From a trading perspective, Bitcoin has lost a lot of value. But unlocking fundamental utility and merit can drive value appreciation in more ways than one.
Cryptocurrency businesses should pay more attention to emerging markets and everyone in the community might want to think differently about Bitcoin as we consider the idea of value and adoption by the masses.
You’ve heard these before: Bitcoin is volatile still in its infancy, it has liquidity problems, limited market size, and is an unregulated market. These common criticisms are true. For traders, all these might be attractive and provide an interesting environment. But these conditions shouldn’t be regarded as anything special or fundamental to value.
Volatility and other arbitrages are relative and inherent in all markets. So this is not how we should frame or appraise Bitcoin. Even thinking about Bitcoin purely as an investable asset may be too reductionist.
Trading is part of the story but it is not the whole story
For traders, or generally anyone serious about diversifying a portfolio, Bitcoin is of interest as a hedge against inflation. Today, it might not seem to be the same fortification that was advocated a few years ago, when we saw a lot of adoption in Venezuela, but in the long-term, this interest could still be borne out.
Short-term volatility, and even a 70% slump, do not negate hedging potential. On a ten-year time frame, Bitcoin has been phenomenal. If, in another ten years, Bitcoin is still hovering at US$20,000 or even US$30,000, then it might be time to re-think things. But despite recent downturns, those who traded their dollars or bolivars for Bitcoin in 2018 are still likely better off than if they hadn’t – or even if they had purchased gold instead.
Still, that narrative isn’t what’s transformative, or even important, about Bitcoin. It is not about trading or investing in the same way that we buy and sell stock in Apple or Google, which have both appreciated considerably from 2018 too.
Despite pointing out that speculative trading would likely drive up Bitcoin prices, Satoshi Nakamoto spoke of Bitcoin more practically, and at a level of principle. Monetary policy, government overreach or sometimes the banking system at large were key issues. Price was mentioned but it was not the focus.
What we should recognize is that around the world, people – billions of people – are trapped in inflating currency pools with limited access, if at all, to financial services or foreign currencies or other supposed safe-haven assets.
Global financial account ownership: emerging markets still lag
This is where Bitcoin comes in, and this is why it’s an investable asset in the first place.
Scarcity and hard money principles make for a good commodity-style collectible-like property. But widespread adoption, either as an escape hatch from a debased fiat system or as a network for financial empowerment, is what ultimately gives Bitcoin upside. Without demand beyond a “collecting” mentality, we won’t see the scale necessary to support high valuations, not if we expect trillions of dollars to flow into, and stay in, Bitcoin.
Bitcoin as a hedge against tyranny
Whether you’re fleeing from war, living under an oppressive regime, facing persecution or perhaps find yourself excluded from a banking system due to your gender, caste, religion, etc., Bitcoin provides a useful tool to retain financial autonomy.
Digital assets can be moved around easily. Remembering a 12-word seed phrase is enough to access Bitcoin from anywhere where there’s an internet connection. For millions of unbanked in Afghanistan, especially women, Bitcoin is useful at a US$60,000 price level, or at US$60.
Financial inclusion in Afghanistan
Raising capital in support of a cause or even a political goal is controversial but there are risks to censoring money as well. Who decides what causes are legitimate? Generally, humans are and should be free to move around, to support what they believe in, and they are liable for all that as well (we don’t live in a world without consequences).
If we view capital allocation and the transfer of funds as indicative of collective values, then regulatory systems can be built around Bitcoin’s on and off ramps only. At the core level, Bitcoin is intended to restore freedom, improve personal agency and provide a hedge against tyranny.
Digitalization of everything, everywhere
Humanity’s digital evolution is not over. As a species we’ve changed drastically over the past 200 years – and while cars, planes, phones, laptops, rockets are all expressions of this change, the real change is at the level of consciousness. In previous eras, innovation around transport and communication drove much of humanity’s transformation. With digitalization, we’ve entered a new phase.
