Hyperbitcoinization: Winner Takes All
TL;DR: Hyperbitcoinization is a state where Bitcoin becomes the world’s dominant form of money. Bitcoin is socially wired and can be adopted exponentially. As it gains traction it will seem to be an organic, self-organizing process. In the model shared below, Bitcoin is in the infrastructure buildout phase and an early form of money. However, when it passes a critical “tipping point” Bitcoin adoption, use and price will skyrocket.
With rapid global acceptance, the cost of rejecting Bitcoin will exceed the cost of adopting it. Bitcoin will begin to assume money’s traditional roles and gain institutional and government support. It will become all money and form the backbone of a new global economy.
At hyperbitcoinization I estimate Bitcoin will reach up to $100M per coin within 20 years and as early 2030. Current price is 0.01% of this future value. Bitcoin is currently experiencing “microbubbles” and future appreciation will continue nearly unabated until it plateaus at a stable price.
Bitcoin affords us the opportunity to radically change our relationship with money. You will own your money. Central bank machinations will come to an end. 20 years ago we could not imagine how the internet would change our lives. In the next 20 years Bitcoin will reframe our roles as citizens in a borderless, global economy.
Hyperbitcoinization is a theoretical state wherein Bitcoin displaces legacy currencies and becomes the dominant if not only method to exchange value. As Daniel Krawisz stated in his 2014 Satoshi Nakamoto Institute article:
Hyperbitcoinization is a voluntary transition from an inferior currency to a superior one, and its adoption is a series of individual acts of entrepreneurship rather than a single monopolist that games the system. — Daniel Krawisz, 2014
He goes on to call hyperbitcoinization a form of demonetization. That is, traditional currencies are supplanted by the superior use case of Bitcoin such that the value of other currencies is driven to 0.
This transformative event has also been described as a “tipping point” at which time rapid, mass adoption of Bitcoin is spurred by economic crisis in order to secure monetary stability and liquidity. Venezuela and Argentina have been proposed as an early models of hyperbitcoinization. During catastrophic national currency hyperinflation people choose/are forced to use Bitcoin to conduct their personal and business transactions.
Bitcoin maximalists posit that hyperbitcoinization is the end game. Bitcoin “wins” when all other currencies “fail.” Andreas M. Antonopoulos warns against this fearing an “all out currency war.” Vested interests will resist fundamental change to the way we manage our money. Advantages accrued to the establishment will be substantially mitigated or lost entirely in hyperbitcoinization.
However, Bitcoin’s “take over” of fiat may not be so implausible nor catastrophic. It can be organic and mutually beneficial. This article will examine how Bitcoin can become the world’s first universal currency in part through voluntary social drivers and its inherent sound monetary policy. A monetary policy that somewhat recalls the (early) era of the gold standard — as sound money it is chosen by the market and governments do not determine its supply nor value. I will also introduce a hyperbitcoinization growth model and propose a range of prices and dates for Bitcoin’s “singularity.”
Throughout the article the term “hyperbitcoinization” will refer to both the process and final outcome of global Bitcoin adoption.
Socially Wired Money
Our connected world collapses time and space. Today an individual with robust social media connections can potentially reach millions of people across the globe. Influencers drive followers to adopt, buy and co-promote products and ideas to their own social circles in near real-time. Consumers trust peer recommendations over any other form of advertising.
How does Bitcoin fit into this new paradigm?
Let’s first look at Everett Roger’s diffusion of innovation model. It describes how innovative ideas/technologies are adopted. The bell curve is divided into successive psychograhic stages. The light blue line sums each group over time and is called the S-curve of adoption. For this discussion we can think of the S-curve as Bitcoin’s price (or market value).
The early part of the curve is relatively flat and defines the slowest phase of adoption. This is where the product is attempting to gain traction and championed by innovators and early adopters. Rapid uptake begins at the “tipping point” when mass market awareness translates into adoption by successively larger cohorts. It roughly correlates to the end of the early adopter phase and marks the beginning of exponential growth. Near the plateau the most risk averse or skeptical join last.
Adoption, however, is not as clean.
Several of the S-curves demonstrate pauses/dips. Others have flattened slopes. And as we can see in the right chart newer technologies are much steeper. The tablet, smartphone and social media all introduced around 2005 show near vertical growth. Although accentuated on these linear short term graphs, once a technology gains momentum it becomes a near unstoppable force. What’s going on?
We have entered a new era where novel ideas, technology and information are shared in socially supportive environments. Our interactions increasingly exhibit network effects resulting in a key transformation of how innovation spreads—
The rate of growth itself is growing, leading to shorter, steeper adoption curves.
