If you’ve spent any time lurking around the bitcoin community on Twitter or Reddit as I have you may have come across the term ‘hyperbitcoinization’. This is the theory where bitcoin surpasses all global currencies, including the US dollar, to become the world’s reserve currency and, ultimately, the world’s only currency.
The hyperbitcoinization theory is, of course, just that – a theory. At the time of writing, the dollar is very much still the world’s reserve currency and the eleven-year-old bitcoin has a market cap of $183 billion with comparatively low adoption. If hyperbitcoinization was ever to happen it would require a devaluation of the world’s major currencies and thus forcing governments and people to adopt The Bitcoin Standard.
Given we are in the midst of the COVID-19 pandemic, the dollar’s position as the world’s reserve currency is likely to strengthen in the short-term as investors see it as a safe-haven to temporarily preserve wealth as financial turmoil and trade wars begin to play out in the coming years. As the Federal Reserve continues to print off trillions of dollars via quantitive easing to prop up the struggling US economy this may eventually devalue the dollar or, worse, destabilise it.
The severity of the situation in the years to come will dictate the odds of bitcoin – or something like it – becoming the global reserve currency. While this might sound farfetched it is in fact the normal state of play. New currencies have surpassed old ones for thousands of years.
The changing of currencies
The Latin definition of the word currency means ‘in circulation’ and before the invention of coins shells were the most circulated form of money and traded throughout the world. So too was silver and more recently gold. Modern paper money was originally backed by the amount of gold stored in a country’s vaults known as the gold standard. Today, however, paper money is not backed by anything other than a country’s promise to honour it.
The world’s reserve currency has also changed throughout history and is usually correlated to the country with the most powerful military. From 1450 to 1530 the world’s reserve currency belonged to the Portuguese. Then from 1530 to 1640 the Spanish, 1640 to 1720 the Dutch, 1720 to 1815 the French, 1815 to 1920 the British and from 1920 to present day the USA. The connection? The country with the world’s reserve currency was (or is) the global superpower at the time.
If history is anything to go by, the US dollar will lose its status as the world’s reserve currency eventually. The question is what will dethrone it? Despite being the world’s second largest economy China has little to no interest in making the renminbi the global reserve. As an exporting nation and with cheap labour the Chinese government prefer to keep the renminbi relatively weak alongside other currencies.
It’s also worth noting that historically the changing of a world reserve currency usually involves war. The last time followed World War 1.
The function of money
Money has to fulfil three functions to be a viable currency. These are:
- A medium of exchange – facilitating the exchange of goods and services
- A unit of account – a measure of value in the economic system
- A store of value – allowing individuals to decide when they spend it
All currencies throughout history have, to some extent, met these three criteria. The dollar, pound, yen etc all do along with being backed by strong democratic governments. Most currencies are increasingly losing their function as a long-term store of value as you can see with the dollar in the illustration below.
To preserve wealth today one must keep it in assets rather than money because of inflation. The value of the dollar decreases over time where the value of an asset such as gold, stocks, property and so on tends to increase over time.
This is why the rich get richer because they store most of their wealth in appreciating assets. Savers, despite their fiscal prudence and low risk, tend to accumulate wealth slower as they swim against the depreciating value of their savings.
While there are many cryptocurrencies available today bitcoin is the original. Perhaps more importantly it is the only one that is truly decentralised. Bitcoin has no CEO, headquarters, marketing department, spokesperson or even website. It belongs to nobody but it’s for everybody.
Bitcoin is not a platform or a website but a protocol, much like the internet. In fact, we can go as far as to say bitcoin is the internet of money.
Bitcoin fulfils the three functions required to be a currency mentioned earlier. It is a medium of exchange because goods and services can be bought with it, it is a unit of account because every bitcoin is worth the same and it is a store of value because, despite its high volatility, its dollar price continues to rise.
“Bitcoin has no CEO, headquarters, marketing department, spokesperson or even website. It belongs to nobody but it’s for everybody.”
Not only does this ‘internet of money’ meet the three functions required to be a currency it also has additional features that currencies like the dollar and assets like gold do not.
- It’s censorship resistant because it’s decentralised and not owned by any entity or government
- It’s borderless because you can send it and bring it anywhere in the world for little to no cost
- It’s scarce because it’s governed by maths and there can only ever be 21 million bitcoins ever created
- It’s easily divisible because one bitcoin can be divided into 100 million pieces
- It’s durable because the bitcoin blockchain exists on thousands of computers all around the world meaning there is no central point of failure
- It’s based on quantitive hardening rather than fiat currency’s quantitive easing meaning the more you save the more value it accumulates
Why bitcoin could be bigger than the internet
Since the advent of the internet numerous industries have been transformed in its wake. Retail with Amazon, TV with Netflix, telecoms with VoIP, video with YouTube, dating with Tinder, publishing with WordPress and music with Spotify to name a few.
Industries that involve engaging with the public such as marketing, PR and politics have gone through dramatic change. Not by one specific internet platform or service but rather by people’s access to a variety of new communication channels allowing them to speak directly with one another or broadcast one to many.
Perhaps the internet’s biggest disruption of an industry so far has been with the news media or what we call the Fourth Estate. The collective of once influential institutions that could make or break political careers or help swing entire elections, is not the powerful tour de force as it once was.
In an era where the internet provides access to a global audience every individual can be their own media company providing an alternative view or perspective to the mainstream narrative. The result of this speaks for itself. With public trust at an all-time low coupled with a broken business model, the decline of the news media today has helped create a highly divided society without one unified narrative.
So what does this have to do with bitcoin? The long-winded point I’m making is this. If the internet can transform entire industries can the ‘internet of money’ transform not only the financial industry but the whole definition of what money is? If it can then we have reached hyperbitcoinization.
If the deflationary bitcoin is a better kind of money in every way compared with inflationary currencies why would people not gravitate towards it just like they did with newspaper to online news, CD to mp3 or film camera to digital camera? When the newer technology is easier to use and exponentially better it’s a natural transition. Like all new innovations, some people will naturally gravitate towards it early and others will be forced to out of necessity later.
So far, however, bitcoin isn’t ‘easier’ to use than regular currencies but each year it gets progressively more so. Much like the internet in the 1990s, only a small percentage of the world could get online because it required technical knowledge to do so. Today, almost the entire world has quick and easy access to the internet at the touch of their fingertips. It ‘just works’ and for bitcoin to succeed it too has to ‘just work’ in the eyes of the consumer.
If hyperbitcoinization is realised it would be to the tune of many trillions of dollars and would be the greatest transfer of wealth ever known. The types of scenarios – both good and bad – that could play out are unimaginable. After all, there is no bigger market than the money market and it’s one which has an effect on every other industry.
Money is the current that runs through almost every output humans produce. If you can change the entire concept of what money is then hyperbitcoinization would be, without doubt, the biggest disruption of all.