Byrne Hobart, a CoinDesk columnist, is an investor, consultant and writer in New York. His newsletter, The Diff (diff.substack.com), covers inflection points in finance and technology.
The most optimistic bitcoin investors are hodling out for one thing: the rapturous bitcoin rally known as hyperbitcoinization. The hyperbitcoinization thesis goes like this: Every saver in the world individuals, companies, financial institutions, central banks needs to own assets that maintain their purchasing power. If an asset, or the currency its denominated in, starts to lose purchasing power, this can set off a cascade of selling. And selling one currency means buying another. If the specific concern sellers have is that the supply of fiat money is unbounded, theyll look at currency-like assets with a relatively fixed supply: gold, perhaps fine art, or bitcoin.
Its a powerful narrative, and theres plenty of historical evidence. The list of currencies that have lost most or all of their value in a short time is lengthy. Today, Venezuela and Zimbabwe are experiencing hyperinflation; the Turkish lira has lost 60% of its value relative to the dollar in the last five years, while the Russian ruble has experienced several inflationary bouts since the fall of the USSR.
In the 1990s, the Asian Tigers (South Korea, Taiwan, the Philippines, Malaysia) saw their currency values collapse as financial bubbles in their markets unwound. Earlier, the Italian lira had high inflation before the euro (what is it about currencies called the lira?), while even the mighty dollar saw its value deteriorate rapidly after the collapse of the Bretton Woods agreements.
Theres a problem with this argument, though. Its true that fiat currencies have a disappointing tendency to eventually lose most or all of their value. But not all fiat currencies are created equal, and even the strenuous efforts of irresponsible spending and high-speed printing presses cant offset other forces.
Take the British pound, for example. It was the worlds preeminent reserve currency by the late-19th century. Central banks hoarded pounds and investors around the world bought pound-denominated assets to keep their money safe. The British government was able to issue perpetual securities, called consols, paying just 2.5% interest. By the 1920s, the U.S. was a larger economy, with a more developed banking system, and many investors had switched from pounds to dollars.
Ironically, the same factors Bitcoin advocates point to as evidence that the fiat system is broken high leverage and a financialized economy make it durable, too.
This caused the fall of the pound as a reserve currency but it took almost a generation.
The trouble with destabilizing reserve currencies is that demand for them is sticky because its partially a function of the amount of debt issued in the currency. A borrower who owes pounds (or dollars, yen or euros) is a future buyer of that currency. And currency owners today can bank on the demand to buy them in the future.
There were other factors in the pounds tenacious grip on the world financial system, which apply in interesting ways to the U.S. dollar. While Britain lost share of global manufacturing to the U.S. during the 19th century, and especially so in the early 20th, Britain still had a well-developed financial system. An over-financialized economy is not a good thing for most purposes, but one thing its great at is keeping demand for currency elevated. If you wanted to borrow large sums of money or engage in a complicated financial transaction, London banks were often the place where youd start.
The pound had another advantage: a captive set of buyers. Britains colonies kept their reserves in pounds, borrowed in pounds and, because they had close trade relationships with Britain, they priced most of their trade in pounds, too. Even after their colonies achieved formal independence, the close relationship and the monetary norms that went with it persisted. Even though the U.S. economy topped Britains in the late 19th century, the pound still constituted over half of global currency reserves until the 1950s.
Today, the U.S. is in a similar position. Our financial services sector is well-developed to the point of excess, but this means novel financial products are disproportionately likely to be priced in dollars. Large funding rounds, IPOs, buyouts and bond issues are in dollars by default. And the dollar is dominant in global trade not just between the U.S. and other countries, but between pairs of countries that dont have one of the top few currencies in the world. Commodity prices tend to be quoted in dollars, which encourages commodity producers to borrow in dollars and price their outsourced services in dollars, too.
