From CoinShares Research Blog by Christopher Bendiksen

Bitcoin is changing the world. With change comes uncertainty and, for many, anxiety. It is natural to wonder what the future will look like, and also to worry about whether this change will be for the better or the worse. We are creatures of planning, of preparation, but more than anything, of adaptation.

In this two-part series I will lay out a possible, and as I see it, even likely future. You might already have noticed that I am writing from a first-person perspective here. I will do that whenever I am discussing the future in this article, and whenever I am contemplating things that are uncertain. This is because this is my vision, not one I necessarily share with everyone at CoinShares. We have a great plurality of opinions within the firm, and our creative ability to formulate different visions of the future is one of our strengths. This piece is my opinion, I stand by it, and I will use the two articles of the series to explain how I have arrived here.

In order to first demonstrate how I have been led to my current stance, I will first summarise key findings from 5 different CoinShares articles from 2023:

Then, I will collect fundamental takeaways from each of these articles and construct a forward-looking thesis of why Bitcoin will continue to drive change, predominantly within the world of money. But to be clear, I believe this will have enormous and wide-ranging consequences that extend well beyond the realm of money, but the necessary analysis to cover these effects is so large that entire books must be dedicated to their proper treatment, so here, I will concentrate on monetary (and the most immediate political) consequences.

Finally, in Part 2, I will lay out my predictions on how this will tend to happen. This part will naturally be the most speculative part of this analysis since it deals entirely with the future, and the future is obviously unknowable and therefore uncertain. Where possible and where evidence is available, I will bring in whatever support we already have of the thesis playing out, but as with all predictions, Part 2 will fundamentally consist of educated guesswork.

There are Five Major Underlying Compound Assumptions Supporting my Thesis

1. The Fundamental Investment Case for Bitcoin

I will ground my thesis in our most basic belief: The Fundamental Investment Case for Bitcoin. The belief in this investment case is one that is shared across the CoinShares firm. We have spent years constructing it and it builds on and borrows insight from many independent thinkers, as well as using adaptations of Austrian, and more specifically, Mengerian monetary theory.

In short, we believe that bitcoin (the monetary good) is in the process of monetising. Monetisation being a process whereby a good takes on a monetary premium in excess of any pure use value — an well-known example being gold taking on a monetary value vastly exceeding its industrial value (or else it would have had a tendency to be consumed). Bitcoin has very limited use value, timestamping and NFT inscriptions being some examples, and so we have to conclude that when bitcoin continues to accrue value, it is doing so because people are valuing it based on their perception of its usefulness as money.

We believe its usefulness as money directly emanates from its monetary properties. These properties are things like scarcity, transportability across space and time, price volatility etc. Some of these can change, others not. For example, bitcoin’s scarcity and transportability are both fixed design choices and cannot easily be changed, its price volatility or liquidity (arguably two sides of the same coin) on the other hand are relational and can improve or deteriorate depending on how people use it.

In our opinion, Bitcoin’s strongest properties are its fixed ones — those that are the least likely to change. Conversely, its weakest properties are its relational ones — those that have improved over time and are continuing to improve.

Curiously, we find that the situation is generally opposite in fiat currencies. Their weakest properties are those that are the least likely to change — properties such as their infinite supply, poor transportability over space and time, and lack of confiscation resistance. Their strongest properties tend to be price volatility and liquidity, and very few fiat currencies can demonstrate improvements on either of those properties recently.

At the end of the day, bitcoin’s ongoing monetisation is a symptom of its success or failure in competing with alternative monies, based on how the end-user views and requires their comparative monetary properties. As such, bitcoin is competing in the global market for monies — a huge market, worth more than $150tn.

So long as bitcoin, in the eyes of its current and prospective users, continues to out-compete fiat currencies based on monetary properties, we believe it will continue to accrue global monetary market share at the expense of other monies. This is why bitcoin is investable.

2. Bitcoin Adoption is Globally Significant and Rapidly Growing

In the spring of 2023, we published the 2023 Global Bitcoin Ownership Overview, a meta-study of more than 20 previous studies detailing global bitcoin adoption. Our findings detailed individual bitcoin ownership percentages for all countries in the world and estimated the compound annualised growth rate (CAGR) in bitcoin ownership between 2016 and 2022.

The findings were interesting on multiple levels. First of all, we found that the total number of people in the world who in some way own bitcoin, was around 270m. If bitcoin owners were a country, they would be the fifth most populated country on earth. Secondly, our numbers showed that bitcoin ownership, at least in absolute nominal terms, is primarily an emerging market phenomenon. While most bitcoin is likely owned by users in developed economies, most bitcoin owners live in emerging markets.

Finally, the CAGR of global bitcoin owners between 2016 and 2022 was a whopping 146%. And while we don’t expect growth rates like that to persist, the trend could not be clearer. People are increasingly turning to bitcoin because it offers them properties their local fiat currencies do not, whatever those properties might actually be.

3. High-Adopting Countries Suffer from Deteriorating Fiat Currencies

On the back of our ownership study, further questions naturally arose: What, if anything, do the countries with the highest reported bitcoin ownership numbers have in common? Might there be shared characteristics leading to this outcome? We had our suspicions.

To us, there seemed to be two general patterns among the top ownership countries. All these countries were either:

In order to test this out, we had a look at 5 out of the 6 top countries in terms of ownership (no data was available for Venezuela, but we all know their situation anyway), and did some comparative analysis of the monetary health of their local fiat currencies.

Unsurprisingly, the pattern was consistent with our supposition — the local fiat currencies were not in good health. Moreover, some had a long history of poor performance, even if data suggested recent performance was not terrible.

