Bitcoin has always had the potential to become a world standard for money. Even if the blockchain that powers Bitcoin lacks the bandwidth to handle the required transaction volume, and even if the world wasn’t ready 11 years ago for non-governmental e-money to go mainstream, the potential was always there.
Indeed, Bitcoin enthusiasts and developers have long insisted the day will come when Bitcoin will stand alongside gold. Back in 2018, Jack Dorsey, CEO of Twitter and Square, emphasized that Bitcoin would become the world’s single currency.
What the visionary, Milton Friedman, predicted about Bitcoin in 1999.
Even before Bitcoin became a reality, visionaries like Milton Friedman were predicting the rise of an internet-version of cash, as long ago as 1999. “The internet is going to be one of the major forces for reducing the role of government,” he said at the time. “The one thing that’s missing but will soon be developed is a reliable e-cash, a method where you can transfer funds on the internet without A knowing B or B knowing A.”
The statements of Milton Friedman are precisely why finance commentators like Vice News producer and The Wisdom of Crowds author James Surowiecki have been so skeptical about Bitcoin going mainstream. “Our economies and financial systems are built around fiat money, and they rely on the central bank’s control of the currency (and the government’s ability to issue debt in that currency) to help manage the business cycle, fight unemployment, and deal with financial crises,” Surowiecki wrote in spring 2018 when Bitcoin hype was peaking.
Can Bitcoin be the dominant economic currency?
“An economy in which Bitcoin was the dominant currency would be a more volatile and harsher economy, in which the government would have limited tools to fight recessions and where financial panics, once started,” he continued, “would be hard to stop.”
Yet, two years later, the signs are positive that the significant disruption of the novel coronavirus could do what nothing else has done so far: give Bitcoin the extra push to become accepted as a reserve currency.
Currency collapse, of course, is nothing new – this all has happened before. As recently as 2017, when the Bolivar collapsed, many Venezuelans went on to adopt cryptocurrency for their transactions. Before that, the Zimbabwean dollar and Argentine peso saw hyperinflation that prevented them from serving as valid currencies. The Icelandic krona suffered a similar fate after that country’s financial collapse in 2008.
In hindsight, 1971, when the gold standard was finally abandoned, was the beginning of the end for fiat currencies. For decades, central banks have reacted to economic threats by printing money and lowering interest rates, slowly creating a massive debt bubble that eventually caused the 2008-9 crisis.
Despite warnings, their strategy hasn’t changed, leaving fiat currencies over-inflated and ready to pop.
The coronavirus crisis brought a substantial economic shock that these currencies can’t withstand.
We are seeing sudden slashes to both supply and demand and cuts to international trade that has brought the global economy almost to a standstill. In response, the US Federal Reserve, the Bank of England, and the European Central Bank (ECB) all increased their quantitative easing plans and brought interest rates down even further to 0% (or below, in the case of ECB and Japan).
In the absence of the gold standard, it’s unclear what fiat currencies have reduced value against.
We can even argue that they reduced value against Bitcoin since it reflects the true market value of currency at any given time. Some hardcore proponents, including the author of Rich Dad Poor Dad, claim that it’s the only true hard money.
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While that insight into the issue is hardly accepted universally, Bitcoin is increasingly seen as “harder” than fiat currencies which are manipulated by central banks.
Indeed, if Bitcoin’s resistance to central bankers’ manipulations is what once made it seem impractical, today, that stand seems like much more of a feature than a bug.
With fiat currencies in disarray and central banks on the back foot, we’re likely to see either a return to old financial ideas perceived as safe and stable, such as the gold standard, or the acceptance of radically new ones like Bitcoin which no longer appear unattractive.
When the internet rules, e-cash is king
Up till now, the decentralized nature of Bitcoin was one of its disadvantages. It was seen as chaotic, disorganized, and unreliable with no one officially “in charge.” The current period shows the manipulation of interest rates and quantitative easing measures — together with the effects of the coronavirus. All of these produce a prolonged period of artificial deflation, or worse, stagflation, decentralization could become an asset rather than a drawback.
Friedman, whom I quoted above, presciently linked the rise of e-cash with the central role of the internet in governing our lives. Once the internet rules, his argument goes, we will trust the currency which it manages.
It’s similar to the slow rise of email, which existed as a medium for communication since 1971 but wasn’t widely adopted until the mid-1990s. Suddenly, trust rapidly increased until it became ubiquitous.
Bitcoin occupies a similar space. It’s an internet-based tool that’s been awaiting its time. You could say that 2009-2020 were Bitcoin’s shadow years, just as 1970-1990 was that era for email. And we’re already seeing the tide start to turn.
The critical role that Bitcoin plays.
We can see this from the increasingly important role that Bitcoin plays, not just as a currency, but as a trustworthy agent in online interactions. The concept has been building and maturing slowly. And, UX has improved with time.
As digital currency spreads and becomes more stable, it’s turned into the foundation for dapps. RSK, for example, uses Bitcoin as the foundation for a smart contract platform, easing people’s ability to use it for transactions. RSK is the first open-source smart contract solution to have been built on Bitcoin’s network, and the platform has also rolled out powerful interoperability capabilities.
Bitcoin’s benefits to Ethereum.
“We believe being able to offer Bitcoin’s benefits to Ethereum users and to connect these respective developer communities is a crucial step for the blockchain ecosystem as a whole,” RSK Strategist Adrian Eidelman told the press in February.
Another example is the recent acquisition of the popular Taringa! Social network by IOV Labs, the company behind RSK. There are ambitious plans on the table to introduce Bitcoin transaction capabilities, to decentralize social media data storage, and to reduce the monopoly of global internet corporations such as Facebook.
At the same time, Atomic Loans is investing in building a decentralized finance marketplace for Bitcoin DeFi-backed loans. Such advances are fast bringing Bitcoin to be a versatile, widely-accepted currency.
Success breeds success
Bitcoin is standing on the threshold of widespread adoption as a reserve currency, and its diversifying use cases attest to this.
The currency is increasingly used for P2P lending and has improved cross-border trade as it removed the need to go through exchange middlemen. Dorsey is among the recent investors in Lightning Labs’s project to build a new protocol layer to speed up and lower the cost of Bitcoin transactions, while his Square Cash App is rolling out payments in Bitcoin, and Money on Chain is building a DeFi platform to serve as the foundations of a DeFi ecosystem for direct financial interactions.
We’re looking the future hard in the eye.
These and other important steps are establishing Bitcoin as a viable, stable means for payment. We anticipate that it will soon be adopted by central banks as a reserve hard currency, alongside their existing fiat currencies and gold stocks. In the short term, governments may even create their own Bitcoin to maintain control over the currency, but Bitcoin relies on decentralization, and in the long term, it will continue to evade governmental control.
A new bitcoin utopia could be on the way.
We still haven’t reached Bitcoin nirvana, but the signs are promising for long-term Bitcoin believers. Fiat currencies have long been losing their appeal, after decades of overprinting money and dragging down interest rates. As they crumble, Bitcoin’s star rises.
The corona-triggered recession is merely the pin that popped the fiat currency bubble.
Simultaneously, the more projects and platforms built on the back of Bitcoin DeFi, the more trust in and familiarity with the currency increases, setting it up for adoption as a reserve currency in 2021 and beyond.