The Roads To Hyperbitcoinization: Describing The ‘Transition Agents’ Bringing Us Financial Freedom


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The Roads To Hyperbitcoinization: Describing The ‘Transition Agents’ Bringing Us Financial Freedom

These bottom-up “transition agents,” from private business to the freedom ladder, will be what drives us all to hyperbitcoinization.

This article is the second part in a series where we outline the views and predictions made by the Bitcoin community concerning the prospect of hyperbitcoinization. In our analysis, we highlight “transition agents”: main players, groups of players or institutions that could accelerate the transition to a Bitcoin world. For each topic, we base our arguments on the references collected, and if possible, present data that aims to assess the probability of this outcome.

The first article described top-down scenarios initiated by institutional agents or governments whose influence is expected to trickle down to a wider audience. We identified monetary inflation and the rollout of central bank digital currencies (CBDCs) as probable scenarios initiated by central banks, while bitcoin hoarding, a rise in cross-border payments in bitcoin, bitcoin as a legal tender and even the advent of a hash war were identified as scenarios likely to induce government acceptance of Bitcoin. In view of the recent pronouncement by El Salvador, it appears that political agendas in South America are in a state of flux, in particular in countries with national elections scheduled for 2021 and 2022.

This second article aims at understanding of bottom-up type initiatives carried out by businesses, communities and individuals.

Bottom-Up Scenarios

We identified several notable hyperbitcoinization scenarios that emanate from two large groups of actors. The first group represents private-sphere-led initiatives brought together by established firms and startups. The second group is composed of grassroots initiatives mostly impulsed by the Bitcoin community whose main purpose is to educate and help new users to be onboarded. The article begins with a discussion of the initiatives driven by these two groups before turning to an examination of emerging individual behaviors. In this article, we have followed the principle of methodological individualism, well-known in the Austrian school of economics, which consists in explaining large-scale social phenomena based on subjective individual actions and motivations.

Private Sphere

Figure one depicts scenarios initiated by private actors that could — intentionally or unintentionally — set off a chain of events driving to hyperbitcoinization.

Figure one: Chain of events driven by private actors.

Business Adoption

Since inception, Bitcoin has demonstrated that it offers a wide variety of benefits to users. Its value proposition as a safe haven for individuals is without question one of its key enduring narratives. In August 2019, the world was surprised when MicroStrategy (MSTR), a NASDAQ-listed public technology company, announced that it was converting part of its cash reserves into bitcoin. Figure two depicts publicly-traded companies that reported owning bitcoin on their balance sheets or have converted a fraction of their cash reserves to bitcoin over time.

Figure two: Mapping of U.S.-based public companies owning bitcoin (Q2 2021). Source: cryptotreasuries.org.

To date, we can divide this trend into four distinct areas:

  • Quadrant I is composed of early-adopter companies that have held bitcoin for several years. It includes Bitcoin mining companies (GLXY, MARA, RIOT) that, historically, have bet on the long-term appreciation of the asset. As they grow, these companies will naturally move into Quadrant II.
  • Quadrant II is territory personified by MicroStrategy, which has suddenly converted a large part of its reserves denominated in USD into bitcoin and keeps on purchasing more bitcoin recurrently. The company value seems to be strongly correlated with its bitcoin holdings (60%).
  • Quadrant III contains the innovators: companies like Tesla and Square (now Block) that have converted a relatively small fraction of their reserves into bitcoin and may increase their exposure in future.
  • Quadrant IV is probably not reachable for most companies. It would imply large companies with valuation exceeding $100 billion getting more than 50% of their reserve in bitcoin. If it happens, the amount of capital allocated into bitcoin will approximate trillions of dollars.

Since the MicroStrategy announcement, many other companies have started to display an interest in Bitcoin, and we can expect to see more of these kinds of initiatives appearing over the coming months once decision-makers have weighed their choices.

If hyperbitcoinization comes to fruition, the revenues, costs, profits and valuations of all companies could be accounted for in bitcoin (Mimesis Capital and Burnett), and most valuable companies would be the ones holding the largest chunks of bitcoin on their balance sheet.

Private Coin

When Meta (formerly Facebook) announced in 2019 that it would be launching a new digital currency, Diem (originally called “Libra”), the move caught governments and financial institutions alike off-guard. Diem’s stable value was to be derived from a basket of fiat currencies (U.S. dollar, euro, Japanese yen, British pound and Singaporean dollar) that would allow any Facebook user to send money as easily and intuitively as sending a message.