In fact we have seen this phenomenon in Bitcoin and most recently in the 2017 year end run up. Bitcoin’s price rose 3.6X in 35 days between November 12nd and December 17th. Public excitement and FOMO during this short time period reached manic levels. Bitcoin was omnipresent on social media sites and mainstream financial news. Google searches for Bitcoin peaked. Price climbed to an intraday high of nearly $20,000.
Bitcoin revealed itself as socially wired sound money for a socially wired society. No organized group controls and advertises its value proposition. It is owned and marketed by users. This allows Bitcoin to be adopted at unheard of rates and at vast multiples. Bitcoin is a low friction innovation with few barriers to large scale adoption. Without a central authority to undermine its value, value is prescribed by people. No border can prevent it from being adopted anywhere as it is decentralized. Bitcoin becomes even more secure as more people use it.
As Bitcoin operates at the junction of currency with sound monetary properties and novel technology it is positioned to become dominant money by orders of magnitude. Viewed in the appropriate context, the path to hyperbitcoinization will include near vertical price appreciation phases interspersed with brief corrective cycles as seen in some of the examples above. During these pauses the infrastructure will continue to grow and subsequently support the next wave up.
The two charts below show Bitcoin is growing exponentially and has only just started its journey to hyperbitcoinization.
Bitcoin Growth Model
Satoshi Nakamoto ensured that Bitcoin’s ecosystem was primed for growth with a finite money supply and secure, decentralized network that incentivizes all participants to ensure Bitcoin’s well being.
Let’s use a growth model that combines the S-curve of adoption with the underlying events (i.e. catalysts) driving Bitcoin’s growth.
The graph depicts a large mineral crystallization schematic — I think an apt model for Bitcoin’s growth and will lead us to an understanding of how hyberbitcoinization can be achieved in what may seem to be a relatively short period of time. The blue curve is nucleation rate which describes the formation of aggregates that ultimately combine to form a crystal lattice. The red line is the crystal growth rate with saturation/crystallization achieved at the top right and flat part of the S-curve. As we can see crystallization begins in earnest well after the equilibration and nucleation phases. The intersection of these two lines — labeled the “tipping point” — represents a narrow zone beyond which the growth process becomes exponential and the energy state of the system favors the crystal over loose, independent aggregates.
Let’s adapt this to Bitcoin.
Equilibration precedes nucleation and contains non specific aggregates (i.e. unorganized clusters). In Bitcoin we can think of this as the time shortly after Satoshi Nakamoto introduced Bitcoin to the world and awareness of his construct slowly diffused into key technical and social circles. During this period we see mostly social discovery and early mining efforts. Though it had essentially 0 external value, energy was added to the system in the form of computational work. At some point during equilibration measurable value was created. Perhaps the catalytic seed was the first Bitcoin purchase. Laszlo Hanyecz externalized Bitcoin’s value and by doing so transformed it from a store of value (as measured by work/energy) to a medium of exchange. On May 22, 2010 he bought 2 pizzas for 10,000 Bitcoins.
Nucleation is a high energy barrier. And we can see why. In order for Bitcoin to “crystallize” many different key ingredients are needed. Clusters of Bitcoin activity must reach critical size such that benefit of growth outweighs the cost. These take the form of wallets, exchanges, nodes, mining pools, more engineering talent etc. Silk Road and Mt. Gox are examples of the ecosystem’s aggregate order during early nucleation.
As nucleation progresses we begin to see cross links between these various aggregates or nodes of activity: network security improves, hashrate climbs, more coins are mined and sold, exchanges provide custodial arrangements, fiat to Bitcoin onramps grow, meetups and conferences draw outside interest, and there are a few real world Bitcoin only transactions. These are early signs of lattice formation. Like a growing crystal each connection adds an order of magnitude strength to the ecosystem.
Crystallization is the most “visible” phase — price is climbing and Bitcoin transactions are becoming more common. Nucleation has primed Bitcoin for rapid growth. It ascends up the S-curve entering the fastest portion of the adoption phase. During this time Bitcoin will seem to be an organic, self-driving and organizing process much like a growing crystal. As aggregates join they reduce their energy state and become more stable. The energetic benefit of joining the crystal lattice outweighs the cost. We will see a similar phenomenon in hyperbitcoinization —
Rejecting Bitcoin will cost more than adopting it.
After the tipping point Bitcoin nucleation will continue albeit at a slower rate. Yet these tail events are also critical for Bitcoin’s success and include wide spread systemic institutional and government adoption. Without these key players Bitcoin may fail to reach saturation and price stability, doomed to unacceptable levels of volatility.