The U.S. doesnt have something exactly like the British Empire in form, but the substance is pretty close. From 1945 onward, the U.S. was the de facto guarantor of open trade for Europe, the Middle East and East Asia. These countries couldnt necessarily defend themselves militarily and couldnt ensure free shipment of goods, but the U.S. could. This relationship was reflected in close economic ties, and sometimes monetary ones: Many Middle Eastern countries, most notably Saudi Arabia, peg their currency to the dollar. East Asian exporters accumulate dollar-denominated assets to keep their currencies cheap. Japan, for example, owns $1.26 trillion of U.S. Treasurys and China is not far behind with $1.07 trillion. Meanwhile, Taiwanese life insurers alone own 14% of long-term U.S. corporate bonds.
All this doesnt make it impossible for bitcoin to appreciate over the long term, but it makes hyperbitcoinization much less hyper than one might expect. Hyperinflationary episodes happen, and they tend to feed on themselves, but they dont happen with reserve currencies. Borrowers act as a brake on high inflation. Inflation represents a general preference for goods, services and hard assets over cash, but anyone who has borrowed money has a legal obligation to get cash, often in exchange for the same sorts of goods, services and assets. As the pound example shows, it can take a very long time for that momentum to unwind. A reserve currency is a No True Scotsman argument run in reverse: Once a currency qualifies as a reserve asset, it can withstand a lot of bad policy before that status flips.
Ironically, the same factors bitcoin advocates point to as evidence the fiat system is broken high leverage and a financialized economy make it durable, too. With so many forces arrayed in favor of the status quo, even the inevitable can take a long time.
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.
- Would Bitcoin suffer if the lead maintainers were kidnapped by aliens? - Cointelegraph - September 12th, 2020
- New DeFi Project Xfinance(XFI) ILO Presale Will Start Today | Press release Bitcoin News - Bitcoin News - September 12th, 2020
- Working in the Cryptocurrency Industry as a Woman | Op-Ed Bitcoin News - Bitcoin News - September 12th, 2020
- On-chain data signals increasing Bitcoin activity But theres a catch - Cointelegraph - September 10th, 2020
- Bitcoin and cryptocurrency are no hedge for inflation - Cointelegraph - September 10th, 2020
- TOP 5 Popular Cryptocurrencies Other than Bitcoin - Analytics Insight - September 10th, 2020
- 'High' Severity Bug in Bitcoin Software Revealed 2 Years After Fix - CoinDesk - Coindesk - September 10th, 2020
- Number of Bitcoin Addresses Holding at Least 1 BTC Hits New ATH - Ethereum World News - September 10th, 2020
- The adjusted on-chain volume of Bitcoin and Ethereum hit a 30-month high in August - Yahoo Finance - September 10th, 2020
- Crypto Borrowing: Here Are Seven of the Best Interest Rates on the Market | Finance - Bitcoin News - September 10th, 2020
- 'Massive moment' as first ever DLC smart contract deployed on the Bitcoin mainnet - Cointelegraph - September 10th, 2020
- Argentina Government Refuses to Pay $4M Bitcoin Ransom to Hackers Who Paralyzed Its Borders | News - Bitcoin News - September 10th, 2020
- Square Aims to Stop Patent Trolls From Killing Bitcoin Adoption - Decrypt - September 10th, 2020
- How bitcoin met the real world in Africa - NBC News - September 8th, 2020