Although an appealing idea in many ways, concerns were raised in some quarters about trusting a company that feeds on user data. Some feared Diem would embody the worst of monies and data privacy practices. On the other hand, the launch of a private digital currency like diem may serve to familiarize large numbers of users with this emerging technology and thereby act as an on-ramp to broader Bitcoin adoption. As users get acquainted with digital currencies, they will develop an understanding of bitcoin as a scarce, censorship-resistant and decentralized digital money.

10x Factor

Bitcoin is often considered a better form of money because it combines significant improvements in terms of portability, divisibility or fungibility when compared to both past and present forms of monies, along with bringing radical disruption in terms of resistance to censorship and fixed supply. One aspect that remains underexplored is transaction costs on the economy.

Over the centuries, people have cooperated to minimize transaction costs and produce more efficiently what they are unable to produce individually. The theory of the firm by Ronald Coase describes the relationship between internal and external costs. 

Figure three: Impact of transaction costs on dynamics of growth. Source: Wikipedia.

When a firm’s external transaction costs are higher than its internal transaction costs, the company will grow. If the external transaction costs are lower than the internal transaction costs the company will downsize by outsourcing, for example.

Applying this theory to the banking sector, we can project that the Bitcoin protocol is likely to capture a significant portion of the banking industry value proposition, and it is not hard to imagine that it could probably capture it entirely once the Bitcoin stack becomes a more tangible reality (see figure three). Over time, we can expect the value created on top of the Bitcoin stack to first capture the value of the financial industry, and then surpass it.

If the transaction costs incurred by Bitcoin users are lower than transactions enabled by conventional payments rails, demand will shift to the cheaper channel. Following Brexit, Visa and Mastercard increased their interchange fees by almost 1%, squeezing merchants’ bottom lines even further. This has also occurred in Colombia, where merchants stopped using debit and credit cards to avoid the excessive fees.

Elsewhere, merchants who want to reduce interchange and swipe fees, may also consider other payment options such as the Lightning Network as a means of reducing costs. Payment service providers risk entering a death spiral initiated by a shrinking customer base placing pressure on profit margins and ultimately rendering their services less competitive. In the context of increasing compliance costs in the banking and payment industries, the likelihood of this scenario cannot be ignored.

Transaction costs represent just one of several key aspects in the battle between established companies and Bitcoin-native services. In terms of remittances, in a recent research article, Bitrefill found that convenience and speed were as important — if not more so — than cost for some customer segments. Looking at the sophisticated process of sending remittances in Nigeria, they determined that the entire process would be reduced to 20 to 30 minutes from the several days it typically takes to send conventional cash-based remittances. Even if 30 minutes sounds like a long and painful experience in today’s financial world, it represents a ten-fold gain compared to cash-based remittances.

Even if we could argue that Bitcoin doesn’t exhibit yet the same number of transactions as large payment service providers, the payment infrastructure has grown at a rapid pace to the point of surpassing PayPal in terms of volume of transactions in 2021 and to present a viable alternative to existing payment rails (see figure four).

Figure four: Volumes of transactions. Source: blockdata.tech.

This adoption is illustrated by the increasing number of Bitcoin transactions observed in Nigeria. According to Bernard Parah, CEO of Bitnob, the transaction volume observed in Nigeria is driven primarily by businesses and commerce. Domestic controls on capital imposed by the Nigerian government considerably limit the capacities of individuals and companies to trade internationally. Lacking access to U.S. dollars, a mechanical company wanting to buy spare parts from China, for example, would not be able to find a seller because no one would accept the naira as a form of payment. The use of Bitcoin — either directly or through a third party who can pay a prospective seller in yuan — creates a credible alternative means of payment that thereby opens access to the global marketplace for our Nigerian mechanical company.

These ten-fold factor examples highlight the role of transaction costs, but this is not to downplay how ecosystem startups also need to pay attention to transaction reliability and to the overall user experience, especially concerning self-custody services that differentiate from custodial services and their onboarding processes dictated by regulation and compliance.

Broader Public Attention

Long seen as the ultimate safe haven in the crypto world, bitcoin is still finding its way as a medium of exchange.

While, in theory, whales and original gangsters (OGs) have had enough time to accumulate significant portions of bitcoin, the purchasing capacity of newcomers is limited by current price. The accumulation of satoshis is therefore the only option for those wishing to become familiar with this new asset class. Programmed regular purchases such as dollar-cost averaging (DCA) or loyalty programs offering cashbacks in satoshis are two options for earning bitcoin that are gaining in popularity.

The progressive integration of Bitcoin services into social networking and e-commerce platforms — or even games for which frequent microtransactions are familiar experience — could have the potential to onboard a large, digitally-savvy customer base in a short period of time.

