 2021) [1].

Over 80% of global trade invoices are priced in dollars, and non-U.S. borrowers hold trillions of dollars in dollar-denominated liabilities. When those loans are made by foreign banks or in non-U.S. jurisdictions, they form part of what’s known as the offshore dollar system or Eurodollar system. This system operates largely beyond the direct regulatory scope of the Federal Reserve but depends on its credibility and backstops when crises arise (Murau, 2021) [1].

What Is Offshore Dollar Credit?

“Offshore dollar credit” refers to dollar-denominated loans, deposits, and other financial instruments that are created outside the United States. These include Eurodollar deposits (dollars deposited in banks outside the U.S.), offshore dollar bond issuances, and synthetic dollar lending through swaps or shadow-bank credit facilities (Atlanta Fed, 2024) [2].

In this parallel system, a dollar isn’t necessarily a Federal Reserve note—it can be a bank liability or digital credit instrument denominated in dollars. A British bank in London can take a dollar deposit and lend it to an energy firm in Singapore. That transaction never touches U.S. soil, yet it expands the global supply of dollar credit.

This offshore credit system effectively multiplies the dollar’s reach. It allows credit to be created in the world’s reserve currency without requiring the physical movement of money or the approval of U.S. regulators (JPMorgan Asset Management, 2024) [3].

The Liquidity Multiplier

To understand why this matters, consider how banks create money through fractional reserve lending. Offshore banks do the same, except they operate outside U.S. monetary aggregates like M2. When an offshore bank issues a dollar loan, it effectively creates a new dollar liability backed by another offshore dollar deposit. That dollar can then circulate through multiple institutions, generating a liquidity multiplier that fuels global asset markets (RIFS Potsdam, 2018) [4].

When offshore dollar credit expands, global liquidity rises. More dollars—real or synthetic—chase financial assets. The result is asset inflation, leverage, and risk-taking across the board. Conversely, when the offshore system contracts (due to higher funding costs or regulatory stress), liquidity dries up, forcing deleveraging and price corrections worldwide.

The Bank for International Settlements (BIS) found that offshore dollar credit to non-U.S. borrowers exceeded $12 trillion in recent years, with much of it unrelated to trade or production. Instead, it feeds asset markets and financial intermediation—a cycle of credit that powers both prosperity and volatility (BIS, 2015) [5].

The Birth of the Eurodollar System

The Eurodollar market originated in the 1950s when Soviet and European banks began holding U.S. dollars in London to avoid potential U.S. seizure during the Cold War. Over time, this market exploded into a global phenomenon. By the 1970s, trillions of dollars were circulating outside the U.S., forming a shadow system of money creation parallel to the Federal Reserve’s domain (RIFS Potsdam, 2018) [4].

Today, the Eurodollar market has evolved into a complex web of offshore funding lines, derivatives, and credit instruments that collectively sustain international finance. This offshore system allows global actors—from banks to corporations to sovereigns—to transact in dollars without ever touching the U.S. financial system. It has become, as some economists describe it, “the real world monetary system” (Murau, 2021) [1].

The Mechanics of Offshore Dollar Creation

Let’s break this process down step by step:

1. Dollar Funding
   A foreign bank borrows dollars from a U.S. bank, another foreign bank, or through FX swaps. This gives it short-term access to dollar liquidity.

2. Credit Expansion
   That bank lends those dollars to another entity—perhaps an exporter, hedge fund, or foreign corporation. This creates new dollar-denominated assets (loans) and liabilities (deposits).

3. Re-lending and Leverage
   The borrower might redeposit those dollars elsewhere, triggering more lending downstream. The same original dollar can therefore be multiplied several times over through the offshore system.

4. Liquidity Feedback
   Rising liquidity encourages higher leverage and asset purchases, which inflate global prices. This feedback loop sustains bull markets across equities, commodities, and crypto.

5. Contraction
   When U.S. interest rates rise or global risk appetite falls, the demand for offshore dollar funding tightens. This creates a scramble for real dollars—often referred to as a dollar shortage—and forces deleveraging across global markets.

This cyclical process of expansion and contraction defines global liquidity. And since Bitcoin trades within that same global pool, it rises and falls alongside it.

Fed Backstops: The Lender of Last Resort

Although offshore dollar markets operate outside U.S. jurisdiction, they are not immune to the Federal Reserve’s reach. During crises, the Fed acts as the de facto global lender of last resort. This was evident in both 2008 and 2020, when the Fed opened dollar swap lines with major foreign central banks to prevent systemic funding shortages (Atlanta Fed, 2024) [2].

These swap lines allow foreign central banks to exchange their domestic currency for U.S. dollars, which they then lend to local banks in need of funding. In effect, the Fed props up the offshore dollar market—demonstrating that while the dollar system is global, it still depends on a single monetary authority.

JPMorgan’s analysis calls this the “three-phases model” of dollar liquidity: expansion, contraction, and crisis intervention. Each phase ripples outward, impacting everything from emerging-market debt to cryptocurrency liquidity (JPMorgan Asset Management, 2024) [3].

