For years we were told how Bitcoin is the future of money and it is going to replace the US dollar as the medium of exchange. This was something espoused by Bitcoin Maxis like Michael Saylor. Whatever the problem, have no fear, bitcoin would fix it.
Unfortunately, this is not how the real world operates. There is theory and reality. Sadly, many, like economists, operate in the world of theory, espousing ideas they think should happen. Markets tend to have other ideas.
Argentina Showing The Path For Cryptocurrency
The people of Argentina are intimately familiar with the destruction caused by inflation. While many take to YouTube to complain about a 3% or 6% inflation rate, this country is actually hyperinflating. Here is what the population of Argentina is dealing with:
Argentina’s inflation rate hit a 32-year high of 211.4% in 2023, according to the latest Jan. 11 figures from the country’s statistics agency, the National Institute of Statistics and Censuses.
That will get your attention.
Once again, the Maxis will tell us bitcoin is the solution. They also take to YouTube, making videos about all the magical natures of BTC.
Those who are dealing with the issue in Argentina, however, tell a different story.
Argentines are using black market exchanges, known locally as “crypto caves,” to buy United States dollar stablecoins in a bid to escape strict currency controls and the triple-digit inflation of the Argentine peso. Argentines are also reportedly shunning Bitcoin (BTC) due to perceived volatility.
To clarify, it isn't perceived volatility. Bitcoin is a volatile asset. There is no way to deny this. Simply look at the price action over the last couple month. In fact, go back to 2022 and focus upon the high and low. It went from $66K down to $15K and now is near $50K.
That is not the epitome of price stability, which is what the Argentinians are looking for.
Fortunately, for them, they found their solution.
USD Denominated Stablecoins
The path forward for cryptocurrency, at least as a medium of exchange, is stablecoins. Specifically, we have to focus upon USD denominated one such as the Hive Backed Dollar (HBD). While others are receiving a lot more attention (and activity), we have to consider whether the solution is asset backed or algorithmic stablecoins.
It is naturally up for dispute at this point.
Nevertheless, it is unlikely the solution to government intrusion, overreach, and general incompetence is in an asset that overseen by these same entities. That is the wolf watching the hen house.
That aside, we can conclude that a simple premise is, once again, being proven by Argentina. When it comes to medium of exchange, price stability is the most crucial.
Therefore, if one is seeking this out, nothing tops the US dollar. That is an unpopular opinion among many circles but, again, we are dealing with reality, not the theoretical world.
The US dollar has the deepest markets, the most economic productivity tied to it and the largest reach. It is truly an international currency. The only rival is the EURO which is really nothing more than a regional currency.
If we want to use a compute viewpoint, the network effect is with the dollar. It is the Facebook of the monetary world. This only enhances it price stability as the reach expands.
Dollar Eating Everything Else
What is likely to happen, due to what was just expressed, is the dollar ends up eating all other currencies, at least by those who can exercise choice.
Basically, people are going to forgo any currency that has more volatility than the US dollar. That is a key point to comprehend. Anything that has more volatility than the USD will be shunned (note what is happening in Argentina). This is true whether it is the peso, rial, or bitcoin.
The second factor in this is the money supply. Here we have an interesting development taking place.
At the moment, the commercial banking system is responsible for the expansion of the money supply. This is all part of the central bank system. Anything that touches a bank is still tied to this system.
With asset backed stablecoins, they tend to be backed by a combination of US dollars, i.e. cash, and US Treasuries. In other words, it is still integrated into the system.
An algorithmic stablecoin used the USD as the unit of account yet has no dollars involved. This means that expansion of the money supply in this realm is actually outside the central banking system. We get an ironic twist in that growth here actually adds price stability through network effects, further diminishing the impact of the Federal Reserve.
The eventual outcome is that you have a US dollar that has little to do with the United States, the Federal Reserve, or bank notes. In fact, it operates completely outside the banking system.
What we have is a measurement. The dollar, the currency, is really no more. Instead, it is akin to an ounce or kilometer; nothing more than an unit of account.
The price stability is the goal. That is the problem for bitcoin. Even the Maxis are all about "price go up". When it comes to medium of exchange, this is fatal since price also can go down.
Ask the people in Argentina what they think about price fluctuations due to currency volatility.
They are showing us how those who are drastically affected are responding to the situation.