Phones and planes made the world smaller, but with digitalization, a new layer of reality has emerged – in a spaceless and metaverse world, we now create value, relationships, experiences, and communities and with increased immersion. Bitcoin also supports more personal investment in a similar sense.
Bitcoin is about enabling everyone in the world to connect to a global, increasingly digital, economy. And that is a choice for a digital future that is free at heart.
And as we look ahead to a digital unknown, bitcoin may offer some security.
Why emerging markets? The 95%
Money means different things to different people under different circumstances. For some, with money to spare, investing is something they care about, or maybe they rather spend their excess on luxury.
For others, money is about survival, or retaining independence. And yet for others, it’s about being able to offer a lifeline to a family member overseas.
Understanding that people and communities are going to be receptive to different features of money, depending on where they live and how, is something to remember in all conversations about Bitcoin.
Since money eventually rests on a shared belief around value, when it comes to the adoption of Bitcoin, we use a holistic form of thinking. For billions of people, Bitcoin’s current volatility poses an obstacle to adoption as a store of value or medium of exchange. But adoption takes place across a spectrum and in phases
For example, apart from buying bitcoin, or taking a payment in Sats, adoption can also focus on infrastructure with minimal exposure to the asset itself.
The Lightning Network provides a good example of such infrastructural adoption. As a second layer protocol on top of Bitcoin, Lightning uses the security of Bitcoin while enabling off-chain payments – especially micropayments – to happen quickly and cheaply.
Think of it like this: When you trade shares on wall street, the trade is instant and you’ll see your account go up or down right away. Meanwhile, the actual transfer of shares and paper settlement may take a few days. Essentially, the settlement between parties is quick, leaving banks to figure out the ledger afterwards.
But even then, not all people are able and willing at this time to interact or be overly exposed to Bitcoin as an asset. And so, in El Salvador, we can see how Strike and the Chivos Wallet enable quick conversion between Bitcoin and stablecoins, largely eliminating risk for the users.
Perhaps more significantly, Lightning Labs is actively working on a new protocol, Taro, which enables issuance of assets other than bitcoin on the Lightning network. This effectively turns Lightning into a multi-asset payment rail. Basically, it brings stablecoins to the Bitcoin network, which could be key to further adoption in markets where the US dollar is seen as the primary store of value.
When talking about money’s value, it’s not enough to focus on investing, hedging or even speculating. That isn’t what will reach “the 95%” of the world that hasn’t yet embraced this new technology. But it’s here where Bitcoin matters the most.
Institutional investors are coming into Bitcoin; hedge funds are taking positions; Michael Saylor is buying more bitcoin for his corporate balance sheet; Robinhood traders are trading spot; yield farmers are gambling with 50x leverage. That might all be well and good, but if Bitcoin isn’t helping women in places like Afghanistan who are by and large excluded from the banking, and if Bitcoin isn’t helping my friend in The Gambia send money to his family in Nigeria, and if Bitcoin isn’t helping Venezuelan households as they struggle with hyperinflation, or people in Cuba who have been cut off from the global economy for too long – well, then Bitcoin isn’t really that impactful.
Impact will drive adoption.
While it’s exciting when a billion-dollar hedge fund buys a few billion dollars worth of Bitcoin, it’s better and safer if we can see billions of people buy and earn small amounts of Bitcoin instead. That’s the distribution that will bring stability to the asset; and only then will we see its sound money principles fully at work.
Why should we focus on emerging markets? Because this is where Bitcoin’s impact could be greatest.
Head of Research & Strategy, AAX
Ben Caselin is Head of Research & Strategy at AAX, the first crypto exchange to be powered by London Stock Exchange Group’s LSEG Technology. With a background in creative arts, social research, and fintech, Ben develops insights into Bitcoin and decentralized finance and provides strategic direction at AAX. He is also a working member of Global Digital Finance (GDF), a leading industry body dedicated to driving the acceleration and adoption of digital finance forward.