Figure five: User base of top social media firms, e-commerce sites and games. Source: Statista, Alibaba, EBay, Wikipedia, estimates.

Big tech companies already offer services to several hundred million or even billions of people worldwide (figure five). If any of these companies were to start accepting bitcoin as a means of payment, this would immediately trigger interest in the technology from a population that had little to no prior exposure to cryptocurrencies. Twitter’s announcement that it had developed a Lightning Network tipping function that would help people send money frictionlessly is illustrative of how large social media firms might leverage the reach of their networks.

E-commerce companies could also play a major role in spreading Bitcoin use. As Tim Draper pointed out, consumers have already been buying products indirectly with cryptocurrencies for years with the purchase of vouchers and gift cards redeemable on e-commerce platforms representing the largest number of payments (figure six).

Figure six: BitPay payment count by industry. Source: BitPay.com

A Rakuten case offers an analogy of how fast a large e-commerce actor can scale up a new payment technology through its user base. By allowing customers to pay by credit card, and gradually capturing payments made outside of their own platforms, over time Rakuten has become one of the largest credit card issuers in Japan.

Financial World

Over the last decade, Bitcoiners have regularly hypothesized how events initiated within the financial industry might accelerate the visibility of Bitcoin, such as the introduction of exchange-traded funds (ETFs) in the United States, or how the creation of clearer regulations might attract trillions of dollars from institutional investors. Even though more sophisticated financial products will likely assist in the wider adoption of Bitcoin and increase prices, actions taken by financial actors have not been particularly associated with the prospect of hyperbitcoinization.

However, El Salvador President Nayib Bukele’s announcement to issue a Bitcoin bond, at the end of Bitcoin week in El Salvador, once again caught many observers by surprise. The Bitcoin bond — also called the Volcano bond — is a $1 billion tokenized bond that will be used to finance the construction of the first Bitcoin city and infrastructure in the Central American country. The Bitcoin bond offers several disruptions in comparison with traditional bond markets:

  • The Bitcoin bond has the power to circumvent several layers of intermediaries, thereby allowing El Salvador to reduce its capital costs and interest payments thanks to low, 6.5% coupons.
  • Out of $1 billion, $500 million will go into infrastructure and $500 million will be invested in buying bitcoin.
  • The first version of the bond will be available in the first quarter or 2022 on Bitfinex under the EBB1 ticker symbol, and if successful, we can expect other bonds to follow.

The long-term reverberations for El Salvador are promising. Not only does this initiative provide for the construction of the geothermal energy infrastructure needed to power an entire new city, but it could also create a surplus of green energy that could be exported to neighboring countries. Most importantly, the Bitcoin strategy designed by the El Salvadoran government could attract the kind of global investment and knowledge workers that would help establish long-term prosperity in the region. By showing the rest of the world its openness to business and capital influx, El Salvador could replicate the success of the Asian Tigers in the 1960s.

The Bitcoin Community

The growth of the Bitcoin network is based in a strong community committed to the idea of a P2P electronic cash system. Orphaned since the disappearance of its creator Satoshi Nakamoto, the Bitcoin ecosystem continues to play a major role in spreading his ideas. By supporting technological developments and their diffusion, the Bitcoin community undergirds the process of technological familiarization within the public and private spheres addressed in this series of articles.

This motley international community of enthusiasts nicknamed “cyber hornets” encompasses miners, node holders, investors, speculators, analysts, entrepreneurs, journalists, influencers, OSS contributors and developers who devote considerable time and energy to educate new users and contribute, defend and support Bitcoin.

The actors described in the following section are representative of this community of cyber hornets, and contribute to the global dissemination of Bitcoin technologies.

Influencers

Influencers represent a group of thinkers, investors and entrepreneurs who have significant media coverage and habitually voice their opinions on Bitcoin. Bitcoin detractors regularly criticize the technology on both social and traditional media to discredit influencers. Others, like Michael Saylor and Jack Dorsey, who understood the impact Bitcoin will have on their companies, frequently praise its invention and are joined in their praise by global business leaders. It may be difficult to quantify the long-term effects that influencers have on uptake of Bitcoin technologies, but debates around these new technologies help normalize them in the eyes and ears of the wider public.

In the short term, however, this kind of promotion may also negatively impact public perceptions, as we saw in the wake of Elon Musk’s inconsistent social media messaging. Following a series of tweets where the tech entrepreneur targeted the energy consumption patterns of proof of work, the price of the asset experienced <a href=”https://www.bbc.com/news/business-570963