Bitcoin: The next world currency?
Can Bitcoin truly become a global currency, and what conditions must be met for this to occur?
Introduction
Today’s Bitcoin statements from seasoned financial gurus could hardly be more divisive. “Bitcoin is a fictitious asset that will quickly lose value and fall to zero.” all the way to “Bitcoin will become the most valuable store of value ever in the coming years, reaching a value of 1.5 million USD per coin.”
This statement is even exaggerated by certain evangelists. But, in the end, how will Bitcoin evolve? In this post, I’d want to highlight a few really useful use cases for which Bitcoin was designed from the ground up in 2008 to provide society with direct added value in a world free of financial institutions. In addition, I will demonstrate under three potential scenarios how and under what conditions Bitcoin could evolve until 2035, as well as which problems must be overcome before Bitcoin can play a meaningful role in financial policy. Please keep in mind, however, that this is my opinion and does not constitute financial advice.
So, can Bitcoin truly become a global currency? Spoilers follow: In theory, “yes,” but it’s not that straightforward.
Review
In response to the Lehman Brothers financial crisis in 2008, a still unknown person with the pseudonym “Satoshi Nakamoto” took the initiative to challenge the corrupt and insatiable financial institutions with a digital currency called “Bitcoin”. Satoshi’s goal was to create a decentralized currency, independent of middlemen (institutions, banks, and government agencies), and across national borders, that enabled the exchange of value between parties based on a multi-layered and modern encryption technology and an ingenious concept. Bitcoin saw the light of day in January 2009 and its acceptance, albeit moderate at the beginning, increased year by year. A brilliant economic and technically planned concept led to the fact that even countries like Ecuador accept Bitcoin as an official means of payment and many people want to have their salary paid in Bitcoin. Bitcoin has today become an integral part of our society and has already achieved the first stage of its goal of being an open and decentralized store of value.
The history of currencies
It is interesting to note that our currencies have been redefined and created again and again, driven by the technological evolution of our species. The most successful of all currencies in our history so far, however, is undisputedly the gold standard. Gold, as a globally recognized disinflationary means of payment, created prosperity and peace for decades (Belle Époque 1871–1914). Only the artificial creation of vast amounts of unbacked fiat money broke the peaceful period. All that was needed was a government decree to create huge amounts of government money. Now it becomes clear what power Bitcoin has.
It is to be expected that in the not foreseeable future, a new, even better currency will be invented to suit our society, or currencies even be abolished completely.
Bitcoin’s currency units
However, anyone who believes that Bitcoin consists only of “one Bitcoin” is wrong. Bitcoin was developed from scratch to exchange existing currencies worldwide. Due to the limit of 21 million Bitcoins, Satoshi Nakamoto was aware that even the smallest amounts have to be paid with Bitcoin, which is why he fractionated Bitcoin from the beginning. Sub-units up to 8 decimal places regulate this. The lowest and really relevant payment unit is called “Satoshi”. 100,000,000 Satoshi are equivalent to one Bitcoin.
It is to be expected that the naming of the units will still change with the corresponding acceptance in society.
Use cases
Satoshi did everything right with the Bitcoin Blockchain. Only in one thing did he not, or perhaps deliberately not, take into account the rapid technological progress: Speed! Only seven transactions per second can be processed via the Bitcoin blockchain. In comparison with today’s top blockchains like Solana, which can theoretically process up to 60,000 transactions per second, it quickly becomes clear that the Bitcoin Blockchain has no chance as a global payment system. After all, the speed of money transfers from one participant to another is elementary to be taken seriously as a global digital currency system. Joseph Poon and Thaddeus Dryja recognized this early on in 2015 and, with the Lightning Network (LN), proposed a way of transporting money from A to B in a matter of seconds despite the severely limited Bitcoin Blockchain. And at a minimal cost. The idea was celebrated by Bitcoin enthusiasts and turned into reality.
The Lightning Network
The Bitcoin Lightning Network is a second-layer solution built on top of the Bitcoin blockchain. It works by creating a network of payment channels between participants and reaches 1,000,000 Transactions per seconds. These channels are like two-way tunnels that allow users to transact with each other directly, without broadcasting every transaction to the entire Bitcoin network. The only transactions that are eventually recorded on the Bitcoin blockchain are the opening and closing of the payment channels.
One of the key benefits of the Lightning Network is its ability to enable almost instantaneous microtransactions with very low fees. Since most transactions occur off-chain, they are not subject to the congestion and confirmation delays of the main Bitcoin blockchain. It is important to note that the Lightning Network is still in the final stages of its development. However, the first software solutions are already on the market and make a good impression. Here the Lightning Network explained for Techie’s.