- Schiff buys more Bitcoin But theres a twist - Cointelegraph - September 8th, 2020
- If A Second Stimulus Check Is Coming, Using It To Buy Bitcoin Could Be A Disaster - Forbes - September 8th, 2020
- Bitcoin Is Braced For A Massive Week - Forbes - September 8th, 2020
- $700 Million Worth of Synthetic Bitcoin Is Circulating on the Ethereum Blockchain - Bitcoin News - September 8th, 2020
- Bitcoin Is Taking Its Place on the Global Monetary Stage - ETF Trends - September 8th, 2020
- A new phase in Bitcoins evolution - City Index - September 8th, 2020
- Bitcoin - The Future of Digital Currencies - Nairametrics - September 8th, 2020
- Bitcoin and Trons TRX Weekly Technical Analysis September 7th, 2020 - Yahoo Finance - September 8th, 2020
- If Bitcoin Crashes Below $10,000 Its All OverHeres Why - Forbes - September 4th, 2020
- Can You Have Your Bitcoin And Eat It Too? - Forbes - September 4th, 2020
- First Mover: As Bitcoin Falls for Second Day, Long-Term Holders Probably Won't Care - CoinDesk - CoinDesk - September 4th, 2020
- First Mover: Buying Bitcoin's Dip, Betting Against Tether and Weighing the Jobs Report - CoinDesk - CoinDesk - September 4th, 2020
- Private Capital And Institutions Are Piling Into Bitcoin And Other Digital Assets But You Need To Know Where To Look - Forbes - September 4th, 2020
- Bitcoin market index back to fear on 91st anniversary of 1929 crash - Cointelegraph - September 4th, 2020
- Bitcoin Will Be Accepted for Tax Payments in Swiss Canton Zug Next Year | Taxes - Bitcoin News - September 4th, 2020
- Why Fusion's DCRM is The Best Option for DeFi Users | Sponsored Bitcoin News - Bitcoin News - September 4th, 2020
- Tax Implications For Donations Of Bitcoin - Forbes - September 4th, 2020
- Wasabi Wallet Patches Flaw That Could Have Thwarted Bitcoin Privacy Feature - CoinDesk - Coindesk - September 4th, 2020
- 3rd Bitcoin SV Hackathon Finalists Announced to Compete for USD $100,000 - AiThority - September 4th, 2020
- Ethereum Is Eating Bitcoin - Forbes - September 2nd, 2020
- Ethereum Soars 10% Overnight Implications For Bitcoin - Forbes - September 2nd, 2020
- A Radical New Crypto Just Blew Past The Bitcoin Price All-Time HighUp A Shocking 3,500% In Just One Month - Forbes - September 2nd, 2020
- The History of Bitcoin - WTOP - September 2nd, 2020
- Major Swiss Insurer Adds Bitcoin and Ether Payments | News - Bitcoin News - September 2nd, 2020
- Max Keiser thinks Warren Buffett will move to Bitcoin soon - Cointelegraph - September 2nd, 2020
- Bitcoin Rally Fails After Breaking Through $12,000 - Forbes - September 2nd, 2020
- Protection Over Profit: What Early Mining Patterns Suggest About Bitcoins Inventor - CoinDesk - CoinDesk - September 2nd, 2020
- Warren Buffett Shifts Funds From US Amid Inflation Fears, Bitcoin's New All-Time High Expected | News - Bitcoin News - September 2nd, 2020
- 3rd Bitcoin SV Hackathon Finalists announced to compete for USD $100,000 - PRNewswire - September 2nd, 2020
- China Is No Threat To Bitcoin, Promises Foundry CEO After $100 Million Bitcoin Mining Bet - Forbes - September 2nd, 2020
- Elon Musk Confirms Serious Russian Bitcoin Ransomware Attack On Tesla, Foiled By The FBI - Forbes - September 2nd, 2020
- Will Bitcoin Dump If Stocks Have Another COVID-19-Scale Crash? - Forbes - September 2nd, 2020
- How the Bitcoin Blockchain Is Being Used to Safeguard Nuclear Power Stations - CoinDesk - CoinDesk - September 2nd, 2020
- Bitcoin Will Break Out This Year, Says Devere CEO | News - Bitcoin News - September 2nd, 2020
