Translation: Blockchain in Vernacular

Bitcoin is changing the world. With change comes uncertainty and, for many, anxiety. It’s natural for people to wonder what the future will look like, while also worrying whether that change will be good or bad. We are creatures of planning, preparation, but most importantly, we are also creatures of adaptation.

In this two-part series, I will lay out a possible, and what I believe is a very likely, future. You may have noticed that I am writing from a first-person perspective here. Throughout this article, I will consistently use the first-person perspective when I discuss the future or think about things that are uncertain. This is because this is my vision, and not necessarily one that I share with everyone at CoinShares. We have many different opinions within our company, and our ability to create different visions of the future is one of our strengths. This article is my personal opinion, and I stand by it, and will use both articles in this series to explain how I arrived at it.

To first show how I came to my current position, I will first summarize the key findings from 5 different articles published by CoinShares in 2023:

The Basic Investment Case for Bitcoin

Overview of Global Bitcoin Ownership in 2023

Deteriorating Fiat Currency Paves the Way for Bitcoin Adoption

Bitcoin’s Role in the Failure of Money and Its Potential Path to Resurgence

Stablecoins - Bitcoin's Transition Channel (Part 1 and 2)

Next, I will extract the key takeaways from each article and construct a forward-looking argument for why Bitcoin will continue to drive change, particularly in the monetary realm. However, to be clear, I believe this will have large and widespread implications that extend beyond the monetary realm. A proper analysis of these implications would require a book dedicated to the subject. Therefore, here, I will focus on the consequences for currency (and the politics most directly associated with it).

Finally, in Part II, I will elaborate on my predictions for this trend. This section is naturally the most speculative part of the analysis, as it deals entirely with the future, which is obviously unknowable and therefore full of uncertainty. Where possible, I will introduce existing evidence to support the arguments, but as with all predictions, Part II will be based largely on rational speculation.

There are five main underlying assumptions that underlie my argument:

1) The Basic Investment Case for Bitcoin

I will build my argument based on our most fundamental belief: the fundamental investment case for Bitcoin. This investment case belief is shared by CoinShares. We spent many years building it, drawing on insights from many independent thinkers, while also using an adaptation of the Austrian School, specifically Menger’s Theory of Money.

In short, we believe that Bitcoin (as a monetary good) is being monetized. Monetization is the process by which a good acquires a monetary premium in addition to its pure use value. A well-known example is gold, which has acquired a monetary value far in excess of its industrial value (otherwise it would tend to be consumed). Bitcoin has very limited use values, timestamping and NFT inscriptions being just some of them, so we conclude that when Bitcoin continues to accrue value, it is because people value it based on their perception of its usefulness as money.

We believe that Bitcoin's usefulness as money derives directly from its monetary properties. These properties include scarcity, portability across time and space, price volatility, etc. Some of these properties can be changed, while others cannot. For example, Bitcoin's scarcity and portability are fixed design choices that cannot be easily changed, while price volatility or liquidity (two sides of the same coin, so to speak) are relative and can improve or deteriorate based on people's usage.

In our view, Bitcoin’s strongest properties are its fixed properties, which are the properties that are least likely to change. Conversely, its weakest properties are its relative properties, which are the properties that improve over time.

Interestingly, we find that the opposite is often true for fiat currencies. Their weakest properties are those that are least likely to change, such as unlimited supply, poor portability across space and time, and lack of confiscation resistance. Their strongest properties tend to be price volatility and liquidity, two properties on which few fiat currencies have been able to demonstrate recent improvements.

Ultimately, Bitcoin's continued monetization will depend on its success or failure in competing with other currencies, which is determined by end-user perceptions and demand for their comparative monetary attributes. Bitcoin is therefore competing with other currencies, a massive global currency market valued at over $150 trillion.

As long as Bitcoin continues to outperform fiat currencies in monetary attributes in the eyes of current and potential users, we believe it will continue to gain share in the global currency market at the expense of other currencies. This is why Bitcoin can be invested.

2) Bitcoin’s global adoption is significant and growing rapidly

In the spring of 2023, we released our comprehensive study, Overview of Global Bitcoin Ownership in 2023, a detailed summary of more than 20 previous studies detailing global Bitcoin adoption. Our findings detailed the percentage of individuals owning Bitcoin in countries around the world and estimated the compound annual growth rate (CAGR) of Bitcoin ownership from 2016 to 2022.

These findings are interesting on multiple levels. First, we find that the number of people worldwide who own Bitcoin in some way is approximately 270 million. If Bitcoin owners were a country, they would be the fifth most populous in the world. Second, our data shows that Bitcoin ownership, at least in absolute nominal amounts, is primarily an emerging market phenomenon. While the majority of Bitcoin may be owned by users in developed economies, the majority of Bitcoin owners live in emerging market countries.

Finally, the CAGR of Bitcoin owners worldwide between 2016 and 2022 is a staggering 146%. While we don’t expect similar growth rates to continue, the trend couldn’t be clearer. People are increasingly turning to Bitcoin because it offers features that their local fiat currency doesn’t, whatever those features actually are.

3) Countries with high Bitcoin adoption suffer from currency devaluation issues

Following our ownership research, further questions naturally arise: What do those countries reporting the highest levels of Bitcoin ownership have in common? Are there common characteristics that lead to this result? We have some doubts.

To us, there seem to be two general patterns among the countries with the highest ownership. These countries are either:

Wealthy, developed countries with a large middle class, an investment culture, and high computer literacy; or emerging market countries with a large middle class where the local fiat currency has either had a history of devaluation or is currently experiencing continuous devaluation.

