Hyperbitcoinization is the belief that eventually all goods and services will be priced in bitcoins instead of dollars. If you know you're a Bitcoin fan, you've probably already taken this for granted. But what does this process actually look like over time? What are the key landmarks that we can point to that might indicate that a Bitcoin overexposure is occurring? In this post, I explore current Bitcoin financial products, the geopolitical reasons why governments should adopt Bitcoin, why central banks will adopt Bitcoin, and more.
Integrating Bitcoin with traditional finance
As adoption continues, more companies will offer Bitcoin financial products and integrate Bitcoin into the world of traditional finance. Unchained is a company on the frontiers of this world whose financial products include USD loans collateralized by Bitcoin, Bitcoin inheritances, and taxable premium retirement accounts. Unchained also helps people use these products in a secure, self-sovereign way: incentivizing key ownership, collaborative multi-signature custody, and building a “keynet.”
Meanwhile, it is a Bitcoin-based, annuity-denominated life insurance company backed by Sam Altman that offers insight into the future of the Bitcoin category. While Bitcoin's value is volatile in the short term, we can safely assume that it will beat inflation over longer time frames. How much purchasing power do you think $300,000 will have in the future compared to 5 Bitcoin? What would you like your loved ones to receive in the event of your sudden death?
I expect financial products that base payments in Bitcoin (BTC) to be long-term at first. As Bitcoin adoption continues, liquidity will increase and price volatility will decrease. This will make financial institutions more comfortable creating products that pay in Bitcoin over shorter time frames. This reminds me of the way Austrian economists think about 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 was used to settle everyday payments.
Unlock efficiencies in existing payment paths
Bitcoin will be increasingly integrated into payment infrastructure. Although there is a countless amount of amazing work on Bitcoin infrastructure that I could mention, I specifically want to focus on the infrastructure created by Synota. Synota is a company that uses the Lightning Network to reduce frictions in traditional payments between energy producers and consumers. Synota is currently focused on energy payments between miners and energy producers.
In the current payment infrastructure between energy consumers and service providers, payments are made every 30 days or more. Energy providers bear the 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 in US dollars by converting Bitcoin to US dollars at the end of the process, it is evidence that Bitcoin routes are creating efficiencies in traditional payment systems. Although I have not yet heard of any instances of energy providers accepting payment directly in Bitcoin, Synota does provide them with the option to do so.
Although the final settlement of Bitcoin has not yet taken place, the infrastructure exists in the background and will continue to spread.
Geopolitical incentives
After Russia's invasion of Ukraine, $300 billion in Russian assets held in Western banks were frozen, and recently the Biden administration discussed using those assets to continue financing the war in Ukraine. Regardless of the ethics of this conflict, this incentivizes countries to hold a larger portion of their assets in Bitcoin due to its non-seizure properties.
Another geopolitical factor to consider is that many countries do not use the US dollar and Treasuries because they want to, but rather do so because they have to. Attempts to form financial networks without the US dollar and Treasuries suffer from a lack of liquidity and price volatility: this makes it difficult to maintain value outside the US dollar. As Bitcoin becomes more liquid, I expect it will be used as collateral in repo markets, markets where financial institutions borrow US dollars, and eventually to settle payments between non-Western countries.
Bitcoin will become so important that the 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 sheets
US Treasuries are viewed as the safest assets internationally, but the recent rise in Treasury interest rates due to monetary policy decisions in response to the coronavirus has led to instability in banks' balance sheets. Silicon Valley Bank (SVB) went bankrupt because it was holding Treasuries at low interest rates. When depositors realized that 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 stronger. Market volatility increased after 1971 when the US dollar completely broke its correlation with gold. Bitcoin will be used as an asset to strengthen balance sheets and the proportion of Bitcoin held by companies, financial institutions and even central banks will continue to rise.
Bitcoin, the global reserve currency and individual sovereign
At some point, a faction in the United States will see bitcoin as a threat to Western finance and the dollar's status as the reserve currency. This faction will attempt to punish Bitcoin holders through higher taxes, limiting self-custodialism, and more. Ultimately, this faction will collapse due to capital flight. Bitcoin-friendly jurisdictions will benefit from the influx of wealthy individuals and their economies will flourish.
Texas is a great example of this. Texas became a powerhouse for Bitcoin mining because it deregulated its power grid in 2002 which led to lower energy prices in the United States. Miners fled China and New York to work in Texas, and now Texas is one of the world's leading mining centers. High state capital gains taxes in New York and California also penalize wealthy individuals, 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 areas. These incentives will appear on the global stage as well. Expect Bitcoin-friendly countries like El Salvador to flourish. Adopt Bitcoin and experience wealth and growth; Fight it, and experience capital flight.
Will everything be priced in Bitcoin?
At a minimum, I expect the currency in central banks to be backed by Bitcoin, which I suspect will have positive effects on the average person once the runaway credit volatility common in a paper economy is reduced. One of the major factors at play in a future where “everything is priced in Bitcoin” is how likely it is that people will be able to directly access their Bitcoin without a third party. If we truly believe that Bitcoin will gain widespread adoption, transaction fees will skyrocket and it will not make sense to transact on the first layer of Bitcoin if the transaction value is less than tens of thousands of dollars.
Will people hold Bitcoin or will they hold Bitcoin IOUs? I can't say it reliably, but I can't discount the hard work being done in the Bitcoin development scene. I arrived at the conclusions of this post by explaining how I think groups will react to Bitcoin when seeking their own self-interest, but there is an altruistic side to adoption. The final
Organizations, companies, and individuals like the developers of Fedi, Lightning, Nostr, Start9, and others are working in the spirit of Satoshi to create limited, censorship-resistant peer-to-peer money for everyone. If we eventually live in a world where everything is priced in Bitcoin, it will be because influencers have developed the technology to transact cheaply in Bitcoin in a self-sovereign way.
This is a guest post by Julian Martinez. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.