Byrne Hobart, a CoinDesk columnist, is an investor, consultant and writer in New York. His newsletter, The Diff (diff.substack.com), covers inflection points in finance and technology.
The most optimistic bitcoin investors are hodling out for one thing: the rapturous bitcoin rally known as “hyperbitcoinization.” The hyperbitcoinization thesis goes like this: Every saver in the world – individuals, companies, financial institutions, central banks – needs to own assets that maintain their purchasing power. If an asset, or the currency it’s denominated in, starts to lose purchasing power, this can set off a cascade of selling. And selling one currency means buying another. If the specific concern sellers have is that the supply of fiat money is unbounded, they’ll look at currency-like assets with a relatively fixed supply: gold, perhaps fine art, or bitcoin.
It’s a powerful narrative, and there’s plenty of historical evidence. The list of currencies that have lost most or all of their value in a short time is lengthy. Today, Venezuela and Zimbabwe are experiencing hyperinflation; the Turkish lira has lost 60% of its value relative to the dollar in the last five years, while the Russian ruble has experienced several inflationary bouts since the fall of the USSR.
In the 1990s, the Asian Tigers (South Korea, Taiwan, the Philippines, Malaysia) saw their currency values collapse as financial bubbles in their markets unwound. Earlier, the Italian lira had high inflation before the euro (what is it about currencies called the “lira”?), while even the mighty dollar saw its value deteriorate rapidly after the collapse of the Bretton Woods agreements.
There’s a problem with this argument, though. It’s true that fiat currencies have a disappointing tendency to eventually lose most or all of their value. But not all fiat currencies are created equal, and even the strenuous efforts of irresponsible spending and high-speed printing presses can’t offset other forces.
Take the British pound, for example. It was the world’s preeminent reserve currency by the late-19th century. Central banks hoarded pounds and investors around the world bought pound-denominated assets to keep their money safe. The British government was able to issue perpetual securities, called consols, paying just 2.5% interest. By the 1920s, the U.S. was a larger economy, with a more developed banking system, and many investors had switched from pounds to dollars.
This caused the fall of the pound as a reserve currency – but it took almost a generation.
The trouble with destabilizing reserve currencies is that demand for them is sticky because it’s partially a function of the amount of debt issued in the currency. A borrower who owes pounds (or dollars, yen or euros) is a future buyer of that currency. And currency owners today can bank on the demand to buy them in the future.
There were other factors in the pound’s tenacious grip on the world financial system, which apply in interesting ways to the U.S. dollar. While Britain lost share of global manufacturing to the U.S. during the 19th century, and especially so in the early 20th, Britain still had a well-developed financial system. An over-financialized economy is not a good thing for most purposes, but one thing it’s great at is keeping demand for currency elevated. If you wanted to borrow large sums of money or engage in a complicated financial transaction, London banks were often the place where you’d start.
The pound had another advantage: a captive set of buyers. Britain’s colonies kept their reserves in pounds, borrowed in pounds and, because they had close trade relationships with Britain, they priced most of their trade in pounds, too. Even after their colonies achieved formal independence, the close relationship – and the monetary norms that went with it – persisted. Even though the U.S. economy topped Britain’s in the late 19th century, the pound still constituted over half of global currency reserves until the 1950s.
Today, the U.S. is in a similar position. Our financial services sector is well-developed to the point of excess, but this means novel financial products are disproportionately likely to be priced in dollars. Large funding rounds, IPOs, buyouts and bond issues are in dollars by default. And the dollar is dominant in global trade – not just between the U.S. and other countries, but between pairs of countries that don’t have one of the top few currencies in the world. Commodity prices tend to be quoted in dollars, which encourages commodity producers to borrow in dollars and price their outsourced services in dollars, too.
The U.S. doesn’t have something exactly like the British Empire in form, but the substance is pretty close. From 1945 onward, the U.S. was the de facto guarantor of open trade for Europe, the Middle East and East Asia. These countries couldn’t necessarily defend themselves militarily and couldn’t ensure free shipment of goods, but the U.S. could. This relationship was reflected in close economic ties, and sometimes monetary ones: Many Middle Eastern countries, most notably Saudi Arabia, peg their currency to the dollar. East Asian exporters accumulate dollar-denominated assets to keep their currencies cheap. Japan, for example, owns $1.26 trillion of U.S. Treasurys and China is not far behind with $1.07 trillion. Meanwhile, Taiwanese life insurers alone own 14% of long-term U.S. corporate bonds.
All this doesn’t make it impossible for bitcoin to appreciate over the long term, but it makes hyperbitcoinization much less hyper than one might expect. Hyperinflationary episodes happen, and they tend to feed on themselves, but they don’t happen with reserve currencies. Borrowers act as a brake on high inflation. Inflation represents a general preference for goods, services and hard assets over cash, but anyone who has borrowed money has a legal obligation to get cash, often in exchange for the same sorts of goods, services and assets. As the pound example shows, it can take a very long time for that momentum to unwind. A reserve currency is a No True Scotsman argument run in reverse: Once a currency qualifies as a reserve asset, it can withstand a lot of bad policy before that status flips.
Ironically, the same factors bitcoin advocates point to as evidence the fiat system is broken – high leverage and a financialized economy – make it durable, too. With so many forces arrayed in favor of the status quo, even the inevitable can take a long time.