Hyperbitcoinization will be ugly
Bitcoiners have long fantasized about “hyberbitcoinization,” the glorious era to come when Bitcoin goes to $50 Million or so. If you’ve stacked up a few Bitcoin over the years, it’s hard not to entertain such fantasies. Just imagine: Those 6.4 Bitcoins you picked up back in 2014 might make you worth over $300 Million in the near future.
I’m a Bitcoin critic, but not the kind who’s going to tell you that Bitcoin is going to crash to zero any day now, that tether is a fraud, or offer some definition of Ponzi scheme and argue Bitcoin fits this definition. I actually believe that the Bitcoin price will continue to surge upwards until the US takes decisive regulation to throttle it, and I hope this happens before hyperbitcoinization.
But why am I so scared of hyperbitcoinization? Let’s be real. It certainly wouldn’t simply be a world in which the early hodlers are enormously wealthy and everybody else is pretty much the same. There would be massive economic carnage, not just your cyclical “creative destruction”. Hyperbitcoinization will be a cataclysmic event.
To jump straight to the punch, true hyperbitcoinization would have to coincide with the collapse of the US Dollar. All paths taking us from now to future hyperbitcoinization must involve some sort of inflection point beyond which the typical rational financial entity sees Bitcoin as a better place to put their money than US dollars or US treasury notes.
Before discussing why a collapsing dollar is a horrible event that nobody wants, it’s worth pointing out the relationship between these two events. They are unlikely to be independent. The dollar is the top of the food chain as the most stable currency in history, built on the greatest, most stable, most efficient, and most successful free-market economy mankind has ever known. Other nations hold US treasuries as a reserve currency and much of the world’s financial transactions and contracts are denominated in dollars. Dominant currencies do not simply collapse, such a collapse would require either monumental malfeasance or wicked sabotage. While Bitcoiners are correct to point out that the US has been printing quite a bit of money over the 12 years, this is something we can get away with given our supreme position on the financial hierarchy. The demand for our currency is expanding as the global economy continues to grow. We are not the Weimar Republic, we are not Venezuela nor Argentina. It’s completely ridiculous to point to the instability of lesser economies and conclude that we are a just couple more rounds of QE away from total collapse. This is simply not true. However, there is a path to the collapse of the US dollar, and this directly involves hyperbitcoinization.
In February 2021, we are in a bit of a touchy economic situation. The forces that be in the US want the economy back on its feet soon and have indicated willingness to use monetary policy and debt-spending to get to these ends. This is normal. But this time, there are a couple of wrinkles. First, the economy isn’t quite ready to open up. Many people are waiting for the vaccine, and many businesses are operating under capacity. We can’t simply hose money through the plumbing and hope it circulates to where it needs to go. Second, we have this new wildly speculative asset class that both individuals and businesses (Michael Saylor, Elon Musk) can dump their cheap dollars into, based on the investment thesis that Bitcoin is the most lucrative place for your money while the economy remains crimped, along with the expectation that dollars will remain cheap into the near future. This quickly becomes a vicious cycle: The US pumps more money into the economy, only to have it go into Bitcoin. This drives the price of Bitcoin up and doesn’t help the real economy, making Bitcoin seem even more attractive.
While most economists seem to laugh at the thought of Bitcoin threatening the dollar’s supremacy, I can see the above cycle as a dance that pushes toward that tipping point. If the US was operating healthily, a sustained explosion of Bitcoin interest probably wouldn’t happen, gravity would catch up, and we’d have to wait until the next four-year cycle.
But once we get near this tipping point, enemies of the US are certain to get excited. North Korea is reportedly hodling anywhere from hundreds of millions to billions of dollars worth, and are actively stockpiling more, by a variety of methods. Russia, if allowed to participate in the collapse of the US Dollar, certainly would jump at the opportunity. If this means using internet psyop to pump Bitcoin while publically investing their treasury in Bitcoin, they will do this. Iran has gone long into Bitcoin, probably dreaming of such a scenario. In fact, at this point, we should assume there is an entire alliance of nations who resent the US’ role as a superpower, who got started into Bitcoin early and would be thrilled to see Bitcoin go to the moon while the dollar collapses. So all the enemies of the US pile in.