The conclusion however, was clear: In the countries where the largest proportion of the population owns bitcoin are all countries where the fiat currencies are either currently or historically deteriorating.

4. The Role of Hard Money Competition in Monetary Collapse

Having noticed bitcoin’s current behaviour in global monetary markets, our curiosity demanded a closer look at instances of historical monetary competition. More specifically, we wanted to review records of situations where hard monies came into contact with loose monies to see if there were any commonalities in the patterns of interactions.

History did not disappoint. We found — and this really should not come as much of a surprise — that weak monies simply do not tend to make it. In fact, fiat monies in general do not tend to survive very long. The only monies that have survived more than a few centuries are commodity monies, and especially the noble metals.

The distinguishing metrics of fiat survival basically boil down to exactly what one would expect: just how badly is it (mis)managed, and how effective is the government’s control on the use of alternative monies in the population. Both points have several important sub-points that may shape the pathway the fiat money takes, but at the end of the day, over the course of history the most reliable predictor of fiat monetary collapse is time.

“Paper money eventually returns to its intrinsic value — zero”

- Voltaire, 1729

Interestingly, our search revealed that a distinguishing characteristic of collapsing fiat money is an increasing level of dollarisation, either de jure or de facto. Dollarisation here does not necessarily mean the replacement of the local fiat with US Dollars, the name has simply stuck as convention because in modern times, more often than not, it is actually the US Dollar that does the replacing. In the past however this was not always the case, with Deutsche Marks, Pound Sterling, Japanese Yen etc all having played this part in some instances.

The critical takeaway however, is that the availability of a harder alternative to a weak local currency can have a huge effect on the rapidity of fiat collapse. A badly debased fiat money can only hope to survive for an extended period if its government maintains a very tight and effective control over the importation and use of harder foreign monies. Easy availability of hard monetary alternatives is unilateral bad news for a poorly managed fiat currency, and tends to accelerate dollarisation, and in many cases, full-blown fiat collapse.

5. The Stablecoin-Bitcoin Gateway

Over the years, our interest and involvement in the human rights side of bitcoin activism has helped us gain a decent understanding of how people on the ground use and interact with, not only bitcoin, but also bitcoin-derived technologies. The patterns are fascinating, especially in emerging markets. Users are opting into different bitcoin-derived monetary technologies to fill different monetary use cases.

For longer term savings, bitcoin is quite popular, but for shorter term saving, and for day-to-day spending, stablecoins are king. And whereas originally, it was bitcoin that tended to introduce users to stablecoins, this pattern has since reversed. Due to their popularity, stablecoins enjoy a demand that is independent from bitcoin and people seek them out on their own.

For most people in emerging markets, bitcoin is still too volatile to be useful as a day-to-day spending money, but stablecoins, or cryptodollars, are often excellent for this use case. The fact that they can be bought easily using only a smartphone is a literal game changer for billions of people across the world. And interestingly, we are now starting to see signs that instead of bitcoin acting as a gateway to stablecoins, stablecoins are acting as a gateway to bitcoin.

There are two critical takeaways from these findings: first of all, global access to dollars has never been easier — the existence of cryptodollars makes legal tender enforcement extremely difficult. Secondly, familiarisation with crypto-rails as financial infrastructure drastically lowers the mental barrier of entry for new users into something like bitcoin. Add to this that more than half of the world’s population are people under 30, and that 90% of them live in emerging markets, and the demographic potential of a mental paradigm shift could not be more obvious.

Bringing the Parts Together

I believe the implication of the above compound assumptions to be the following: The combination of stablecoins and bitcoin are a threat to emerging market currencies. Basically, I believe that while currency collapse in the past has been somewhat rare, it might become much more common in the future. The reason is that the radical new availability of stablecoins and bitcoin makes it much harder than previously to force monetary debasement on a population. Access to harder alternative monies now extends more or less to anyone with a mobile phone and internet access, in fact, even ‘dumb’ phones can be used to send and receive bitcoin without internet connectivity.

As I mentioned in Part 1, in the past, people needed to physically import (read: smuggle in) foreign banknotes in order to de facto dollarise, and this was naturally a slow process since inflows in most cases could be fairly effectively controlled. With the introduction of bitcoin and stablecoins, the importation of hard foreign currency can no longer be effectively controlled. I believe the result of this will be that currency mismanagement will have a much more immediate effect on the local currency being debased.

The arrow of time is defined by technology, and all lasting change in society is fundamentally a result of technological improvements. Going forward, given the availability of harder monetary alternatives, and the extreme costs governments will face if they try to enforce restrictions on them, it simply will not be possible to confiscate wealth through monetary inflation to any degree resembling that of today. And if an attempt is still made, the available outcomes will be quick retreat, hyperinflation and/or monetary collapse.

Realistically, this will be an issue that will first and foremost manifest itself in emerging markets. This is simply because these currencies are the ones that have traditionally suffered the highest levels of inflation. Reality will merely catch up to the worst ones first, and these just tend to be in emerging markets — but that doesn’t have to be the case.

In fact, there is no reason at all to believe that over time developed market currencies will somehow be immune to this effect, so you may justifiably consider the title to be a bit clickbaity — unless they’re very well managed, they’re all at risk! Over time I believe the dollar wrapped as stablecoins, then bitcoin, will destroy all mismanaged fiat currencies, regardless of where they are. Only the most disciplined central banks will stand a chance. I will spend the upcoming Part 2 of this series to detail what I think this might end up looking like in practice.