Hyperbitcoinization is coming. Yes, according to a group of 42 cryptocurrency executives and researchers, Bitcoin will one day replace fiat currency, with 54% of this panel predicting that this will happen by 2050 at the latest (if not sooner).
This is an extremely bullish prediction, with the implication that, if bitcoin replaces a significant number of fiat currencies, its price will have skyrocketed.
Skeptics can immediately dismiss such an exuberant prediction, but the survey in question includes input from 12 researchers from recognized universities, suggesting that it is not based on wishful thinking.
However, as encouraging as the survey conclusions may be for some, it is this author’s opinion that it is highly unlikely that bitcoin will ever replace fiat currencies.
While some governments might end up adopting bitcoin as a reserve asset (i.e. as a complement to gold), it seems hard to believe that any large nation-state will gladly adopt it as its main or sole currency. Because doing so would have a number of very undesirable consequences from the point of view of governments, from making debt increasingly expensive to curbing consumption and making business cycles more extreme.
When the Moon? What about hyperbitcoinization?
A study published by Finder.com in 2021 produced some interesting conclusions regarding the prospect of hyperbitcoinization.
61% said bitcoin (which was worth $39,000 at the time of the study) was undervalued, with the average price forecast for the end of 2021 reaching $66,284. It turns out they were more or less correct with Bitcoin hitting $69,000 by November in 2021.
Even more interestingly, the average panel forecast for the end of 2025 is $318,417, while the average for the end of 2030 is $4,287,591 (although the median forecast for this date is only $470,000).
As for opinions on hyperbitcoinization — the process of replacing bitcoins with one or more fiat currencies — 54% of the 42 speakers believed that at some point it would happen by 2050, with this percentage fairly evenly divided as to when exactly.
As the chart above illustrates, 5% of the panel (or rather, two people) think that hyperbitcoinization will happen within four years. 10% (or four people) think it will happen in less than nine years, while 15% (or six people) think it will happen in about 14 years. The largest percentage (20%) of true believers think it will happen in about 20 years, while some suspect it will be much more distant.
Referring to El Salvador’s adoption of bitcoin as legal tender, Amber CEO Aleks Svetsk believes it could set a trend that could eventually lead to some form of hyperbitcoinization.
“The momentum will only increase. But the beauty is also that these broken nations will transform faster than the big nations as Bitcoin undermines the nation state model,” he said.
Similarly, Coinmama CEO Sagi Bakshi also suspects that El Salvador could end up being a pioneer.
“All eyes are on El Salvador now – some mocking, others crossing their fingers. I’m sure their use case will be a great example of innovation and rapid penetration. Financial services will be built on a public ledger and opponents will be surprised,” he said.
Why governments will resist Bitcoin
However, while a good portion of the survey panel was optimistic, it should be noted that 44% of the panel said hyperbitcoinization will never happen.
Unlike the CEOs of the gung-ho industry, it was largely researchers – who have far less financial interest in bitcoin’s success – who supported this view.
“I can imagine a world where Bitcoin is used by populist governments to challenge and undermine the dominant economic forces in our world, but more as a bargaining tool than because they are true believers,” said Dr. Paul J. Ennis, who is an assistant professor at University College Dublin’s School of Business and whose research currently focuses on cryptocurrency.
As for this author, this is more or less the correct position to take. Hyperbitcoinization in its narrowest sense – bitcoin replacing national fiat currencies – will almost certainly never happen.
On the one hand, governments will never willingly replace their fiat currencies with bitcoin. And for various reasons.
First, most governments finance their spending on public services (and war) through debt financing, which means they sell bonds (they also raise taxes, but let’s leave that aside for now). For example, the British government sold over £500 billion (about $681 billion) in bonds in 2020, while the U.S. government owes $1.1 trillion to China alone through bond sales.
Imagine if such debt were denominated in bitcoin. Knowing that BTC has a fixed supply and is a deflationary currency, it could potentially make $1 trillion in debt even more insanely expensive in just a few years. The same goes for corporate bonds, which reached $1.3 trillion in the U.S. in 2020.
The subject of corporate bonds touches on another issue: by making credit more expensive, bitcoin would potentially limit economic growth, making it harder for companies to repay loans. Copious amounts of research have long shown that rising interest rates (and lending in bitcoin would equate to imposing a high interest rate) results in more business failures and bankruptcies. One possible way out would be to actually compensate for bitcoin’s deflation by adding a negative interest rate, so that borrowers would actually have to repay a little less BTC than they receive. But would creditors really be willing to accept less bitcoin than they have lent, particularly when they could just sit on their bitcoin and let it appreciate?
And one of the other unfortunate consequences of deflationary currency like bitcoin is that it would likely weaken consumption, something that has been shown (in Japan’s case) to cause economic stagnation.
Indeed, they
can take a bad hit, but inflationary currencies have their uses and benefits, and stimulating spending – and therefore job creation – is one of their main virtues. Similarly, the ability of governments to print money and spend more during economic crises (as with Covid-19) is also quite important with regard to smoothing out business cycles, with research showing that monetary shocks (i.e. lack of money) during the gold standard era often exacerbated the severity and duration of contractions.
Reserves, not currencies
Basically, there are many reasons why most nation-states would not want to replace their existing fiat currencies with bitcoin.
On the other hand, proponents of hyperbitcoinization might argue that the process of bitcoin becoming the dominant form of currency will have nothing to do with governments, which may even become irrelevant or obsolete by the time BTC’s rise is on the rise. However, the disappearance of governments and nation-states (as Aleks Svetski’s comments implied) is such a speculative, remote and alien outcome, that it would be very difficult to predict, among other things, whether bitcoin will become the dominant currency in such a scenario.
But although the prospect of hyperbitcoinization is unlikely, it is also the opinion of this author that we may eventually see numerous central banks and/or governments adopting bitcoin as reserve assets of some kind. Assuming bitcoin continues to be bought and invested by major institutions and corporations, its value will sooner or later increase to a level where many governments may find it difficult to resist owning bitcoin in addition to gold.
This is basically what Morpher CEO Martin Fröhler predicts, although he has gone so far as to suggest that bitcoin will replace gold.
“The next half-life cycle will see greater adoption of Bitcoin as legal tender by developing countries, and by 2030, Bitcoin will have replaced gold as a global reserve asset,” he said.
And from the point of view of current bitcoin holders, this should be almost as good as hyperbitcoinization, since it will imply a very high price.
