Hyperbitcoinization is a voluntary transition from an inferior currency to a superior one…
…Hyperbitcoinization should be accompanied by a rapid improvement in productivity and wealth…
…Hyperbitcoinization will probably be a confusing time for everyone, like a second adolescence. However, once it is over, no one will be able to imagine how we got by with the earlier system.
– Daniel Krawisz, Hyperbitcoinization
Hyperbitcoinization is an old term in Bitcoin circles – it was first coined by Daniel Krawisz in 2014, and has always been a source of much speculation, both financial and intellectual. For those unacquainted with the term, hyperbitcoinization is the process of replacing fiat currency with Bitcoin. Daniel argues that, similarly to hyperinflation, once this process starts it will be impossible to stop and events will happen rapidly in a very short timeframe, after which there will be no going back to the previous monetary system.
This text isn’t about how hyperbitcoinization occurs or how probable it is. If you are curious about those topics, I recommend reading these pieces:
In this article, I look beyond the road to hyperbitcoinization and analyze the likely consequences of a hyperbitcoinized world. To appreciate how major an impact hyperbitcoinization would have on our society, I divide its effects into two eras:
Short term: the beginnings of hyperbitcoinization, where only a handful of countries have officially adopted Bitcoin as their legal tender. Individuals and companies with an understanding of what’s to come are already living on a Bitcoin standard. I believe that in 2022, we have a few years before this era truly begins.
Long term: the vast majority of the world is hyperbitcoinized, fiat remains a curious historical footnote, perhaps with a couple of backward nations still clinging to it.
The short-term impacts of hyperbitcoinization
It took 12 years for the first country to embark on its way to hyperbitcoinization. It will take probably one or two years before the second country joins in. The third will probably follow shortly after. Then we’ll stop counting, as small countries that have nothing to lose will quickly join in in the fears of being left behind again.
The first major effect of hyperbitcoinization will be a new form of currency substitution: instead of the 20th century dollarization, we will witness bitcoinization happening across the globe in the 21st century. Accompanying this development, fiat currencies will quickly lose trust – both the obscure little currencies like the Lebanese Pound that is currently hyperinflating, as well as the likes of the US dollar, which suddenly won’t be seen as the world’s most sound currency anymore. The dollar will lose this status because of two mutually reinforcing causes: a monetary policy of permanent inflation (and the resulting erosion of its purchasing power), and the obvious lifeboat of Bitcoin, with a monetary policy that is the dollar’s very opposite.
The second major effect of this era will be a loss of monetary premium in substitute instruments that currently stand-in for the store of value quality that fiat money lacks. Gold, real estate, bonds, stocks – these instruments have their use in the economy, but they won’t be necessary as a store of value once we find ourselves under a sound money standard. Here’s a quick recap of how these instruments fare against Bitcoin:
- Gold: has its use in electronics, industry, and jewelry; has a strong Lindy effect going for it, but has inferior monetary qualities when compared with Bitcoin. It cannot be teleported across the globe, requires trusted third parties for transactions, verification, and safekeeping at scale.
- Real estate: the direct beneficiary of the Cantillon effect (which will evaporate in a hyperbitcoinized world); one of the most taxable and confiscatable property types; illiquid in short time frames; value heavily dependent on monetary policy, jurisdiction, local politics, and development.
- Bonds: basically an already-nuked instrument that became a victim of the state’s monetary policy: with real yields deep below inflation, there is no economic reason for holding bonds long-term and only those who speculate on short-term movements or are mandated to hold this instrument do so (follow Greg Foss for more insights on the bond market).
- Stocks: another direct beneficiary of the Cantillon effect; stocks will keep on rising as long as central banks can keep interest rates at zero; ending the Cantillon effect (due to the evaporation of fiat’s trustworthiness and value) will bring stocks closer to their true market valuation; over the long term, stocks should generate profits above the appreciation of the monetary unit, with corresponding risks and no bailouts in the form of cheap credit and quantitative easing.