The path to hyperbitcoinization is described by the red S-curve which represents Bitcoin’s price (or market value). During nucleation Bitcoin begins to experience a series of microbubbles. Each of these reflects a fundamental shift induced by underlying events. Sophisticated retail investors are joined by early public risk takers. Institutional investors join the fray. VC funded businesses are built around Bitcoin’s core concepts. Wall St. firms devise instruments to monetize Bitcoin. Public corporations adopt it for payments. And so on.
Larger price bubbles and continued volatility follow these discovery phases. During this time Bitcoin use cases, improved fiat to Bitcoin onramps coupled to early institutional and select banking acceptance become important drivers. Price rapidly climbs, nearly unabated.
Beyond the tipping point Bitcoin’s rate of appreciation itself becomes exponential. It begins to supplant fiat taking on characteristics of money beginning with store of value, followed by medium of exchange, and finally unit of account at the plateau of the S-curve. At the plateau price volatility is minimal and hyperbitcoinization has been achieved.
As of this writing I believe Bitcoin is in the mid to late nucleation phase. The current bubble cycles are “microbubbles” on this scale. As we’ll see in the next sections, $10K 200 day moving average is not even a rounding error in the world of hyperbitcoinization.
Global Valuation of Money
Social acceptance, resulting demand coupled to Bitcoin’s technology are driving growth at network speeds. Fundamental, beneficial sound monetary properties give Bitcoin the opportunity to become the world’s first universal digital currency:
- No border control — Bitcoin unwinds nationalistic/feudal monetary systems that trap local populations into using government decreed currencies. It is a digital currency that can achieve global consensus.
- No centralized authority — Bitcoin has inherent property rights & security. No central agency can confiscate your coins nor prevent you from transacting with Bitcoin.
- No inflationary policy — Government agencies cannot artificially deflate Bitcoin’s value via conventional currency machinations. Price is determined by the market. Money supply is based on computational work and math.
Bitcoin’s recent ATH market capitalization reached $326B on Dec 17, 2017. Although a phenomenal achievement for nascent technology, if Bitcoin aims to displace fiat it has a long way to go.
What does Bitcoin need to do? How much value must it absorb? Trace Mayer endows Bitcoin with infinite expansive capacity.
By analogy, these institutional products [futures, ETFs] are like connecting a major metropolis’s water system (US$90.4T and US$2 quadrillion) via a nanoscopic shunt to a tiny blueberry ($150B) that is infinitely expandable. — Trace Mayer, November 2017
If Bitcoin becomes the only unit of account, medium of exchange and store of value it will need to absorb a global glut of value.
This is what we have today —
- $7.7T of gold
- $73T value in global stock markets
- $127T in money (coins, notes, checking, savings)
- $215T in debt (and growing)
- $217T global real estate
- $1.2Q+ in derivatives
- and more
(Q = quadrillion = 1,000,000,000,000,000)
Though not an exhaustive list, it gives us a general idea of the scale and scope of the market. This accounting will include derivatives and similar instruments though they may be significantly altered, scaled back or perhaps even entirely eliminated in an ideal implementation of hyperbitcoinization.
In order to supplant fiat, Bitcoin must be at least equivalent value and play every part in our traditional currency system and satisfy money’s various roles. Hyperbitcoinization requires complete and total domination over every corner of the financial world. Bitcoin should be able to buy coffee and power the global economy.
In hyperbitcoinization, Bitcoin needs to be all money.
Bitcoin proponents talk about “abandoning” the use of “Bitcoin” as a commonly used unit of denomination. They reason as Bitcoin becomes a global currency its astronomical value will not be feasible for everyday transactions. Like any good form of money Bitcoin is divisible. In fact, by up to 100,000,000 satoshis. The satoshi will act as our base accounting unit. You will buy goods and services and be paid in satoshis.
Let’s see if this is plausible.
There will be nearly 21 million coins once the last Bitcoin block is mined. It’s estimated 20% of current mined Bitcoins are forever lost. If this loss rate holds then the total accessible will be at most 16.8 million. The list of global value of all money totals about $1.8Q.
Some basic math:
Global value of all money= $1.8Q.
Divide by 16.8 million Bitcoins = $107,142,857
Round result = $100,000,000/Bitcoin
100,000,000 satoshis per Bitcoin
$100,000,000/Bitcoin ÷ 100,000,000 satoshis per Bitcoin
= $1 per satoshi
Each Bitcoin is $100,000,000 and each satoshi accounts for $1 of value in the age of hyperbitcoinization. Of course, this may be more or less depending on the actual total value that Bitcoin subsumes. And we have not accounted for changes in how we may value assets and Bitcoin’s future impact on practices such as fractional reserve banking. For this exercise I will defer discussion as much of this has yet to be determined.