- Fidelity Is A 1,000 Pound Bitcoin Gorilla In The Making - Forbes - September 2nd, 2020
- Venezuela's Bitcoin Use Soars Amid Hyperinflation: 3rd on Global Crypto Adoption Index | News - Bitcoin News - September 2nd, 2020
- Coinsilium backs RSK as Bitcoin and DeFi rocket (COIN) - Value The Markets - September 2nd, 2020
- Is Bitcoin About to Explode? - TheStreet - September 2nd, 2020
- 3.5 Million+ Crypto Wallets Downloaded in July, Active Users up 110% in the Year | Wallets - Bitcoin News - September 2nd, 2020
- Russia Blocks Cryptocurrency Websites Ahead of Regulation | News Bitcoin News - Bitcoin News - September 2nd, 2020
- Digital Dollar To Be In Competition With Bitcoin - Forbes - August 22nd, 2020
- Bitcoin and Economic Uncertainty: Patience Is the Name of the Game - Cointelegraph - August 22nd, 2020
- Market Wrap: Bitcoin Dips to $11.6K, ETH Options Predict Price Below $400 by End of Year - CoinDesk - CoinDesk - August 22nd, 2020
- What Top US Politicians and POTUS Election Candidates Think of Bitcoin - Cointelegraph - August 22nd, 2020
- Bitcoin Macro Trend Unaffected by Chinese Investors $50B Tether Exodus - Cointelegraph - August 22nd, 2020
- YFI Price Exceeds Bitcoin Price at $15K But Theres a Catch - Cointelegraph - August 22nd, 2020
- Bitcoins Bull Run Is Slowing Pullback Now Expected - CoinDesk - CoinDesk - August 22nd, 2020
- Bitcoin Has Lost Its Way: Heres How to Return to Cryptos Subversive Roots - CoinDesk - CoinDesk - August 22nd, 2020
- John McAfee Ditches Ghost Crypto Project: He Says It Will Fail | News - Bitcoin News - August 22nd, 2020
- Dust Attacks Make a Mess in Bitcoin Wallets, but There Could Be a Fix - CoinDesk - CoinDesk - August 22nd, 2020
- 12 Crypto Firms Authorized to Operate License-Free in Hawaii for Two Years | Regulation - Bitcoin News - August 22nd, 2020
- Bitcoin Ransomware and Remote Working: What the Future Holds - Cointelegraph - August 22nd, 2020
- China's Bitcoin Mining Industry Impacted the Most This Year, Says Report - Bitcoin News - August 22nd, 2020
- Bitcoin and Tesla: America's Most Loved Assets on Tradingview | News - Bitcoin News - August 16th, 2020
- Bitcoin (BTC) has a 30% Chance of Hitting $17k by EOY - Crypto Analyst - Ethereum World News - August 16th, 2020
- Bitcoin Price Keeps Rejecting $12K Heres What Can Happen to BTC - Cointelegraph - August 16th, 2020
- U.S. Seizes Bitcoin Said to Be Used to Finance Terrorist Groups - The New York Times - August 16th, 2020
- With All Eyes On Bitcoin, Another Crypto Is Up 500% In The Last YearAnd Its Still Soaring - Forbes - August 16th, 2020
- What Venezuelans Think About Bitcoin and American Media - CoinDesk - CoinDesk - August 16th, 2020
- Surging Chainlink Pushes Bitcoin Cash Out Of The Crypto Top Five As Wild Value Tops $6 Billion - Forbes - August 16th, 2020
- Coinbase to Offer Bitcoin-Backed Loans to US Customers - CoinDesk - CoinDesk - August 16th, 2020
- PSF Token Invokes the First Coin-Age Staking Protocol on Bitcoin Cash | Technology - Bitcoin News - August 16th, 2020
- Bitcoin.com Wallet Reveals USDT Support - Users Can Swap and Store SLP-Based Tether | Promoted - Bitcoin News - August 16th, 2020
- Is This The Real Reason Behind Bitcoins Huge Weekend Flash Crash? - Forbes - August 4th, 2020
- First Mover: As Fed Nears Inflation Rubicon, Analysts See $50K Bitcoin in Play - CoinDesk - CoinDesk - August 4th, 2020
- TUM team finds Bitcoin accounts for 2/3 of total energy consumption of cryptocurrencies - Green Car Congress - August 4th, 2020