This is to say that none of these instruments will disappear, they will just lose their store-of-value premium, which will gradually accrue to sound money – Bitcoin. Bitcoin wins over these instruments because it is not reliant on any single jurisdiction or monetary authority, can be verified and protected independently of any trusted third parties, and doesn’t rely on the Cantillon effect to increase in value. And most importantly, it’s not a speculative or investment instrument, but a monetary good, a savings instrument.
The long-term impacts of hyperbitcoinization
The conclusion of the fiat experiment will bring about tremendous changes to our society. In a world where DCA is simply called saving and everybody accounts in sats, we can expect the following developments.
The end of perpetual inflation. The fiat monetary policy is necessarily one of perpetual inflation – money is created at an increasing pace and prices rise continually, even though productivity increases due to technological developments should drive costs and prices down. With a fixed money supply, growth deflation will take place and the purchasing power of our money will gradually increase over time. But this won’t trigger a “deflation spiral”, just as there never manifested any spiralling crisis in high-growth industries such as electronics. If you’re curious about the nature of growth deflation and why preventing it is a disastrous policy, check out Jeff Booth’s The Price of Tomorrow: Why Deflation is the Key to an Abundant Future.
Perpetual inflation under the fiat standard. WTF happened in 1971, right? Shaded areas are recessions – we’ll get back to this later. Source: Fred.
No investment bubbles. What do all the major investment bubbles in history have in common? Easy money and cheap credit. The South Sea Bubble, the Panic of 1819, The Roaring Twenties, The Dot Com Bubble, The Subprime Bubble – all these bubbles have all been massively fuelled by artificially cheap credit, and often even direct government and/or central bank involvement. There will be badly placed investments and companies going bankrupt even under the sound money standard, of course – but they will not overgrow to economy-halting crises anymore, since all the losses will have to be carried by the hapless investors themselves and the monetary policy won’t inflate the malinvestments into the balloons we witness every decade now.
The end of the boom/bust cycle. The inception of the Fed in 1913 was preceded by a propagandist campaign calling for a monetary authority that would end the boom/bust cycle (for more on the background of the founding of the Fed, consult the amazing book The Creature from Jekyll Island: A Second Look at the Federal Reserve). In fact, the very opposite happened and, since the Fed was created, the business cycle became a common occurrence. This is because the central banks’ meddling in the money supply and interest rates is the very reason for the cycle, as adherents of the Austrian school of economics have been saying for the better part of a century now.
In the 108 years since the Fed was created, there have been 20 recessions in the United States (see the shaded areas in the Consumer price index chart above). Recessions may happen under the sound money standard, but without central banks and government intervention, they would be quickly over and soon forgotten, just as the early 1920s recession was (compared to the 1929-1939 depression, which was prolonged by attempts to centrally plan the economy, as Murray Rothbard analyzes in his masterpiece America’s Great Depression).
No Cantillon effect. When money is created within the fiat system, it costs almost nothing to produce. The state and the financial sector – i.e. those closest to the money spigot – are the first recipients of new money, usually through credit with very favorable rates. As these first recipients spend their new money, price inflation and asset valuations rise, with goods and assets becoming less affordable to everyone else. The Cantillon effect is the most insidious way to redistribute wealth from the working classes to those closest to the money spigot by devaluing savings and allowing shareholders to benefit from ballooning valuations.
Bitcoin prevents the emergence of the Cantillon effect because miners need to spend real resources to issue new monetary units; they cannot change Bitcoin’s monetary policy for their own benefit and that of their friends. Without fiat, the Cantillon effect dies.
The elimination of FX frictions. There are currently 180 currencies circulating worldwide. The friction caused by this monetary Babel is so huge that the FX market is considered the world’s largest market, with around 2.4 quadrillion in annual volume – yet this market didn’t even exist a hundred years ago. The need to switch between currencies when conducting cross-border commerce brings about huge costs and risks (which can be mitigated by hedging, meaning more costs).
