For the first time in its history, Bitcoin is acting as a safe haven during a global banking crisis, just as its supporters have always predicted. While bank stocks are tanking, Bitcoin has gained approximately 20% during the month of March 2023. The combination of collapsing banks and a rising Bitcoin has vindicated Bitcoin’s value proposition as a store of value in uncertain times, causing many investors to sit up and take notice. The bullish sentiment was exemplified by Balaji Srinivasan, the former CTO of Coinbase, who recently made a bold prediction that Bitcoin’s price will reach $1m by June 15, 2023. Srinivasan has even put a $2m bet on the line to prove his point.
The bet may seem ridiculous, and many people think Balaji intended it to be a dramatic publicity stunt. Nevertheless, it has successfully brought the topics of hyperinflation and hyperbitcoinization into the conversation, raising the profile of Bitcoin globally.
Central to Balaji’s bet is the notion that Bitcoin is working as intended in times of global fiscal uncertainty. While trust in banks is eroding worldwide, Bitcoin continues to deliver scarcity, predictability, and self-custody as promised. This is also the first crisis where the price of Bitcoin is reflecting its role as ‘digital gold.’ Unlike March 2020, when Bitcoin crashed along with the entire market due to COVID, March 2023 has seen Bitcoin display its resilience as investors flee bank stocks in search of safety.
Srinivasan’s prediction is based on the difficult decision facing the Fed as it contends with the dual challenges of inflation and a shaky banking sector. On the one hand, the Fed has committed to a tight monetary policy by raising interest rates in a bid to stave off inflation, and has succeeded in bringing down inflation from its previous highs. On the other hand, the Fed faces a serious crisis of confidence in the banking sector, one that it typically resolves by injecting more money into the system. In order to save the banks, the Fed risks undoing all its hard work on inflation.
Regardless of how it may choose to act on interest rates, the Fed is back to its old printing habits in an effort to save banks. In the week following the SVB collapse, the Fed balance sheet expanded with an additional $300bn worth of assets. When the Fed buys assets, such as government bonds or mortgage-backed securities, from financial institutions, it then credits the accounts of these institutions with newly created money. By adding to its balance sheet while inflation is still on the horizon, the Fed risks devaluing the dollar even more, leading to a total loss of confidence in fiat currencies.
Enter Bitcoin. In a world where hyperinflation renders fiat currencies essentially worthless, people will have to price goods and services in an alternative asset with a fixed, scarce supply such as gold or Bitcoin. This brave new theoretical era even has a name – hyperbitconization.
Hyperbitcoinization is a hypothetical scenario in which the widespread adoption of Bitcoin signals a shift away from fiat currencies and towards Bitcoin as a reserve asset. In this scenario, Bitcoin becomes the preferred medium of exchange for individuals, businesses, and governments, displacing traditional currencies such as the U.S. dollar, the euro, and the yen. Prices will be denominated in bitcoin, or in satoshis, the smallest unit into which a single bitcoin is divided.
Bitcoin’s newfound popularity may be sweeping up the markets in waves of euphoria, but the fact remains that the technology is not quite mature enough to form the foundation of a global reserve currency. For starters, the Bitcoin network is only capable of processing around 7 transactions per second, which is significantly less than the amount needed to support commerce. Furthermore, governments are unlikely to relinquish their monetary sovereignty so quickly.
Despite the fact that Bitcoin has yet to reach a stage capable of underpinning the world’s financial system, the very fact that such a scenario is currently debated in the public sphere is a major victory for a coin that is only 14 years old.
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