Bitcoin burst into the media spotlight with soaring valuations in late 2017. Not only was it fashionable to declare that you had invested in the next big thing, but people began wondering if this was really the start of mass adoption. At its core, the concept of Bitcoin is quite simple. The idea is to create peer-to-peer currency that doesn’t have to go through a traditional financial institution.
Twitter CEO says Bitcoin will be the world’s single currency in 10 years:
In early 2018, Twitter CEO Jack Dorsey created quite the stir when he declared, “The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be Bitcoin.” Mr. Dorsey also elaborated on the timeline, too, stating, “probably over 10 years, but it could go faster.”
Bitcoin predictions plucked out of thin air are rife. However, we must remember that Bitcoin does fulfill two core criteria:
- It’s built on innovative and new technology. Indeed, many governments are trying to leverage the blockchain tech Bitcoin is built on. In the United Kingdom, Housing Minister Eddie Hughes released a detailed report concluding that the country could save £8 billion a year by embracing blockchain technology. Proof-of-concept tests have already been carried out in the United Kingdom for processing benefits payments.
- Bitcoin derives value from network effects. The same is true of technology stocks like Twitter, themselves. Put simply, if Twitter had one user, then the platform would have zero value or utility. If you put two people on Twitter, people assign it more value; and if you add a third, it’s worth even more. The reason why social media platforms like Facebook, Twitter, and Snapchat are assigned billions of dollars in valuation is their big user bases creating network effects. The same is true of Bitcoin. If no one was using Bitcoin, then no one would assign any value to it.
In this article, we’ll examine if Jack Dorsey’s prediction could be correct and consider which triggers could result in higher levels of Bitcoin adoption.
Could rising consumer debt levels lead to greater Bitcoin adoption?
Throughout the world, there are alarming warning signs that consumers are being overburdened with debt. During 2017, U.K. household debt surged to levels not seen since the 1980s. The difference between spending and income resulted in U.K. households taking on £25 billion in additional debt in 2017. That’s about a quarter of what the country spends on its national health service.
In the United States, consumer debt levels have hit peak levels. How much consumer debt is there in the United States? It’s estimated that this debt figure will reach a staggering $4 trillion by the end of 2018.
The United States and the United Kingdom are not unique examples. Nearly every country in the world is experiencing rapid rises in consumer debt levels. What we need to remember is that debt is essentially taking future cash flows (income) and spending them today. Consumer-credit fuelled growth cannot be sustained long term. At some point, the debt will need to be repaid.
How does this tie into Bitcoin adoption? If you are a believer in Keynesian economic theory, then you will believe that world governments should boost growth by increasing demand for consumer items. The stats for global consumer debt show that low interest rates have encouraged consumers to take on ever-increasing amounts of debt and have therefore artificially increased demand over the last decade. It is this artificial demand that has fuelled economic growth over the last 10 years.
However, interest rates around the world are beginning to rise again and consumer debt levels are already at all-time highs. What does this mean? It means consumer disposable income should shrink as consumers repay their debts. It’s this part of the credit cycle that usually leads to economic recession. That’s bad news for most businesses and the housing market.
That prompts the question, which assets typically make up the majority of a person’s total wealth? Usually, it’s housing, stocks, and pensions, typically invested in the stock market. All these assets usually fall in value during economic recession. So, will people sit back and watch their net wealth fall? Or will they look for uncorrelated assets to hedge and attempt to preserve their wealth? It is in this exact situation where most people will be searching for an asset that acts as a store of value. If Bitcoin is truly digital gold, then it should benefit from increased net-fund inflows and increased adoption in these circumstances.
Stock market bubble:
Since the financial crisis, investing in the stock market has been exceptionally profitable. In August 2018, the S&P 500 set the record for the longest bull market in history with around 3,500 days without a correction. What has made this miraculous bull run possible? Most would agree that a combination of near-zero interest rates and quantitative easing were behind this rise.
However, things are changing. Global interest rates are on the rise, and quantitative tightening is being deployed as a policy across numerous central banks. There are a couple of key signs that indicate that the global bull run in stocks is ready to correct.
The XLF ETF is a basket of large commercial and investment banks. The Homebuilders ETF is a good indicator of consumer confidence. If consumers are feeling good about the economy, then they will be more likely to buy new homes. Both indicators have seen a correction in 2018.
The graphs below show the price action for each ETF from 2007 to today. The interesting thing is that the market tops before the 2008 financial crisis and in 2018 are nearly exactly the same. The point is that the 2007 level of valuations seems to be respected. No one can say when a crash will happen. However, the charts indicate that we are in the last innings of the current credit cycle.
Quantitative easing has also played a vital role in propping up global stock markets over the last 10 years. Companies have been able to borrow money essentially for free. Most would think that these funds were used for R&D or business expansion, but the truth is that a significant amount of this capital was used to artificially inflate share prices via share buybacks.
Bitcoin: Born out of financial crisis and the potential solution to the next?
Hopefully, you can now see that the global economy is not all sunshine and rainbows. The truth is that we are currently experiencing bubbles in:
- Consumer debt
- National debt
- The stock market
All this has been a direct result of fiat currencies along with government and central bank policy. Debt caused the 2008 financial crisis, and it was all about nations bailing out financial institutions. However, the current figures for consumer and national debt indicate that the next crisis will be about whole nations being bailed out. The question is whether anyone will be able to stump up the cash.
