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1. Inflationary spiral and over-indebtedness precipitate the collapse of fiat currencies
The push towards Hyperbitcoinisation is increasingly fuelled by rising inflation in fiat-based economies. Economist Stephanie Kelton blames fiat currencies for becoming mere " points " that can be manipulated and lack real value. This situation is unsustainable, given current struggles with inflation and examples of hyperinflation in Venezuela (193% in 2023) and Argentina (160.9% in 2023). Against this backdrop, bitcoin offers a striking contrast: a decentralised network beyond the control of central banks, with a fixed supply limited to 21 million tokens. This scarcity makes bitcoin an inflation-resistant asset.
What's more, the United States faces a staggering level of debt, amounting to $34 trillion in 2024 and now increasing by $1 trillion every three months. The permanent cycle of borrowing and accumulating debt without a clear repayment strategy is a deep flaw in the fiduciary regime. This instability is reflected in the price of bitcoin, which is reaching new all-time highs across every currency in the world.
Source: The Kobeissi Letter, BofA
2. Mass adoption of bitcoin
Universal acceptance of bitcoin is accelerating, with over 15,000 global businesses, including giants such as Apple, Walmart, and Disney, accepting payments in cryptocurrency, either directly or via third-party apps. This trend continues as the benefits of bitcoin acceptance outweigh the costs.
The push towards Hyperbitcoinisation could also be accelerated by increased institutional adoption and bitcoin-derived products, such as ETFs, futures, and options, making cryptocurrencies more accessible to traditional investors.
Other countries might follow El Salvador's lead in adopting bitcoin as their official currency, particularly in regions in need of a stable currency. Since 2022, under the initiative of its president Nayib Bukele, El Salvador has pledged to buy one bitcoin a day. By 2024, they had accumulated 5,690 bitcoins (equivalent to around $400 million).
Source: Nayib Bukele on X
3. Central bank digital currencies (CBDCs)
Many politicians are now advocating the creation of CBDCs, government-controlled digital currencies, to maintain their influence on monetary policy. They believe that such a move could weaken cryptocurrencies. Yet it could have the opposite effect. The introduction of government-controlled digital currencies, such as the digital yuan, raises concerns about privacy and personal security, and could ironically drive people towards bitcoin, seeing it as the only true form of independent money.
If an account falls by 10%, for example from $100,000 to $90,000, traders proceed as if the account only had $80,000. Therefore, instead of risking 2% of $90,000 ($1,800), a trader would risk 2% of $80,000 ($1,600). This conservative strategy serves to control losses during adverse periods and keeps traders disciplined and focused on long-term goals.
1. Status of fiat currencies
Investments and transactions in bitcoins are becoming increasingly popular, but their integration into everyday transactions is crucial to their mainstream adoption. According to Chainalysis, over 460 million bitcoin wallet addresses have been created. However, around 90% of these wallets are inactive, leaving just over 46 million wallets with at least $1. Daily bitcoin transactions currently stand at around 450,000, indicating a still limited use compared to global fiat currency transactions.
Source: JP Morgan
2. Volatility
Bitcoin is notorious for its wide price fluctuations, which poses a major problem for its use in everyday transactions. For bitcoin to be considered a unit of account, its value must be predictable and stable, like traditional currencies such as the dollar. Increased liquidity and adoption of bitcoin should reduce its volatility. Nevertheless, it is still difficult to reach a market maturity that would definitively stabilise bitcoin's price.
3. Technological obstacles
While Layer 2's Lightning Network has improved the speed and scalability of bitcoin transactions, also making the process more environmentally friendly, instant processing of billions of transactions remains out of reach for the time being. What's more, as the network grows and transaction volumes increase, so do transaction fees. In April 2024, the average transaction fee for bitcoin was $9.1, well below the 2021 peak of $60 per transaction. Imagine having to pay $60 just to buy a bottle of water. Challenges also include dependence on internet access, high energy consumption by miners and cybersecurity risks such as the double-spending problem or 51% attacks.
Source: Bitcoin Transaction fees, Blockchain.com
4. Governments’ response
In a world marked by Hyperbitcoinisation, the traditional monetary policy powers of central banks would be significantly challenged. Governments could resist Hyperbitcoinisation by resorting to repressive measures, or they could adapt to integrate bitcoin into their regulatory frameworks.
Governing a decentralised financial system poses unique regulatory challenges. Governments will need to develop new laws or modify existing ones to manage a currency that transcends national borders and operates outside the traditional banking system. In particular, they will need to adapt tax, securities, and consumer protection laws. Global cooperation will be required to establish standardised regulatory frameworks.