June 16, 2024
1 Solar System Way, Planet Earth, USA

What is hyperbitcoinization like?

Hyperbitcoinization is the belief that eventually all goods and services will be priced in bitcoins instead of dollars. If you identify as a Bitcoin maximalist, you may have already accepted this as a fact. But what does this process actually look like over time? What are the key milestones we can point to that would indicate hyperbitcoinization is occurring? In this post, I explore current Bitcoin financial products, the geopolitical reasons why governments will adopt Bitcoin, why central banks will adopt Bitcoin, and more.

Merging Bitcoin with traditional finance

As adoption continues, more companies will offer Bitcoin financial products and further merge Bitcoin with the traditional financial world. Unchained is a company on the frontier of this world whose financial products include dollar loans secured by bitcoin, bitcoin inheritance, and tax-advantaged retirement accounts. Unchained is also helping people use these products in a secure, sovereign way: incentivizing key ownership, collaborative multi-signature escrow, and building the “key web.”

Meanwhile, there is a life insurance company that denominates premiums and payments in bitcoins 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 outperform inflation over long periods of time. How much purchasing power do you think $300,000 will have in the future compared to 5 bitcoins? What would you prefer your loved ones to receive in the event of your untimely death?

I expect financial products that call payments in BTC to have a long expiration date at the beginning. As Bitcoin adoption continues, liquidity will increase and price volatility will decrease. This will make financial institutions more comfortable creating products that pay in bitcoins in shorter periods of time. This reminds me of how Austrian economists think between hard money and soft money when it comes to saving and spending. Throughout history, the hardest money, gold, was hoarded and used for larger payments, while silver and other types of softer money were used to settle everyday payments.

Releasing efficiencies in existing payment methods

Bitcoin will become increasingly integrated into payments infrastructure. While I can mention countless amazing works on Bitcoin infrastructure, I want to focus specifically on the infrastructure created by Synota. Synota is a company that uses the Lightning Network to reduce the friction of traditional payments between energy producers and consumers. Currently, Synota focuses on energy payments between miners and energy producers.

In the current payment infrastructure between consumers and energy providers, payments are made every 30 days or more. Energy suppliers bear the credit risk in this system. With Synota, settlement can happen every day or every week via the Lightning Network. While this system still ultimately pays energy providers in dollars by converting bitcoin to dollars at the end of the process, it is evidence that bitcoin rails create efficiencies in traditional payment systems. While I have yet to hear of any cases of energy providers accepting payments directly in bitcoin, Synota offers them the option to do so.

While there has yet to be a final settlement in bitcoin, the infrastructure exists in the background and will continue to proliferate.

Geopolitical incentives

After Russia invaded Ukraine, $300 billion in Russian assets held in Western banks were frozen, and the Biden administration recently discussed using those assets to continue financing the war in Ukraine. Leaving aside the morality of this conflict, this incentivizes countries to hold more of their assets in bitcoin due to its non-confiscatable properties.

Another geopolitical factor to consider is that many countries don't use US dollars or Treasuries because they want to, they do it because they have to. Attempts to form financial networks without US dollars and Treasuries suffer from illiquidity and price volatility: this makes it difficult to preserve value outside the dollar. As bitcoin becomes more liquid, I anticipate it will be used as collateral in the repo markets, markets where financial institutions borrow USD, and eventually to settle payments between non-Western countries.

Bitcoin will be so important that BRICS countries will form mining alliances to protect themselves in case Western countries force miners within their jurisdiction to censor transactions from certain addresses.

Strengthening central bank balance sheets

US Treasuries are considered the safest asset internationally, but the recent rise in Treasury bond interest rates due to monetary policy decisions in response to COVID caused instability in banks' balance sheets. Silicon Valley Bank (SVB) went bankrupt because it held Treasury bonds with low interest rates. When depositors realized that the SVB's assets no longer matched its liabilities, a bank run ensued: US Treasury bonds made the SVB vulnerable.

Bitcoin will eventually be recognized as a balance sheet-strengthening asset. Market volatility increased after 1971, when the US dollar completely broke its bond with gold. Bitcoin will be used as an asset to strengthen balance sheets and the percentage of bitcoin in the hands of companies, financial institutions and even central banks will continue to increase.

Bitcoin, the world reserve currency and the sovereign individual

At some point, a faction in the United States 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 through high taxes, limiting self-custody, and more. Ultimately, that faction will give way due to capital flight. Bitcoin-friendly jurisdictions will benefit from the influx of wealthy people and their economies will prosper.

Texas is a great example of this. Texas became a Bitcoin mining powerhouse because they deregulated their energy grid in 2002, resulting in some of the lowest energy prices in the United States. Miners fled China and New York to operate in Texas and now Texas is one of the world's major mining centers. High state capital gains taxes in New York and California also punish wealthy people, further incentivizing them to move to places like Texas, where the state capital gains tax is zero.

In these types of regions capital, talent and power will accumulate. These incentives will also be reflected on the global stage. Expect Bitcoin-friendly nations like El Salvador to prosper. Adopt Bitcoin and experience wealth and growth; fight against it and experience capital flight.

Will everything be priced in BTC?

At the very least, I hope the currency in central banks is backed by bitcoin, which I suspect will have positive effects for the average person simply by limiting the wild credit swings common in the fiat economy. A key factor influencing a future where “everything is valued in bitcoins” will be the likelihood that people can have direct access to their bitcoins without a third party. If we truly believe that Bitcoin will gain mass adoption, transaction fees will skyrocket and there will be no point in transacting on layer 1 Bitcoin if the transaction value is less than tens of thousands of dollars.

Will people hold bitcoins or hold bitcoin IOUs? I can't say for sure, but I can't discount the hard work being done in the bitcoin development scene. I came to the conclusions of this post by explaining how I think groups will react to Bitcoin when pursuing their own interests, but there is an altruistic aspect to adoption. The key X factor in hyperbitcoinization is developers who turned down jobs at high-paying tech companies because their passion is building free 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 everyone. If we eventually live in a world where everything is traded in bitcoins, it will be because altruists developed the technology to make cheap transactions in bitcoins in a self-sovereign manner.

This is a guest post by Julián Martínez. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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