2024-6-8 17:00 |
Hyperbitcoinization is the belief that eventually all goods and services will be priced in bitcoin instead of dollars. If you identify as a Bitcoin maximalist, you might have already accepted this as a given. But what does this process actually look like over time? What are key milestones that we can point to that would indicate hyperbitcoinization is taking place? In this post, I explore current Bitcoin financial products, geopolitical reasons governments will adopt bitcoin, why central banks will adopt bitcoin and more.
Merging Bitcoin with Traditional FinanceAs adoption continues, more companies will offer Bitcoin financial products and further merge Bitcoin into the traditional finance world. Unchained is a company at the frontier of this world whose financial products include USD loans collateralized with bitcoin, bitcoin inheritance and taxed advantaged retirement accounts. Unchained is also helping people use these products in a secure self-sovereign manner: incentivizing key ownership, collaborative multisig custody and building out the "network of keys."
Meanwhile is a life insurance company denominating premiums and payouts in bitcoin backed by Sam Altman that offers insight into the future of bitcoin denomination. While bitcoin's value is volatile in the short term, we can safely assume that it will beat inflation over long time frames. How much purchasing power do you think $300k will have in the future compared to 5 bitcoin? Which would you prefer your loved ones receive in the event of your untimely passing?
I expect financial products that denominate payouts in BTC will be long-dated at first. As Bitcoin adoption continues, liquidity will increase and price volatility will decrease. This will make financial institutions more comfortable creating products that payout in bitcoin over shorter time frames. This reminds me of how Austrian economists think of hard money versus soft money when it comes to saving and spending. Throughout history, the harder money, gold, was hoarded and used for larger payments, while silver and other softer money were used to settle everyday payments.
Unlocking Efficiencies in Existing Payment RailsBitcoin will increasingly be integrated into payment infrastructure. While there are untold amounts of amazing work in Bitcoin infrastructure I can mention, I specifically want to focus on infrastructure created by Synota. Synota is a company using the Lightning Network to reduce frictions of traditional payments between energy producers and consumers. Synota is currently focusing on energy payments between miners and energy producers.
In the current payment infrastructure between energy consumers and providers, payments happen every 30 days or more. Energy providers take on credit risk in this system. With Synota, settlement can happen every day or every week over the Lightning Network. While this system still ultimately pays energy providers USD by converting bitcoin to USD at the end of the process, it is evidence that bitcoin rails create efficiencies in traditional payment systems. While I have not yet heard of any instances of energy providers accepting payment directly in bitcoin, Synota provides them the option to do so.
While final settlement isn't yet happening in bitcoin, the infrastructure exists in the background and will continue to proliferate.
Geopolitical IncentivesAfter Russia invaded Ukraine, $300 billion in Russian assets held in Western banks were frozen, and recently the Biden administration discussed using those assets to continue funding the war in Ukraine. Morality of this conflict aside, this incentivizes countries to hold a greater portion of their assets in bitcoin because of its non-confiscatable properties.
Another geopolitical factor to consider is that many countries don't use US dollars and treasuries because they want to, they do it because they have to. Attempts to form financial networks without US dollars and treasuries suffer from lack of liquidity and price volatility: this makes it difficult to preserve value outside of USD. As bitcoin becomes more liquid, I anticipate that it will be used as collateral in repo markets, markets where financial institutions borrow USD, and eventually to settle payments between non-western countries.
Bitcoin will become so important that BRICS countries will form mining alliances to protect themselves in the event that Western countries force miners within their jurisdiction to censor transactions from certain addresses.
Strengthening Central Bank Balance SheetsThe US treasury bonds are seen as the safest asset internationally, but the recent hike in treasury bond interest rates due to monetary policy decisions in response to COVID led to instability in bank balance sheets. Silicon Valley Bank (SVB) went bust because they held Treasury bonds with low interest rates. When depositors realized SVB's assets no longer matched their liabilities, there was a run on the bank: US treasuries made SVB vulnerable.
Bitcoin will eventually be recognized as an asset that makes balance sheets more robust. Market volatility increased after 1971 when the US dollar completely broke its link to gold. Bitcoin will be used as an asset to strengthen balance sheets and the percentage of bitcoin held by companies, financial institutions and even central banks will continue to rise.
Bitcoin, the World Reserve Currency and the Sovereign IndividualAt some point, a faction in the US will see Bitcoin as a threat to Western finance and the reserve currency status of the dollar. This faction will attempt to punish bitcoin holders via high taxes, limiting self-custody, and more. Ultimately, that faction will cave due to capital flight. Jurisdictions friendly to Bitcoin will benefit from an influx of wealthy individuals and their economies will thrive.
Texas is a great example of this. Texas became a Bitcoin mining powerhouse because they deregulated their energy grid in 2002 leading to some of the lowest energy prices in the US. Miners fled China and New York to operate in Texas and now Texas is one of the leading mining centers in the world. High state capital gains taxes in New York and California also punish wealthy individuals, further incentivizing them to move to places like Texas where the state capital gains tax is zero.
Capital, talent and power will accumulate in these types of regions. These incentives will play out on the world stage as well. Expect Bitcoin friendly nations like El Salvador to thrive. Adopt Bitcoin and experience affluence and growth; fight it, and experience capital flight.
Will everything be priced in BTC?At bare minimum, I expect currency at central banks to be backed by bitcoin, which I suspect will lead to positive effects for the everyday person merely by limiting wild credit swings common in the fiat economy. A key factor that plays into a future where "everything is priced in bitcoin" will be how likely people are able to have direct access to their bitcoin without a third party. If we really believe that bitcoin will gain mass adoption, transaction fees will skyrocket and it will not make sense to transact on layer 1 Bitcoin if the value of the transaction is under tens of thousands of dollars.
Will people hold bitcoin or will they hold bitcoin IOUs? I cannot reliably say, but I cannot rule out the hard work being done in the bitcoin development scene. I arrived at the conclusions of this post by playing out how I think groups will react to Bitcoin when pursuing their self-interest, but there is an altruistic aspect to adoption. The ultimate X factor in hyperbitcoinization are the developers who turned down jobs at high paying tech companies because their passion is building freedom technology.
Organizations, companies and individuals like Fedi, Lightning and Nostr developers, Start9 and others are acting in the spirit of Satoshi to create finite, censorship-resistant peer-to-peer money for all. If we eventually live in a world where everything is priced in bitcoin, it will be because the altruists developed the technology to cheaply transact in bitcoin in a self-sovereign manner.
This is a guest post by Julian Martinez. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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