Apr 1, 2021
The Nakamoto Shock Is Happening, Can You Feel It?
With the titans of technology and finance embracing Bitcoin, hyperbitcoinization does not seem so far-fetched after all.
PayPal launches crypto checkout services for US consumers.
Visa starts settling payments in USDC on Ethereum.
Tesla announces a $1.5 billion purchase of Bitcoin. Its CEO Elon Musk sets off a frenzy by changing his Twitter bio to contain one word, #Bitcoin.
Microstrategy’s Michael Saylor releases a ‘Bitcoin playbook’ for corporates in anticipation of the wave of company treasuries flowing into Bitcoin.
The bullish headlines are coming hard and fast, with the first two arriving in the last few days only. Whereas retail investors and early adopters drove previous crypto bull runs, the finance and technology leaders are catalyzing today’s wave of growth. A 556% growth over the last six months doesn’t lie. Many feel that crypto’s market cap is only just beginning to react to the keen interest it has attracted from sophisticated individuals and companies.
On the surface, it seems like the narrative is straightforward. Bitcoin begins as a cypherpunk experiment on the fringes of the internet, picks up steam amongst early adopters, and, following multiple boom-and-bust cycles, finally penetrates Wall Street towards the end of 2020. The fact that players like Visa, Paypal, Elon Musk, and Michael Saylor have joined Team Bitcoin is why Bitcoin, and the crypto market as a whole, exploded beyond the resistance levels set in 2017 on the way to record highs.
However, peel beneath the surface, and you’ll find not one but two concurrent narratives that have both received significant boosts lately. The intersection of these two complementary narratives could eventually bring about the big bang of hyperbitcoinization and the seemingly inevitable Nakamoto shock.
Store of Value or Medium of Exchange? Crypto Does Both and More!
Money has three primary functions, all of which Bitcoin and crypto are on the way to carrying out:
- It’s a store of value. Money is used to preserve wealth through time.
- Money is used as a medium of exchange to transfer value through space.
- Prices are denominated in money — it’s a unit of account?
In 2017, the Bitcoin community experienced a contentious split, with the two warring camps arguing over which of these functions should be prioritized. One group advocated for bigger blocks which would allow more transactions to be processed each second and bolster the medium of exchange function, while the traditionalist camp passionately disagreed. For them, Bitcoin’s store of value properties should be the focus at this time.
The Bitcoin vs. Bitcoin Cash’ civil war’ embodied a larger debate held across the crypto space. Are Bitcoin and cryptocurrencies coming to replace gold, bonds, and other asset classes as a way to store value, or are they instead competing with Paypal and Visa on the way to becoming the new payment rails of the planet?
Fast forward four years, and the emphatic answer is both.
In the past, cryptocurrency investing was reserved for risk-taking mavericks hanging around niche forums online. Today the list of Bitcoin holders reads like the whos-who of Wall Street and Silicon Valley. Kevin O’Leary from Shark Tank is advocating for Bitcoin. MassMutual’s brought $100 million worth. Paul Tudor Jones called Bitcoin ‘the fastest horse’ and said that it reminded him of the epic gold rush of the 1970s. And then we have Elon Musk and Michael Saylor, two public company CEOs flying the flag for Bitcoin as a treasury asset for corporations both large and small.
Once a pariah, Bitcoin has evolved into a bonafide inflation hedge, especially throughout the COVID-19 pandemic. With fiat currencies continuing their frantic pace of money printing and devaluation, more and more captains of industry are waking up to the imperative of storing their value in Bitcoin.
If Bitcoin’s growing institutional esteem as an asset class is the fuel driving the current boom, the adoption of public blockchains by payment giants like Visa and Paypal is the turbo charge accelerating this bull market. It was only a few years ago that the naysayers were pointing to Visa and Paypal as evidence of the impossible competition that crypto was facing on its road to adoption. After the latest moves from the two heavyweights, it’s clear that Bitcoin, Ethereum, and the idea of public blockchains as a whole was always a lot bigger than any one company. By choosing to build on top of public blockchains instead of creating proprietary blockchains, Visa and Paypal have signaled strongly that the future of payments lies with decentralized networks.
The Nakamoto Shock and Hyperbitcoinzation
We spoke about store of value and medium of exchange. But what about the third function of money? Will prices ever come to be denominated in Bitcoin?
Once an outlandish proposition, the idea that Bitcoin might become full, global money does not seem as far-fetched when considering the past year’s events.
On the one hand, the drums are beating louder on Bitcoin’s march to mass adoption. As we explained, the dual narratives of Bitcoin as an institutional asset class and public blockchains as the future of global payments are fuelling incredible excitement in the space. At the same time, central banks have lost all sense of restraint printing money.
When Richard Nixon unpegged the dollar from gold in 1971, a move intended to curb inflation instead set off 40 years of aggressive monetary expansion, debt, and ultimately, the same inflation it was meant to prevent. Known as the Nixon shock, the move that was intended to preserve the supremacy of the dollar also triggered four decades of toxic consumerism and rising inequality.
Unlike the Nixon shock, the Nakamoto Shock is not a single point in time. Instead, it’s the process by which Bitcoin dominates its fiat competitors on the road to becoming the preferred currency of the world. The path to global dominance runs through behaving the exact opposite to fiat currencies. As they inflate faster, Bitcoin gets more scarce, cutting its supply in half every four years. Fiat encourages spending before inflation dilutes your wealth. Bitcoin fosters a high time preference and a savings attitude.
Fifty years ago, the President of the United States took the world off the gold standard to dramatic effect. Thirty-eight years later, an anonymous hacker had the vision to return the world to sound money. Today, 12 years on from that fateful release of Bitcoin, we are beginning to feel the rectifying effects of the Nakamoto shock.
Only this time, it’s Bitcoin, not gold, that’s taking center stage.
