This is an opinion editorial from Shinobi, a self-taught Bitcoin space educator and technology-oriented Bitcoin podcast host.
With the advent of the Lightning Network, the notion of bitcoin as a medium of exchange has skyrocketed in recent years in terms of dominant narratives in this space. Ultimately, this is a necessary component of something that aims to turn into money. Storing value doesn’t make sense in the context of money without the ability to easily exchange it, and Lightning is the most promising tool right now to really scale the ability to do that.
Although conceptually, most of the focus of media of exchange as functionality has been on consumers: meeting the needs of your average person and their daily needs in grocery shopping, online shopping, paying services, etc. He is not the only one. scale of exchange in an economy. Companies pay suppliers, they also have to pay contractors or services, international shipping companies have to receive money from all over the world from their customers, most of whom are not consumers, but companies. Imports flow around the world on a massive scale and have to deal with the complexity of currency exchanges between many different national currencies.
Medium of exchange doesn’t just mean people pay for their coffee, the entire medium of exchange function occurs at every level and scale of the economy for purchases of far greater value than your Starbucks latte diary
This is where Bitcoin will start to really shine sustainably at scale as a medium of exchange, not Joe buying his coffee every day. SWIFT processes about $5 trillion in payments every day, about $1.25 trillion a year. One need look no further than numerous Russian banks that cut themselves off from the SWIFT system to see the potential risks of relying on it to settle international payments. This follows a skewed distribution where 5% of global payments processed account for 95% of the value and the vast majority of payments are for much lower sums (median payments ~$400,000 and median ~$5,000 in October of 2010). So very large value payments make up the vast majority of value transferred to the network, but that small percentage of the remaining value is distributed among a wide variety of individual actors making small payments who are still in the grand scheme, not a small amount of money. This distribution really shows why SWIFT is ripe for Bitcoin disruption in the latter category.
As I discussed in this article in March, discussing this very issue in the context of explicit sanctions evasion, the key limiting factor in using Bitcoin to process conventional fiat-denominated payments is liquidity. I broke down how even if 100% of the miner hashrate in Iran, which is 5% of the network, were completely owned by the government and retained 100% of the revenue, they could acquire 700 million worth of Bitcoin dollars a year. to pay for imports. That in the grand scheme of things isn’t much. Iran imported $38 billion worth of goods in 2020; $700 million is just a fraction of that.
This dynamic changes when you start considering a country with a thriving Bitcoin fiat market. The situation with Iran was that they considered burning oil instead of being able to directly export it for sale and use Bitcoin mining to fill that gap. The problem is that you are limited by the amount of mining hardware they can get their hands on. Consider a country that is not so heavily sanctioned, but potentially at risk, that can still export things and has a thriving Bitcoin/Fiat market with roughly $10 million a day in volume. If people all over the world were willing to pay for this country’s exports with Bitcoin, there is a $10 million a day market that could convert that into fiat every day. That’s potentially $10 million dollars of money coming into the country every day to pay for exports (I know…this is an oversimplified analysis, ignoring changes in market conditions, how that will affect market liquidity, the consistency of Bitcoin demand etc.) but follow the simplified analysis just to consider the point). That’s about $3.6 billion a year. Now imagine a market volume of $100 million a day, that’s $36 billion a day. This is almost Iran’s annual imports as of 2020.
Now imagine that last 5% of the value processed by SWIFT which represents 95% of all individual transactions. Imagine all the different companies and people making international payments that fit into this payment group. As long as the source country has the liquidity in a fiat/Bitcoin market to allow someone making a payment to buy it and the destination country has enough liquidity for the receiver to sell it, Bitcoin is a perfect vehicle to process this international payment with minimal slippage/fees and settle it in a few blocks. Add the Lightning network to the picture and this can be solved in seconds.
The more speculative liquidity that surrounds Bitcoin, the more value can be processed in this system between different jurisdictions to facilitate international trade. You don’t even have to be a sanctioned entity country to see the value of this. Settlement can be literally instantaneous. SWIFT can take days, sometimes even weeks, depending on where the money moves and the checks SWIFT runs on a payment. Bitcoin eliminates this delay and eliminates the possibility of a third party interrupting the payment. It boils down to just the two exchange points between fiat and Bitcoin in the respective jurisdictions in terms of counterparty risk to which both transactors are exposed.
However, even this can be removed by simply guarding and controlling the Bitcoin directly. The only risk at this point is the volatility of Bitcoin itself. This can also be treated. At the simplest level, a small portion of the Bitcoin a company holds can be deposited into an exchange with futures products, and leveraged can be used to short the price of Bitcoin to hedge against volatility. 10x leverage means you only need to put 10% of your Bitcoin on that platform to hedge that exposure. If the price of Bitcoin rises and your short is liquidated, the appreciation in the price of Bitcoin will offset this and leave you with the same amount of fiat value. If it goes down in value, the money you make from the short position will offset the depreciating value of the Bitcoin and you will still have the same amount of fiat value.
Discrete Log Contracts (DLCs) even offer the ability to hedge against Bitcoin price volatility natively on the network itself via a smart contract. This allows you to directly control the Bitcoin, have contracts returned to your control in custody when it closes, and even allows the use of multiple price oracles so that no single one can be trusted to honestly report the price of Bitcoin.
People act as if Bitcoin has to reach the point of hyperbitcoinization to become a mainstay of payment processing in the world, or to become as important a system to the economy as SWIFT. it doesn’t Market volume of a certain level means this this amount of Bitcoin is being actively bought and sold. This means that there is demand to regularly process Bitcoin purchases and sales within this value range for whatever time frame you are looking at. The same goes for the futures markets, whatever volume is available, people who want to hold Bitcoin themselves rather than be exposed to counterparty risk to hedge against that volatility and not ruin their their businesses if the price of Bitcoin suddenly falls. to a massive degree.
Bitcoiners have focused so much on the notion of grassroots adoption, which in itself is not a bad thing, as this is an absolutely necessary aspect of Bitcoin adoption to actually become real money, but they have begun to lose sight of the other side of it. currency Big players, great value clearance. Bitcoin is ripe for a massive disruption of systems like SWIFT, and at the rate the world is becoming both politically and economically unstable, I think the time will come sooner rather than later.
I think Bitcoin and Lightning will start to see widespread adoption by businesses as an alternative to SWIFT and other settlement systems before it sees widespread adoption as a means of consumer payment. It’s easier to convince a few thousand companies of the added value and usefulness, and do the work to integrate it, than it is to convince hundreds of millions of people of the added value and do the work to integrate it there. It would probably also make the latter’s job easier if the former was achieved first, as most people tend to follow the footsteps of things that seem believable.
What could add more credibility to your average person’s mind than constantly hearing how Bitcoin is being used to settle international trade payments and take business away from conventional settlement systems?
This is a guest post by Shinobi. The opinions expressed are entirely my own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.