From CoinShares Research Blog by Christopher Bendiksen

Why does bitcoin’s long-term price just keep going up? This seemingly evergreen topic has a tendency to bring out some of the wildest takes imaginable, with institutional proximity tending to be inversely related to explanatory power.

Call it a smooth brain, low-IQ take, but to us the reason is obvious: Bitcoin is increasingly outcompeting other monetary assets in the global markets for money. People are simply preferring to own bitcoin instead of alternatives. And it shouldn’t surprise to see that where we see the highest rates of bitcoin adoption, we generally find poorly managed national fiat currencies.

So let’s put our ‘straightforward’ answer in context. Our Bitcoin Investment Thesis can be distilled into the hypothesis that bitcoin is an emerging form of global monetary good, competing in the global markets for money based on a set of compelling monetary properties. We consider these monetary properties to come in two general forms, those that are fixed (in white), or unchanging, and those that are relational (in gold), or dependent on how people relate to (use) them.

Fixed properties of bitcoin are things like its supply schedule, its ability to be self-custodied, or its ability to be freely transacted anywhere in the world. Relational properties are things like its volatility, its liquidity, and its general level of acceptability in commerce. The former are determined by the design of the protocol itself and can not easily improve or deteriorate, the latter are determined by usage and will improve or deteriorate based on how, and how many, people use it.

The same is generally true of its monetary competitors like gold and fiat currencies. Gold has fixed properties determined by the laws of chemistry and physics, and relational properties based on usage. Fiat currencies have weaker ‘fixed’ properties since they can be altered by decree, but they too have at least some level of resistance to changes of their fundamental properties. These ‘fixed’ properties are primarily determined by the incentives of the institutions that control them.

Just like other monies, they also have relational properties that may improve or deteriorate. For example, the volatility of a fiat money can improve or deteriorate based on the monetary policy choices of its supporting central bank. Additionally, the acceptance of a fiat money such as the US dollar can improve or deteriorate based on the long term impression global users have of its soundness.

Some key points of our thesis are that bitcoin’s relational properties are its weakest points, but we note that they are and have been improving and we expect its relational properties to continue improving. Competition in general at least in part relies on the health of your competitor. What we find in regions of high adoption is that the principal fiat competitor is poorly managed and has deteriorating properties. Our purpose here is to outline the health of bitcoin’s fiat competitors in the global countries with the highest bitcoin ownership rates.

Existing Fiat Currencies Generally Have Superior Relational Properties vs. Bitcoin

This claim is obviously true and so we won’t spend much time supporting it. Everyone knows that within any country on Earth, bitcoin is less accepted than the local fiat currency. Similarly, but no longer true for every country, bitcoin is generally more volatile than fiat currencies — although as we shall see, it is not at all true across the board. Lastly, most of the major fiat currencies are more liquid than bitcoin, but here, this is now only true for the largest ones.

However, the Relational Properties of Fiat Currencies are Deteriorating

More interestingly though, we observe a trend of deterioration of fiat currencies that compete with bitcoin in global markets for money. Not only is this part of our long term Bitcoin Investment Thesis, but it seems to be a clear driver of bitcoin adoption across the world.

According to our own meta-analysis of global bitcoin ownership, out of the 20 countries with the highest ownership rates, only 4 were developed countries. This makes sense. Bitcoin’s adoption is highest where the need for its monetary properties is highest.

To illustrate, we analysed 5 out of the top 6 adopting countries — excluding #4 Venezuela for which there is no reliable data — Turkey (#1, 8.3%), Vietnam (#2, 7.9%), Nigeria (#3, 7.6%), Brazil (#5, 6.7%), and India (#6, 6.3%), based on the development of the relational properties of their fiat currencies over the last 10 years. In our analysis, we looked at expansion of the money supply (M2), CPI, and exchange rate against the US dollar.

We also took a larger look at some of the above metrics for the full top 20 of bitcoin-owning countries. The results are exactly what you’d expect.

M2 Growth Rates

In our 5-country sample, the compound annual growth rate (CAGR) in M2 over the last 10 years averages 14.8% with a median of 11.2%. Over the last 2 years, M2 CAGR has averaged a whopping 20.9% with a median of 12.8%. The major offender in this sample is Turkey, whose M2 CAGR is 26.6% over the last 10 years, and 56.4% over the last 2 years.

We also note that these numbers would have looked much worse had we been able to find reliable data on the #4 on our bitcoin ownership ranking, Venezuela.

CPI

We’d like to begin this section with an expression of a certain distrust in CPI metrics in general. Problems with CPI metrics are well known even in countries with relatively low levels of corruption. When applied to countries further down on such lists, we consider a certain scepticism of metrics made by the government for the government — with the potential to downplay the ruinous consequences of that government’s policies — justified.

Regardless, in all our top 5 countries except, apparently, Vietnam, CPI tends to be pretty bad. Whereas a CPI print in the range around 5% is considered near-disastrous in the West, this is entirely normal in large parts of the world. Nigeria and Turkey have outright catastrophic CPI figures as their norm as far back as we could get data, and over the last 7 years, it has compounded a total of 199% and 546%, respectively.

FX

But the absolute clearest sign of monetary deterioration for all these countries, and indeed all countries with freely floating currencies in the top 20, except Australia, can be seen in the performance of their local currencies against the US dollar.

In our top 5 sample, the average 10y performance against the US dollar is -52%, the best performance is -11.24% (Vietnam), and the worst is -93% (Turkey). In our larger sample of 20 top ownership currencies, 15 of which have available data and freely floating currencies, 6 have lost more than 50% against the US dollar over the last 10 and 4 years have lost more than 80%.

As a result of the sometimes extreme losses observed in some of these competing fiat currencies, bitcoin prices are currently at all-time-highs in many countries. When taking this into account, even if its annual volatility exceeds 30% against the US dollar (and most of that to the upside), when compared against many of the local currencies it competes against globally, bitcoin is looking quite attractive.

Qualitative Evidence of Deterioration is Also Mounting

One does not have to look far for qualitative evidence of deterioration in the monetary properties of Bitcoin’s fiat competitors. Over the last few years alone, blatant financial censorship has moved from primarily being a part of repressive toolkits in authoritarian regimes, to becoming valued political weaponry even in western countries.

Whereas financial censorship levied via a deputised banking system used to be reserved for terrorist organisations, it has now been used against peaceful protestors in Canada, and against political opposition in the UK. Even on the largest possible political level, the US dollar has now been made a political weapon after the US froze and now threatens to seize Russian reserves in response to the invasion of Ukraine.

Meanwhile, bitcoin’s Relational Properties are Improving

As time passes, we observe that bitcoin’s relational properties are steadily improving. Liquidity is already stronger than most fiat currencies (but still nowhere near the main global competitors), volatility is tempering over time, and acceptance is slowly improving.

For example, bitcoin volatility is trending significantly downwards in the long term.

Similarly, bitcoin liquidity and size is trending upwards over the long term. When compared against global fiat currencies, bitcoin ranks #16 on market capitalisation.

Bitcoin is Therefore Increasingly Competitive in Monetary Markets

The takeaway is simple: Bitcoin is becoming increasingly competitive in the global monetary market. Not only are Bitcoin’s relational properties improving, but those of its competitors tend to be deteriorating (with the notable exception of gold, against which bitcoin has appreciated the least since inception).

Unless its competitors can turn things around and start gaining ground in the competition for global monetary market share, we should expect bitcoin to keep gaining ground and extracting monetary premium from competing currencies. This in turn is likely to create a virtuous cycle in its relational monetary properties, improving liquidity and acceptability while reducing volatility — improving its competitiveness even further.