For the following use cases, we assume the Lightning Network.
Peer-to-Peer Transactions
You will say, “Yes, that already exists with Paypal”. In principle, this is true, but what if, for example, the NSA gives the order to Paypal to freeze all funds worldwide? Remember, Bitcoin is decentralized, and there are usually no middlemen. Payments are processed independently of government controls or bank reprisals.
Streaming Transactions
Peter and Steve both book the new blockbuster “The biggest Movie” via their streaming service provider. While watching the movie, both find it bad and cancel it. Peter paid the full rental amount with a credit card, whereas Steve opened a payment channel with his Bitcoin Lightning wallet and only pays for every second he watches.
Steve’s perspective
- If he doesn’t like the movie, he can quit it after a few minutes and pay only a fraction.
- He does not pay for services if he has no possibility to watch movies (vacation, illness, business trips etc.)
- He has the option to watch parts of the movie at any time without having to rent it whole again.
- He has no pressure to watch the movie within a stated deadline.
Blockbuster.io’s perspective
- Blockbuster.io generates a higher level of customer confidence with Steve because only what is actually incurred is charged.
- Blockbuster.io generates higher revenue when Steve repeatedly watches or rewinds scenes of the movie.
Streaming Bitcoin Lightning payments are a way to make periodic or continuous micropayments with Bitcoin. In a streaming payment agreement, rather than a single lump sum payment, a user delivers a continuous stream of tiny payments to a recipient over a set period of time.
This can be beneficial for a variety of applications, including subscription-based services, pay-per-use models, and content creators that wish to be compensated for each view or download of their work.
“Why do you only get paid at the end of the month?”, “Why do you not get paid every day or every hour? — It’s a technology problem.”
Institutional Transactions
For transfering confidentially, both parties use Bitcoin wallets such as Wasabi or Samourai, which take the freedoms and privacy of their users very seriously and are 100% open source. In addition, the wallets establish an encrypted connection over the Tor network. The higher fees for the transaction are shared.
Financial Inclusion
Bitcoin in combination with the Lightning Network and Starlink can help to grant people and businesses in the dessert areas access to the internet and to financial services. Optionally, financial institutions can also be integrated if required.
“1,7 billion adults (31%) has no access to the financial market and 3,8 billion have still no access to the internet”
Financial inclusion is important because it can help to reduce poverty, increase economic growth, and promote greater stability and prosperity for individuals and communities. By providing access to financial resources and services, individuals and businesses are better able to participate in the economy, invest in their futures, and protect themselves from financial risks and shocks.
Challenges for Bitcoin
After 14 years on the market, Bitcoin is showing strength like never before. Despite years of a global pandemic, inflation, and an unnamed recession, Bitcoin now represents dominance in value storage and stability with its competitor Gold. With the upcoming halving in mid-2024, reducing miner costs from 6.25 to 3.15 BTC per block, Bitcoin is expected to overtake Gold’s stock-to-flow index to become the most valuable store of value.
However, the King Coin still has some hurdles to overcome before it achieves the potential to become the world’s currency. The most important thing, however, is to gain society’s acceptance. The following measures are necessary for this:
Clear regulation
States mostly still refuse to accept Bitcoin as an official store of value, let alone as a means of payment. The reason for this is the fear of losing control. Financial systems represent power, and power is the guarantor of influence over the people, which governments naturally do not want to lose. Nevertheless, they must face up to the task and define clear limits. This is the only way to create honest and qualitative applications that inspire trust among users and increase acceptance. The EU has already made a good start with the MICA Regulation.
Differentiation from CBDC
While in 2020 there were only 30 countries, today 114 countries worldwide are already working on concepts to replace their local fiat currency with a digital currency (CBDC — Central Bank Digital Currency). Even if it will never happen, let’s imagine for just 10 seconds what costs, time and CO2 resources could be saved if all 114 countries were to pull together and introduce Bitcoin as a global means of payment? We would then use the savings to do really important things like fight climate change, poverty and promote research into energy production. Sounds plausible, doesn’t it?
Back to reality: The multitude of digital currencies is coming and with it countless problems regarding interoperability. If Bitcoin and other cryptocurrencies are regulated globally, Bitcoin will initially be a store of value like gold and later rise as a coexistence to the existing CBDCs.
Lower volatility
Bitcoin’s price fluctuations are very high because the asset is fairly new to the market and is a popular speculative asset in what is still a relatively small financial market. Rapacious market makers also contribute to bitcoin’s high volatility. Higher acceptance in society and better government regulation could lower the fluctuations.
Low transaction fees
Bitcoin is already well on its way with the Lightning Network. The first promising applications are already available, and more are coming onto the market every day. With the Bitcoin Lightning Network, small amounts can be exchanged among each other with almost no fees.