In the pre-fiat era, there were many currencies, but one single money: gold. Under the gold standard, the exchange rates between national currencies like dollars or marks were based on the ratio of their gold/silver content. The need for FX markets arose only when pure “free-floating” fiat was introduced over the course of the 20th century. Throughout history, we can observe the tendency to converge on a single monetary medium. Hyperbitcoinization will end the current chaos and return the order of a global monetary standard, eliminating the artificial friction of exchange rates.
The role of the state is diminished. Fiat allows the state to chronically spend more than it takes in via taxes, mostly because of the Cantillon effect and the permanent demand for government bonds by the financial institutions and the central bank. Over the past 50 years, the US budget has only been in surplus on five occasions, and public debt recently crossed 30 trillion dollars. The calamitous scale of the 20th century’s world wars was a direct result of the ease of money creation – in previous conflicts, governments had to resort to unpopular taxation, whereas after 1913, printing presses sucked the purchasing power out of the citizens’ pockets with ease. This lesson wasn’t lost on the totalitarian governments that arose after each of the wars, as the power of the totalitarian regimes was greatly enhanced by the control of the printing press. Without the inflation tax and the ability to perform monetary “reforms”, the state would have a much harder time justifying its bloated expenses, as each satoshi spent would have to be directly paid for by the working man.
Overall decrease in time preference. Time preference is an oft-mentioned economic term among bitcoiners. In simple terms, time preference corresponds to our valuation of the future over the present. People and societies with high time preference choose to focus on satisfying their present needs, whereas people and societies with low time preference forego current pleasure for future prosperity. Fiat currency, with its perpetual inflation, drives time preference higher as we are motivated to spend our money before it loses its purchasing power.
Sound money like Bitcoin increases in purchasing power over time, driving the time preference lower. Austrian economist Hans-Hermann Hoppe describes low time preference as the “process of civilization”, and it’s true that sound money correlates with society’s orientation towards future – humanity’s peak civilizations such as the Roman Republic, Byzantine Empire, Venetian Republic, Florentine Republic, British Empire; all of these were built on the basis of sound money, and correspondingly died when they undertook the path of monetary debasement. Bitcoin as the global monetary standard has the potential to reorient our focus on the future on a scale yet unseen.
Some bitcoiners have a very low time preference, indeed.
From the debt economy to the savings economy. The current monetary regime revolves around debt: new money enters circulation via a credit-creation process, interest rate manipulation incentivizes going into ever more debt, and perpetual inflation is required to eat the debt away so that the state doesn’t default. Though fiat economists argue that this is the only way our economies can function, there is nothing in the nature of human action and interaction that would require ever-inflating debt levels for us to prosper. Investment requires capital, and that capital doesn’t have to be borrowed; it can be saved up, either by the entrepreneur himself or a third-party investor. Also let’s not forget that the biggest loan we undertake in life is mortgage: a loan for real estate, an asset class that is heavily inflated due to its substitute store of value function. Under the Bitcoin standard, savings would appreciate over time, while housing would become much more affordable.
If it sounds too good to be true…
You might get the impression that this is just a load of hopium and the future isn’t so rosy. Well, I disagree – not just because I want to believe (of course I do), but mostly because I like to study the history of economic progress. Over the past couple of centuries, we have made tremendous leaps in prosperity, and compared to historical standards, we are currently living in a world that our ancestors would consider a paradise – if you don’t believe me, just read Johann Norberg’s Progress. Sound money is simply the catalyst we need to move on to the next civilizational level. This is one of the exceptions of “if it sounds too good to be true, it likely isn’t” – we humans have a tendency to improve our lot in an exponential way.
That said, the road to hyperbitcoinization sure will be messy and the establishment (the state and all its allies) will protect its monopoly. We will experience false flag attacks, confiscations, unjust taxation, pervasive surveillance, and attempts at regulatory capture. If we want to get there unscathed, we need to use the proper tools. Trezor, BTCPay Server, Bisq, Muun, and many other open-source tools are at our disposal – use them and steer clear of the centralized traps such as KYC exchanges and neobanks promising yield on your bitcoin. Your grandchildren will thank you one day.