To test this, we looked at 5 of the top 6 countries by ownership (no data available for Venezuela, but we all know their situation) and performed a comparative analysis of the monetary health of their national fiat currencies.

Not surprisingly, the results are consistent with our hypothesis - these countries' domestic fiat currencies are not in good shape. Moreover, some countries' currencies have been weak for a long time, even if the data suggests that recent performance has not been bad.

However, the conclusion is clear: among the countries with the highest percentage of Bitcoin owners, all of them have fiat currencies that are either currently or historically depreciating.

3) The role of hard currency competition in currency collapse

After observing Bitcoin's current performance in the global currency market, our curiosity drove us to take a closer look at historical currency competition. More specifically, we wanted to review those situations where hard money came into contact with easy money to see if there were any common patterns in their interaction patterns.

History has not let us down. We have found – and this should not come as a surprise – that weak currencies tend not to survive. In fact, fiat currencies generally do not survive for very long. The only currencies that have survived for more than a few centuries are commodity currencies, especially precious metals.

The differentiating metric for fiat currency survival essentially comes down to what one would expect: how badly it is (un)managed, and how effective the government’s control over people’s use of alternative currencies is. These two perspectives involve several important sub-perspectives that may affect the path of fiat currencies, but overall, from a historical perspective, the most reliable predictor of fiat currency collapse is time.

“Paper money eventually returns to its intrinsic value: zero” — Voltaire, 1729

Interestingly, our research found that a distinguishing feature of collapsing fiat currencies is the increasing use of the U.S. dollar (both fiat and de facto). “Dollarization” here doesn’t necessarily mean replacing local fiat currencies with US dollars, it’s just that name because in modern situations, more often than not, it’s actually the US dollar that’s doing the substitution. However, in the past, this was not always the case and the Deutsche Mark, Pound Sterling, Japanese Yen, etc. all played this role in some cases.

However, the key point is that when a weak local currency has a stronger alternative, this will have a huge impact on the rapid collapse of a fiat currency. A severely devalued fiat currency can only hope to survive for a long time if the government can maintain very tight and effective control over the importation and use of stronger foreign currencies. Easy access to strong currency alternatives is one-sidedly bad news for a poorly managed fiat currency and tends to accelerate dollarization and even lead to a complete collapse in many cases.

4) The bridge between stablecoins and Bitcoin

Over the years, our interest and involvement in the human rights aspects of Bitcoin activities have helped us gain considerable insight into how people interact with Bitcoin and its derivative technologies. The patterns in emerging markets are particularly fascinating. Users choose different Bitcoin derivative currency technologies to meet different monetary usage needs.

For long-term savings, Bitcoin is very popular, but for short-term savings and daily consumption, stablecoins dominate. While Bitcoin tended to lead users to stablecoins initially, this pattern has reversed. Due to the popularity of stablecoins, they enjoy their own demand independent of Bitcoin, and people seek them out on their own.

For most people in emerging markets, Bitcoin is still too volatile to use as a currency for daily consumption, but stablecoins or crypto dollars are often very suitable for this purpose. The fact that they can be easily purchased with a smartphone is a real game changer for billions of people around the world. Interestingly, we are now starting to observe signs that stablecoins are no longer a means to introduce users to Bitcoin, but rather a bridge to Bitcoin.

There are two key points worth noting from these findings: First, global access to dollars has never been easier - the existence of stablecoins makes it extremely difficult to enforce fiat currencies. Second, familiarity with cryptocurrency infrastructure has greatly reduced the psychological barrier for new users to enter fields such as Bitcoin. Coupled with the fact that more than half of the world's population is under the age of 30, and 90% of them live in emerging markets, the demographic potential of this psychological paradigm shift could not be more obvious.

5) Putting the pieces together

I believe the impact of the compounded hypothesis above is as follows: The combination of stablecoins and Bitcoin poses a threat to emerging market currencies. Basically, I believe that while currency collapses have been relatively rare in the past, they are likely to become more common in the future. The reason is that the new availability of stablecoins and Bitcoin makes it more difficult than ever to force people to accept currency debasement. Now, anyone with a mobile phone and internet access can send and receive Bitcoin using even a "regular" phone without an internet connection.

As I mentioned in part one, in the past people needed to physically import (i.e. smuggle) foreign paper money to actually use the dollar, and this was naturally a slow process because most of the time the inflow could be controlled fairly effectively. With the introduction of Bitcoin and stablecoins, the import of hard foreign currency will no longer be able to be effectively controlled. I believe this will lead to a more direct impact of currency mismanagement on the devaluation of local currencies.

The arrow of time is defined by technology, and lasting change in society is largely the result of technological improvements. Going forward, given the availability of stronger monetary alternatives and the extremely high costs governments will face in trying to impose restrictions on them, it will simply not be possible to confiscate wealth through monetary inflation to the extent it is today. If it is still attempted, the plausible outcome will be a rapid withdrawal, hyperinflation, and/or currency collapse.

In reality, this will be seen first in emerging markets. This is simply because these are the currencies that traditionally suffer the highest levels of inflation. The reality is that the worst currencies are caught up first, and these are usually in emerging markets - but this is not necessarily the only case.

In fact, there is no reason to believe that developed market currencies will somehow be immune to this effect over time, so you could say the headline is a bit over the top - unless they are well managed, they are all at risk! Over time, I believe the dollar in the form of stablecoins, and then Bitcoin, will destroy all poorly managed fiat currencies wherever they are. Only the most disciplined central banks have a chance of surviving this challenge. In the next part 2 of this series, I will detail what I think this might look like in practice.