At this point, it’s not just enemies of the US that pile in, it’s businesses, hedge funds, and wealthy individuals or any opportunists who see this playing out and don’t want to get left behind. Treasuries get dumped for Bitcoin. And then we have it, the US can no longer print dollars to pump the economy, because these dollars go into Bitcoin. Now because Bitcoin has replaced the US treasury around the world as a reserve asset, the US can no longer borrow. Suddenly the nightmare scenarios that fiscal hawks have been warning about for decades become reality. We can’t pay the debt, we have to shut down the government, we cease to function as we have been. Our enemies rejoice.
The collapsing dollar is essentially a zero-sum game. Yes, those that got into Bitcoin first win and win really big. But most everybody else in the US loses. The buying power of people with savings accounts in dollars is decreased, with the corresponding increase headed to North Korea to entice scientists to their nuclear program, or ISIS to buy more weapons, or maybe just Tyler Winklevoss spending $140,000 per ounce on wrinkle cream.
Beyond the zero-sum transfer of wealth, there’s the destruction of the economy. It will be difficult, during the mooning period, to carry on business as usual. Businesses on the wrong end of contracts denominated in dollars will be toast. Sure, if you’re Pfizer or Walmart you can try to trade some futures contracts to mitigate the risk, but this isn’t something every mom-and-pop business wants to do to stay afloat. Jobs will be lost, the economic crisis will deepen, and the social safety net will have evaporated.
Now we’re in a situation where the US wields significantly less power, not only in the international scene but also at home as the reservoir of funding dries up. While Bitcoiners might suggest this weakened state will bring on an era of harmonious coexistence among US citizens, an honest examination of human nature and history suggests a much darker story.
To begin, probably 95% of the US will be financially worse off after hyperbitcoinization. Included in the 95%, unfortunately, you will not find the old 1%. Bitcoin will not exactly act as a rototiller for the social order. The risky, early-bird structure of the game favors those who have massive amounts of wealth to risk in the first place, also those fret about uber-first-world problems like “wealth preservation.” The Winklevoss brothers, I can assure you, didn’t go from destitution to Harvard; they started at Greenwich Country Day School, whose one-year tuition for a high school student dropped under a BTC last week. It also goes without saying that most politicians will have found their way to ride the wave. While the typical American might be proud that they managed to stack away five or six Bitcoins while eating ramen and drinking Ranier over the last six years, some rich oligarch with offshore accounts just bought enough tether to get 1500 BTC.
So levels of inequality will have surged beyond industrial age levels to feudal age levels. People will not be happy, especially as the social safety net is decimated. None of this will activate the better angels of our nature. Crime, organized and otherwise, will rise as law enforcement will be defunded and the private security forces will see intense demand from early hodlers of Bitcoin.
The era where one could enjoy a stable career for a stable income will be dead, replaced by an era of anxiety, a 24–7 financial game of chutes and ladders. The key to escaping destitution will be winning at these financial carnival games, but by this time these games will have been picked clean of low-hanging fruit, and will most certainly have been rigged by corporations powered by a massive advantage of asymmetrical information and data sophistication. Power, as it always does, shifts toward the wealthy, and the wealthy will at the core be avaricious Ayn Rand stans. They will consider showing sympathy for those left behind and resurrecting social safety nets only the moment when it becomes in their rational self-interest to do so, and this moment will most likely occur when the angry mobs overpower their private security forces with pitchforks. But then it will be too late.
To be honest, it’s difficult to describe exactly how a collapsing dollar would play out. Such an event would defy hyperbole and be filled with unexpected twists. The possibilities for very bad things are endless. I can’t make an exhaustive list, but I’m working on making a shorter one — 21 ways in which hyperbitcoinization will make your life suck