Fortunately for the United States, it is technically impossible for the nation to ever default. The reason why is that U.S. debt is denominated in its own currency, the U.S. dollar (USD). If push came to shove, the United States could just print more dollars to service its debt and bail itself out. However, by doing so, it would destroy the purchasing power of its citizens and any USD holders. If the U.S. government were ever to take such drastic action, the most likely outcome would be hyperinflation.
Countries like Venezuela, Argentina, Turkey, and Syria are already experiencing problems with inflation. In each of these affected countries, the purchasing power of their citizens is being destroyed. As citizens continue to lose faith in their currency, they naturally look towards alternative means of exchange. That’s where cryptocurrencies like Bitcoin come in.
Bitcoin adoption: Which countries are embracing the cryptocurrency?
Not surprisingly, the United States has the highest levels of Bitcoin trading — it is the most wealthy country, after all. There is little doubt that speculation is the main driving force behind Bitcoin adoption in developed countries like the United States and the United Kingdom. However, why is Venezuela ranked fourth on the list of June 2018 trading volume stats?
Well, Venezuela is currently experiencing the worst hyperinflation on the planet. Estimates from the IMF put the expected levels of Venezuelan inflation at 1 million percent in 2018. It is quite clear that Venezuelan citizens cannot trust their government or financial institutions to preserve their purchasing power. The hyperinflation we see in Venezuela is exactly what happens when citizens lose faith in their national currency. It’s a vicious cycle, where citizens paid in local currency try to trade it for something else as quickly as possible. The data seem to indicate that an increasing number of Venezuelans are converting their currency into Bitcoin.
The interesting thing is that Bitcoin adoption also seems to be increasing in other countries like Argentina, which is suffering from a milder economic crisis.
Why are people turning to Bitcoin in times of economic crisis?
Fiat currency derives its value from the citizens of a country having faith that it actually has value. In times of economic crisis, this faith is regularly shattered. What makes things worse is that in hard economic times, governments tend to impose oppressive capital controls to try and prop up their currency. Naturally, citizens lose faith in their government, currency, and financial institutions. After all, wouldn’t you refuse to trust your bank with your money if they restricted ATM withdrawals to $1 a day? That exact situation happened in Venezuela. In Greece, it was maybe worse, with €1.6 billion being confiscated directly from citizens’ bank accounts to help pay off sovereign debt.
Bitcoin offers an alternative to fiat currency. Yes, it is volatile right now. However, the fixed supply of 21 million Bitcoin means that it cannot be hyperinflated. Fiat currencies, on the other hand, have technically an infinite supply. This means that citizens need to have faith that their government and central banks will preserve their purchasing power. With that confidence broken, it appears that people are now choosing to place their faith in Bitcoin. This actually makes a lot of sense, seeing that Bitcoin is not controlled by any central bank or government. Capital controls cannot be imposed, and Bitcoin can be freely transacted across borders.
Could the Twitter CEO be correct?
Jack Dorsey seemed to make an exceptionally bold claim when he stated that he believed that the world would have a single global currency and that it would be Bitcoin. However, the truth is that the fiat currency system could come to an end in the next financial crisis.
According to former U.S. Congressman Paul Kanjorsk, we were literally 24 hours away from total economic collapse in 2008. However, the figures suggest that the next economic crisis will be on an even bigger scale. The question is, who will bail out the impacted nation-states and stop the contagion?
In event of a global financial crisis, the stock market is likely to make things even worse. Experts believe the global market cap of stocks is in excess of $80 trillion. As with any financial crisis, we saw the stock market decimated in 2008. Quite simply, investors won’t sit by and watch their investments halve overnight. As in 2008, the most likely scenario is that investors will run for the exits as quickly as possible. But where they will reinvest this value to maintain its purchasing power?
One candidate is gold, and another is commodities. However, physical commodities are highly inefficient to use as a medium of exchange for international business. Also, if 1933 has told us anything, it is that the U.S. government is more than capable of outlawing the ownership of precious metals.
Hopefully, the next economic crisis will never come. But if it does, then it seems highly likely that Bitcoin will play a key role in the global economy. Bitcoin trading volumes in economies like Venezuela have shown that in times of economic stress, people are increasingly turning toward cryptocurrency. It seems that the masses are coming around to the benefits of Bitcoin. A monumental global economic crisis certainly seems to be the most likely catalyst to cause Bitcoin to be adopted as the world’s single currency.
Final word:
Bitcoin could just be a financial experiment that has spiraled out of control. Or, it could be the evolution of money. The truth is that nobody knows. However, it would be foolish to rule out Jack Dorsey’s insights into the future of Bitcoin. After all, he is more experienced than most when it comes to tech adoption.
What’s for sure is that governments and financial institutions will not allow the status quo to be disrupted without a fight.
Ultimately, the system supported by the majority will triumph. The question you must ask yourself is, how much faith do you have in fiat currency and your government? If the answer is “not much,” then maybe it’s worth looking at Bitcoin more deeply.
Only time will tell if Jack Dorsey is correct in believing that Bitcoin could become the world’s single currency. It’s on you to decide if you should take his prediction seriously or not.