Why Offshore Dollar Liquidity Matters for Bitcoin

Bitcoin does not operate in a vacuum. Although it is independent of central banks, the liquidity that flows into or out of Bitcoin is heavily influenced by the broader dollar system.

During periods of expanding global liquidity—when offshore credit is abundant and real yields are low—investors search for alternative assets. Bitcoin, with its limited supply and global accessibility, becomes an attractive outlet for excess liquidity. Conversely, when dollar funding tightens, speculative positions unwind and Bitcoin, like other risk assets, tends to decline (Alden, 2022) [6].

Empirical data supports this correlation. Analysts have shown that Bitcoin’s major bull markets often coincide with expansions in global M2 money supply, while bear markets align with liquidity contractions. In one study, Bitcoin lagged global liquidity trends by roughly three months—suggesting it acts as a downstream recipient of dollar credit cycles (Coinbase Institutional Research, 2023) [7].

The Three Mechanisms of the Offshore Engine

Let’s summarize the key mechanics driving this global liquidity engine:

1. Offshore Dollar Funding
   Non-U.S. banks borrow dollars—often short-term—to finance global operations. These loans create a rolling dependency on continuous dollar liquidity. When that funding dries up, the consequences are immediate and widespread (BIS, 2015) [5].

2. Credit Multiplication
   Each borrowed dollar can be lent and re-lent multiple times through offshore deposits and derivatives. The result is an elastic money supply outside traditional monetary controls (JPMorgan Asset Management, 2024) [3].

3. Liquidity Repatriation
   When yields in the U.S. rise or risk sentiment shifts, capital flows back onshore. This reverses the multiplier effect, shrinking global liquidity and pressuring asset valuations—Bitcoin included (Liberty Street Economics, 2021) [8].

This dynamic explains why global dollar conditions—not just Bitcoin-specific events—often dictate the crypto market’s macro trajectory.

Historical Example: Liquidity and Bitcoin’s Cycles

Consider early 2020. The COVID crisis caused a global liquidity freeze, and dollar funding costs spiked. Bitcoin crashed from nearly $10,000 to under $4,000 in March. Days later, the Fed injected massive liquidity through swap lines and QE. Offshore dollar credit rebounded, and Bitcoin began its historic run to $69,000 over the following 18 months.

In contrast, during the 2022 tightening cycle, the Fed’s rate hikes and quantitative tightening caused global liquidity to contract. Offshore dollar credit shrank, the dollar index soared, and Bitcoin dropped from $69,000 to $16,000. These aren’t coincidences—they are direct reflections of the global liquidity tide.

The Bigger Picture

Understanding offshore dollar credit reframes how we view Bitcoin’s volatility. It’s not merely a product of speculation or hype. It’s a mirror of global monetary tides—rising when dollars are plentiful, retreating when they are scarce. Bitcoin’s decentralized protocol may be immune to manipulation, but its price still breathes in rhythm with the dollar system that underpins the global economy.

In the next section, we’ll explore how stablecoins have become the synthetic eurodollars of the digital era, linking crypto markets directly to this offshore dollar machinery.

Shout-out

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References

1. Murau, S. (2021). Offshore dollar creation and the emergence of the post-2008 international monetary system. Boston University Global Development Policy Center. https://www.bu.edu/gdp/files/2021/02/Steffen-Murau-GEGI-Study-2-Feb-2021.pdf

2. Federal Reserve Bank of Atlanta. (2024). Offshore dollar and U.S. policy. Policy Hub Series, 2. https://www.atlantafed.org/research/publications/policy-hub/2024/05/15/02--offshore-dollar-and-us-policy

3. JPMorgan Asset Management. (2024). Examining offshore dollar liquidity in light of the three-phases model. https://am.jpmorgan.com/be/en/asset-management/institutional/insights/portfolio-insights/fixed-income/fixed-income-perspectives

4. Research Institute for Sustainability (RIFS) Potsdam. (2018). Offshore dollar creation and the international monetary system post-2008. https://www.rifs-potsdam.de/en/output/publications/2018/offshore-dollar-creation

5. Bank for International Settlements. (2015). Dollar credit to emerging market economies. BIS Quarterly Review. https://www.bis.org/publ/qtrpdf/r_qt1512e.pdf

6. Alden, L. (2022). Bitcoin: A global liquidity barometer. LynAlden.com. https://www.lynalden.com/bitcoin-a-global-liquidity-barometer

7. Coinbase Institutional Research. (2023). Bitcoin at a macro crossroads: Liquidity and risk cycles. Coinbase.com. https://www.coinbase.com/institutional/research-insights/research/market-intelligence/bitcoin-liquidity-and-macro-crossroads

8. Liberty Street Economics. (2021). Do the Fed’s international dollar liquidity facilities affect offshore dollar funding markets and credit? Federal Reserve Bank of New York. https://libertystreeteconomics.newyorkfed.org/2021/12/do-the-feds-international-dollar-liquidity-facilities-affect-offshore-dollar-funding-markets-and-credit