October 10, 2020

7 FAQs About Bitcoin Becoming A Country's Currency

17 minutes

In 2018, Gary Arndt told me, "Bitcoin is the currency of the future and always will be."

I agree. Let's answer 7 questions related to that statement:

1. Was bitcoin designed to be a major currency?

When Satoshi Nakamoto invented bitcoin, it's unclear if he ever expected it to be a country's currency.

Instead, it seems that he envisioned it becoming digital gold. He saw it as a way to:

Store wealth

Make low-fee international transactions possible

Make money that cannot be confiscated or debased by a horrible government

Nakamoto thought that it's terrible that someone who works hard to save $50,000 and keeps it in a bank, will see the purchasing power of that $50,000 decline each year as inflation devours whatever lousy interest rate the bank pays.

Bitcoin gives everyone the ability to store their savings in the ether. It provides a bank to the unbanked. It offers a place to store money that no government can confiscate. That's bitcoin's true value.

If bitcoin never becomes a national currency, that doesn't mean it has failed since that was never its goal.

2. When countries make their own national cryptocurrencies, won't that make bitcoin obsolete?

In the 2020s, several countries will create an "official national blockchain-powered cryptocurrency." Some believe when Chinese and/or American governments make their own cryptocurrencies that bitcoin will vanish or devalue.

This is improbable.

Whatever governments will create will have all the genius and innovation of ... a government.

Yeah. That bad.

Governments will use their cryptocurrencies to make it easy for them to:

Tax people

Track payments (in the name of reducing criminal payments)

Reverse payments

Confiscate money

Devalue the currency by "printing" more of it

In short, government cryptocurrencies will be everything bitcoin is not.

Paradoxically, when governments introduce such cryptocurrencies and mandate their use, they will inadvertently shine a spotlight on bitcoin. People will wonder how bitcoin compares to their national cryptocurrency. They will quickly realize that bitcoin is better overall.

As a result, some countries will make bitcoin illegal. Indeed, many countries already have banned bitcoin.

Such bans will hurt bitcoin and force bitcoin to go underground in those countries.

Countries ban Facebook and WhatsApp. Users use VPNs and other tricks to bypass the ban. Some countries ban the Internet, but satellite-powered Internet gets around that too.

Likewise, bitcoin users will find a way to get around bans. They're already doing that today.

3. Which countries might adopt bitcoin as their national currency?

It's possible that a few small countries with worthless currencies could, in a fit of revolutionary rage, decide to abandon their hyperinflated currency and adopt bitcoin instead.

Several countries abandoned their currency for the US dollar (e.g., Ecuador, Panama, El Salvador, and Palau).

Others have adopted the euro without joining the eurozone (e.g., Kosovo and Montenegro).

Therefore, when the US dollar collapses (and it will at some point), then a few countries with shattered economies may give bitcoin a shot. That's especially possible if the revolutionaries are young tech-savvy leaders. (Revolutionaries are often young.)

Big economies (e.g., Russia, China, USA, Canada, UK) are too nationalistic, proud, and obsessed with controlling their economic sovereignty to abandon their currencies. Therefore, it's almost impossible to imagine any of them abandoning their currencies.

4. How would a bitcoin-priced economy be like?

Economists will study bitcoin-denominated countries with great interest.

We're used to inflation and a devaluing currency. If you held $1 that was given to you in 1775, it would be worth 1 cent today. That's because the US government has issued so many new dollars that dollars, like all currencies, have trended toward worthlessness. Although that produces downsides, we're used to it.

In a bitcoin-priced economy, you would get an annual pay cut instead of a pay raise. Your rent would decline. Valued in bitcoins, your house would technically lose value.

Confused?

Then imagine this: your house was worth 100 BTC in 2025 but in 2035 it's worth only 50 BTC. Nominally, your house has declined in value.

However, in real terms, it may have doubled.

Why?

Because perhaps in 2035, 50 BTC is worth 4 times more on the world currency markets than 100 BTC was worth in 2025. Weird, right?

However, that's exactly how a country that priced everything in bitcoin would work.

Every year, a bitcoin-denominated economy would give workers an annual salary cut, not a raise.

Once again, the nominal salary cut would actually be a raise in real terms.

The only analogy is the tech industry where Moore's Law has made faster, better products cheaper with time.

5. Will bitcoin be a reserve currency?

In this century, Bitcoin will be a reserve currency for some countries.

Currently, most countries hold reserves of USD and gold.

Many countries also hold the EU's Euro, Japan's Yen, China's renminbi, and Switzerland's Francs.

Sovereign wealth funds (SWF) not only hold gold and currencies but often hold commodities such as petroleum.

Many countries will realize that they ought to add bitcoin to the list of their holdings since it will have proven that it's a better store of value than gold, currencies, and commodities.

Of course, they won't hold a large percentage of their reserves and SWFs in bitcoin. Perhaps 1% of their portfolio would be bitcoin.

Although that's a small bet in percentage terms, it would mean billions of dollars of new demand would flood the BTC market which has, effectively, a fixed supply. That would raise BTC's price, which would then make more countries consider holding some of their reserves in bitcoin (or upping their percentages).

6. Will Bitcoin change its default unit of account?

Bitcoin needs to change its default monetary unit to Satoshis or Bits if it wants to enter the mainstream. One bitcoin is composed of 1 million Satoshis. Just like one dollar is made up of 100 cents.

As bitcoins become more valuable, satoshis should become the default unit.

Right now, bitcoin is at an annoying halfway point.

For example, today, a cup of coffee costs about 0.0005 bitcoin. That just sounds weird.

But so does 50,000 satoshis (which has the same value as 0.0005 bitcoin).

If bitcoin becomes 10 times more valuable, then that cup of coffee will be 5,000 satoshis, which is a number that feels like some world currencies.

Ideally, bitcoin would become 100 times more valuable, so that coffee is only 500 satoshis.

However, until then, bitcoin is in an awkward state: 1 bitcoin is too valuable and 1 satoshi is too worthless.

When bitcoin first came out, bitcoins were worth much less than $1. Indeed, 10,000 bitcoins bought a couple of medium pizzas.

https://www.youtube.com/watch?v=LjNMgeqUgks

Today, 10,000 bitcoins will buy you a $100 million home!

7. What is Bitcoin's fate?

Gary Arndt's prediction that bitcoin will never be a currency will probably be correct, especially if you're wondering if a major country will make bitcoin their primary currency. At best, a small country might do that.

However, that doesn't mean that bitcoin will be a failure or a useless experiment.

For hundreds of years, no economy has used gold as their medium of exchange, but that doesn't make it worthless.

I expect that in the 2020s, more hedge funds will buy a tiny bit of bitcoin as a hedge. Similarly, a handful of countries may put 1% of their reserves into bitcoin. Although these are small steps, because bitcoin's supply is effectively fixed, such relatively small actions can cause a price surge.