As small-cap currencies inflate, Bitcoin gains adoption.
Bitcoin is the first fully sovereign digital currency. This means that anyone in the world with an internet connection and a computer can download the protocol and start running it. Maybe they want to invest in the technology, maybe they want to store their wealth, or maybe they are using it as a form of payment. Whatever the reason, Bitcoin doesn’t discriminate on the basis of race, creed, or nationality.
This is especially attractive for people in countries with a history of inflation or even hyperinflation. What is hyperinflation? It is when a country's government or central bank, by printing more and more money to supplement their needs, increases the supply of the currency at a rapid and excessive pace. When the supply of money increases more rapidly than the demand, the price of goods nominally rises. A good example of this has occurred during the last year: food prices have risen dramatically, in part due to the monetary expansion of the world's currency supplies.
Price increases of bitcoin in fiat terms can also be seen when the supply of fiat currency expands. Extreme increases in national currency supplies cause the prices of everyday goods to rise. Two recent examples of this are Venezuela and Zimbabwe: prices have risen so dramatically that Zimbabwe is now printing 100 trillion dollar bills and even using paper bills in more utilitarian ways, such as using them as fire starters.
Many times, countries shut down access and use of the US dollar. Because people change over to a more reliable currency, demand drops and so does the value for the currency being left behind. In turn, closing off the escape route to other currencies cripples the people’s ability to save and destroys the economy. People aren’t allowed to buy USD,so they are forced into using it on the black market
When countries' currencies hyperinflate, countries have blamed the US dollar. In 2010, Hugo Chavez signed a currency law, pegging the Bolivar to a certain exchange rate. Since then, inflation has only risen, and citizens have been forced into using dollars on the Black Market.
In November, 2020, Zimbabwe’s Secretary for Finance, told business leaders Zimbabwe wouldn't return to the USD, saying “One of the biggest mistakes was dollarizing and removing your own currency,” according to a Bloomberg report.
Bitcoin solves this. With the use of bitcoin, people have an option to escape their collapsing, hyperinflated currencies and hold their wealth in a decentralized network that is independent of the current financial system. You cannot stop someone from buying bitcoin, you cannot stop them from transacting in bitcoin, and you cannot stop them from holding bitcoin. There are ways in which a government could constrict the use of bitcoin, but in the past, this has increased adoption. And to stop Bitcoin all together, you would need to shut down the Internet. We all know that doing that, would mean there would be no GDP. When a currency collapses, and people adopt Bitcoin, the incredible value of its use case is revealed in both theory and practice. This increases adoption and could help propel people to create more Bitcoin infrastructure.
The more countries that have hyperinflated currencies, the more capital gets eaten up. Because Bitcoin was created to be the scarcest asset in the world, it is the best instrument to which people can turn. The people who see its value the most are the ones closest to the problem. The first likely event is that impoverished countries adopt Bitcoin as a store of value that is less volatile than their own currencies. Although USD is great for this, Bitcoin allows for better digital transacting. As Bitcoin’s market cap grows, it becomes a more stable form of money. Then, eventually, we could see a cascading effect as an exponential amount of adoption occurs. In Argentina, the inflation rate has increased by 40% in 1 month (January–February 2021). They have a history of inflation, and Paxful, a trading exchange, has been onboarding people there in a rapid manner.
This is known as leapfrogging. When a new technology is introduced to a poorly developed country, they leapfrog the entire costly infrastructure of the previous system and adopt the new, less costly one. A good example of this is the introduction of cell phones in less developed countries. Building the infrastructure and wiring for traditional telephones would have cost large amounts of money that these countries simply didn't have. Then, cell phones came around, and building their communication towers carried only a fraction of the cost. This is very similar to the situation with banking infrastructure. So, the first dominoes of adoption to fall could be the smaller, less developed countries.
Historically, the US dollar has been extremely stable, so seeing this specific use case in the US is difficult. However, in a country whose currency loses 40% of its value year over year, Bitcoin would seem stable. As countries with less stable currencies start to adopt Bitcoin and add to its market cap, the network will slowly become less volatile until price fluctuations are reduced to stable levels. This is already visible on the network today.
This all seems very far away, but adoption generally occurs slowly, then all at once. This is the nature of network effects and exponential growth. Ultimately, Bitcoin can be a tool for liberty and freedom from currency abuse, empowering the world and its people. The more efficiently people can store their time and energy as money, the more efficient the world economy will be.
This is a guest post by Mitch Klee. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.