Trusted applications
Untrustworthy handling of customer funds, crashes such as FTX and Terra Luna unsettle society and prevent acceptance and investment. With the help of clear regulation, space can be created in which trustworthy applications can emerge. Just as financial companies are monitored by regulators, Web3 providers, DEXs and CEXs with a payment connection should be able to demonstrate a mandatory certificate from a certification body.
Future Scenarios until 2033
In an uncertain world where protectionism and much unrest dominate the global population, it is difficult to predict how Bitcoin will perform between now and 2033. Black swan events such as nuclear war, global natural disasters, or a comet impact would change Bitcoin’s performance just as dramatically as a merger of mankind.
“Bitcoin is valuable because people believe in is valuable”
A global currency like Bitcoin would solve many of humanity’s problems, as described earlier here in this article, in one fell swoop. Realistically, however, this is impossible at the current time, as even highly democratic states will cling to their central financial power and subjectively try to prevent decentralized structures. So only a creeping process or an extraordinary macro situation can lead to Bitcoin growing into the world currency.
The following three scenarios are worth considering:
Szenario 1: The Ongoing-Principle
If most governments manage to regulate Bitcoin in coexistence with their fiat currencies or CBDCs in the coming years, acceptance in society will steadily increase. As a result Bitcoin will become more popular, and even harsh critics will be forced to open up to it. New applications and financial products will emerge around Bitcoin, and people will increasingly invest in Bitcoin. Bitcoin, much like the gold standard in the Belle Époque, could grow to be a world currency alongside local fiat and CBDC’s of the states by 2033. The prerequisite for this is global economic stability and average world peace as we know it today.
Szenario 2: The Worst-Case Szenario
If we experience a Black Swan event such as a nuclear confrontation, a global natural disaster, or a global collapse of the economic and financial system in the coming years, Bitcoin’s hour would have come. Bank runs would cause chaos, and our money as we know it today would steadily lose value. As long as there was still energy and networks, people would flee into Bitcoin because it would be the only store of value that could be reasonably relied upon. Like a phoenix from the ashes, Bitcoin would inevitably rise to become the global world currency — at least until the situation returns to normal.
Szenario 3: The Technical Desaster
If governments oppose Bitcoin due to concerns of a loss of power, or if major industrialized nations agree to adopt an IMF-controlled global CBDC Worldcoin before people are caught up with Bitcoin, this could lead to a drastic devaluation of Bitcoin. Also, manipulation of BTC miners by new technologies such as quantum computing or General Artificial Intelligence (AGI) could do so much damage to the network that investors would flee Bitcoin and the asset would lose value.
Beware
Regardless of the scenarios described here, the distribution of the 21 million Bitcoins poses a corresponding risk. Currently, institutions and states such as Grayscale (654,600 BTC), MicroStrategy (130,000 BTC), and Bulgaria (210,000 BTC) hold Bitcoins. Stablecoin giant Tether (USDT) has announced that it will now invest 15% of its profits in BTC every month, which represents around 210 million USD in BTC — every month. Tether already holds USD 1.8 billion worth of BTC. If one takes seriously predictions that a Bitcoin will be worth at least 1 million USD in 10 years, Grayscale would be worth 654 billion USD just because of Bitcoin. If the great unknown Satoshi Nakamoto, who holds about 1 million BTC, activates his wallet again, he would represent an extremely powerful force on the financial market. We must all be aware that giants are emerging here who will regulate the world market in the future. Let’s hope that they only have good things in mind.
Survey
In preparation for this article, I initiated a poll on LinkedIn called “Can Bitcoin grow up to a global currency in the next ten years?”. I didn’t expect the poll to be so close and it shows that something fundamental is happening in our society.
I have decided to repeat the survey once a quarter. Just activate the bell in my profile here or at LinkedIn to be informed about further development.
This article was written as part of the Frankfurt School Blockchain Center’s Scholar Program “Bitcoin-Talents 2023”. Thank you for allowing me to be a part of this fantastic team of talents, mentors and organizers.
Remarks
This article is no financial advice and the content was made by human hands.
If you liked this article, feel free to forward it to your colleagues or share it on social networks. If you are an expert in this field and would like to criticize or endorse the article, kindly send me a private message. I’m happy to respond.
About the author
Ralf Emanuel is a passionate entrepreneur. He founded two companies in the IT industry after managing large-scale IT projects since 1995. After developing and operating several critical enterprise applications in the tourism and finance sectors, he now specializes in IT consulting, focusing on digital transformation, cybersecurity, and blockchain while advising companies on their strategic direction.
