This is an opinion piece by Shinobi, a self-taught educator in the Bitcoin space and host of the tech-oriented Bitcoin podcast.
With the advent of the Lightning Network, the concept of bitcoin as a medium of exchange has made a comeback in the past few years of dominant narratives in this space. Ultimately, it’s a necessary component of something that’s aiming to be money. Stores of value are pointless in a context where money is not easily exchangeable, and Lightning is the most promising tool at the moment to really expand the ability to do that.
Conceptually, though much of the focus of mediums of exchange as a function has revolved around the consumer – meeting your average person’s needs and their day-to-day needs in grocery shopping goods, online shopping, payment for services, etc. This is not the only size of exchange in an economy. Businesses pay suppliers, they also pay contractors or services, international shipping companies need to receive money from all over the world from their customers – most are not consumers. users, but businesses. Imports flow all over the world on a large scale and it is necessary to deal with the complexity of exchanging foreign currencies between many different national currencies.
Medium of exchange not only means people pay for their coffee, the entire function of medium of exchange takes place at all levels and sizes of economies for purchases of great value. much more than your daily Starbucks latte.
This is where bitcoin will start to really shine sustainably on scale as a medium of exchange, not Joe buying his coffee every day. SWIFT handles around 5 trillion dollars dollars in payments per day, about $1.25 four million dollars a year. Look no further than many Russian banks are cut from the SWIFT system to see the potential risks of relying on this system to settle international payments. Here according to a curvilinear distribution where 5% of the total payments processed represent 95% of the value and the majority of payments are much lower amounts (average payments are ~$400,000 and the median is ~$5,000 la in October 2010). So, very large payments make up most of the value transferred over the network, but that small percentage of value is distributed to many individuals making small payments that are still within the network. Big plan is not a small amount. This distribution really shows why SWIFT is ripe to be broken by Bitcoin in that second category.
When I grow up this in March discussing this same topic in the context of apparent sanctions evasion, the main limiting factor of using Bitcoin to process regular fiat payments is liquidity. . I broke the way even if 100% of the mining hashrate in Iran i.e 5% of the network is completely owned by the government and they are keeping 100% of the proceeds they can get $700 million la Bitcoin a year to pay for imports. It’s in the grand scheme not really much. Iran imports $38 billion dollars goods in 2020 – $700 million is just a fraction of that.
This dynamic changes when you start looking at a country with a thriving fiat market for Bitcoin. The situation with Iran is that they are looking at burning oil instead of being able to export it directly for sale and using Bitcoin mining to fill that void. The problem is that it is limited by the amount of mining hardware they can use. Consider a country that is not heavily sanctioned, but potentially risky, can still export anything, and has a thriving Bitcoin/fiat market with ~$10 million daily volume. If people from all over the world are willing to pay for goods exported from that country with Bitcoin, there is a market of $10 million a day that can convert that amount into fiat money every day. That’s a potential $10 million in money pouring into the country every day to pay for exports (I know… this is an oversimplified analysis that ignores changes in market conditions, that’s all. will affect market liquidity, demand consistency for Bitcoin, etc – but stick with simple analysis just to see the point). That’s ~$3.6 billion a year. Now imagine $100 million a day market volume, which is ~$36 billion a day. That’s almost Iran’s annual import from 2020.
Now, imagine that the last 5% of the value is processed by SWIFT, which accounts for 95% of all individual transactions. Imagine all the different businesses and individuals that make international payments that fit that payment group. As long as the source country has liquidity in the fiat/Bitcoin market to allow someone to pay to buy it, and the destination country has enough liquidity for the recipient to sell it, then Bitcoin is a perfect medium to handle international payments. Slip the minimum price/fee and solve it in the span of a few blocks. Add Lightning Network to the picture and that can be solved within seconds.
The more speculative liquidity around Bitcoin, the more value can be processed in such a system between different jurisdictions to facilitate international trade. You don’t even have to be an approved country of legal entity to see the value of this. The resolution can be literally instant. SWIFT can sometimes take days, even weeks, depending on where the money is sent and the check that SWIFT runs through for a payment. Bitcoin eliminates that delay and eliminates the possibility of a third party stopping payments. It boils down to just two points of exchange between fiat and Bitcoin in their respective jurisdictions in terms of the counterparty risk faced by the two traders.
However, even that could be eliminated by directly holding and controlling Bitcoin. The only risk at that point is the volatility of Bitcoin itself. This can also be solved. At the simplest level, a fraction of the Bitcoin a company is holding can be deposited in an exchange with futures products and with leverage that can be used to short the price of Bitcoin to hedge against futures. movement. 10x leverage means you only need to put 10% of your Bitcoins on such a platform to hedge that risk. If the price of Bitcoin rises and your sale gets liquidated, the increase in the price of Bitcoin will compensate for that and leave you with the same amount of fiat value. If it drops in value, then the money you make on your short position will offset the drop in value of Bitcoin and you will still have the same amount of fiat value.
Discreet Log Contract (DLC) even offers the ability to hedge against price fluctuations of Bitcoin natively on the network through a smart contract. This gives you direct control over Bitcoin, letting contracts settle right in your control in self-management when it closes, and even allowing usage many price miracles so that such trust is not placed on a single basis for truthfully reporting the Bitcoin price.
Everyone acting like Bitcoin has to reach the point of hyper-bitcoinization to become the main backbone of the payment processing in the world or to become a system as important to the economy as SWIFT. It’s not. Market volume at a certain level means That amount of Bitcoin is being actively bought and sold. That means there is a need to regularly process Bitcoin purchases and sales in that value range during whatever time period you are analyzing. Same for the futures market, whatever volume is available is available to those who want to hold their own Bitcoin instead of taking on counterparty risk to hedge against such volatility and not ruin their business. their own if the price of Bitcoin suddenly drops to a large extent.
Bitcoin miners have become too focused on the concept of origin adoption – which is not a bad thing in itself, as it is absolutely a necessary aspect of Bitcoin adoption to truly become one. into a real currency – but they’ve started to lose the other side of that coin. Big players, great value settlement. Bitcoin is ripe for a major disruption of systems like SWIFT and with the rate at which the world is becoming unstable both politically and economically, I think the time will come sooner rather than later.
I think Bitcoin and Lightning will begin to be widely adopted by businesses as an alternative to SWIFT and other payment systems before it sees widespread adoption as a means of consumer payment. use. Simply convincing a few thousand businesses about the added value and utility and getting the job done to integrate there, it’s simpler than convincing hundreds of millions of people about the added value and getting the job done to integrate it there. It can also make the latter’s job easier if the former is completed first, as most people tend to follow in the footsteps of seemingly believable things.
What can create more credibility in your average person’s mind than constantly hearing how Bitcoin is used to settle international business payments and pull business away from payment systems. Ordinary math?
This is a post by Shinobi. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.