Let’s put this in perspective with today’s prices.
Current 200 DMA = $10,000/Bitcoin
Hyperbitcoin price = $100,000,000/Bitcoin
Current % of future value = 0.01%
Bitcoin’s current price is a fraction of its potential should hyperbitcoinization become a reality. Even if we reduce the scope of Bitcoin’s market an order of magnitude to $10,000,000/Bitcoin (a Fundstrat price estimate) we are still in the 0.1% of future value range.
Does price trajectory support the immense increase in value?
Bitcoin Price Trend
Bitcoin’s price will not go up forever as at some point all economic value will be accounted for. First let’s determine when price reaches $100,000,000 per Bitcoin. I will use a model introduced in one of my earlier articles. It uses “top of the bubbles” and a non-linear regression curves to form a channel. We’ll use this as our guide.
The channel narrows as price approaches the $100,000,000 mark in 2030. I suspect Bitcoin’s price will oscillate within and around these boundaries, increasingly constrained as it approaches hyperbitcoinization.
Based on these curves the theoretical limit for Bitcoin’s price is just north of $500,000,000 where our two curves meet. But as discussed above, innovative technologies eventually reach saturation and we should expect Bitcoin to behave similarly. There will be a plateau in value. Using the above trend let’s build a graph incorporating Everett’s S-curve of adoption.
Of course as we learned above, adoption will not follow a textbook S-curve. But this linear price chart shows Bitcoin has not even begun its ascent. Bitcoin’s price is still within horizontal part of the curve. Even if we adjust our final price by an order or two magnitude today’s price is on the flat part of the curve before the tipping point.
Bitcoin’s path to peak price will more likely be composed of successive smaller overlapping S-curves and we can surmise that it won’t plateau exactly as shown. Moreover at these scales minor changes of the curves delimiting the path to hyperbitcoinization will result in valuation changes on the order of millions of dollars and could push price stability out several years.
Nevertheless we have a range of $10M to $100M (fractional percentages of current price) that may be achieved within a 20 year span.
“Bitcoin is network money for a network economy”
Exponential rates of growth are difficult to comprehend due to our propensity to forecast the future using linear time frames. Yet in a short time computers and the internet have become integral parts of our lives and key economic drivers. The current long term price trend and continued exponential growth support Bitcoin’s case to supplant present value carried by all money in the world.
Bitcoin Pragmatists may counter that Bitcoin — as money — will become part of a mosaic of digital and “paper” currencies (most paper currencies are just computer ledger entries). In certain locales and businesses it may become the dominant currency, will satisfy limited (but valuable) use cases such as remittances, wealth transfer, off shore banking and interbank settlement. It may evolve to power a token economy but will not entirely supplant fiat.
The pragmatist’s view leaves room for fiat which opens the path to Bitcoin fractional reserve banking, deepening government decree and resulting monetary shenanigans.
Bitcoin Maximalists will argue this is a missed opportunity.
I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop — Friedrich Hayek, 1984 (video here)
Centrally controlled money supply begets a centrally planned economy. With money out of the hands of controlling entities we have a chance to return to a sound monetary policy and stop gifting enormous debt to future generations.
Maximalists would be ecstatic to see Bitcoin achieve manifest destiny and complete the journey to hyperbitcoinization. The end of the fiat economy would herald a new economic paradigm espoused in part by Austrian free market economists. Money would no longer be controlled by the whims of central banks.
- No more fractional reserve banking.
- No more government induced boom and bust cycles with quantitative easing, bail-ins, and runaway inflation.
- No more forced high time preference (immediate gratification).
- Eradication of government abuse and confiscation of money through inflationary policies.
The global economy would be bound by an immutable, decentralized, verifiable and consensus powered form of digital money. One sound standard through which all business is transacted. Bitcoin becomes the dominant currency by social decree. Although social decree is voluntary, as more people agree to place value in Bitcoin network effects transform it into an indestructbile and unavoidable form of communicating value.
With Bitcoin you own your money. Personal ownership of money may thoroughly transform our modern world. We will go from a centralized economy manipulated by the few to one based on sound money principles — protecting the present, preserving the past and preparing for the future. Education, agriculture, medicine, and industry will be radically transformed once short sighted policies which benefit the few are abandoned for those with longer time horizons providing greater and lasting benefits for everyone. Incessant government machinations devaluing our money, work and lives will come to an end.
Hyperbitcoinization is not necessarily a fantasy. 20 years ago we could not imagine how the internet would impact our world. Bitcoin will not be a panacea for all of our ills but I am fairly sure it will drive a monumental shift in our relationship with money and reframe our roles as citizens as part of a borderless global economy.