This is an opinion piece by Shinobi, a self-taught educator in the Bitcoin space and tech-oriented Bitcoin podcast host.
With the advent of the Lightning Network, the notion of bitcoin as a medium of exchange has again taken off in recent years in terms of the dominant narratives in this space. Ultimately, it’s a necessary component of something that aims to become 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 at this point to really scale the ability to do so.
Conceptually, although the majority of the means of exchange as a feature has been consumer-centric – catering to your average person and their day-to-day needs for grocery shopping, shopping online , payment for services, etc. This is not the only scale of trade in an economy. Companies pay suppliers, they also have to pay subcontractors or services, international shipping companies have to receive money from all over the world from their customers – most of whom are not consumers, but businesses. Imports move around the world on a large scale and have to deal with the complexity of exchanging foreign currencies between many different national currencies.
The medium of exchange does not just mean that people pay for their coffee, the whole function of medium of exchange occurs at all levels and scales of the economy for purchases of much greater value than your daily Starbucks latte.
This is where bitcoin will begin to shine on a lasting scale as a medium of exchange, not Joe buying his coffee every day. SWIFT processes about $5 trillion in payments every day, or about $1.25 quadrillion a year. One need not look any further than many Russian banks are cut off from the SWIFT system to see the potential risks of relying on it to settle international payments. This follows a curved distribution where 5% of all payments processed represent 95% of value, and the vast majority of payments are for much smaller sums (with average payments being around $400,000 and the median around US$5,000 in October 2010). Thus, very large value payments represent the vast majority of the value transferred through the network, but this remaining small percentage of value is distributed among a wide variety of individual actors making small payments who are still in the grand scheme and not a small sum of money. This distribution actually shows why SWIFT is ready to be disrupted by Bitcoin in the latter category.
As I discussed in this article in March discussing this very topic in the context of explicit sanctions evasion, the primary limiting factor to using Bitcoin to process conventional fiat-denominated payments is liquidity. I explained how even if 100% of the mining hashrate in Iran, or 5% of the network, was entirely owned by the government and they kept 100% of the profits, they could acquire $700 million worth of Bitcoin per year to pay for imports . It’s in the grand scheme not really much. Iran imported $38 billion worth of goods in 2020 – $700 million is just a fraction of that.
This dynamic changes when you start to consider a country with a thriving fiat market for bitcoin. The situation with Iran was that they were considering burning oil instead of being able to export it directly to sell, and using Bitcoin mining to fill that gap. The problem is that it is limited by the amount of mining hardware they can get their hands on. Consider a country that isn’t so heavily sanctioned, but potentially risky, can still export stuff, and has a thriving bitcoin/fiat market with around $10 million in volume per day. If people around 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 of money coming into the country every day to pay for exports (I know…that’s a simplistic analysis, ignoring changes in market conditions, how that will affect the liquidity of the market, Bitcoin demand consistency, etc. — but stick to the simplified analysis just to consider the point). That’s about $3.6 billion a year. Now imagine a market volume of $100 million per day, or about $36 billion per day. This is almost Iran’s annual imports from 2020.
Now imagine that the last 5% of the value processed by SWIFT represents 95% of all individual transactions. Imagine all the different businesses and individuals making international payments that fall into this category of payments. As long as the source country has liquidity in a fiat/Bitcoin market to allow someone making a payment to buy it, and the destination country has enough liquidity for the recipient to sell it, Bitcoin is an ideal vehicle to process that international payment with minimal slippage/fees and settle it within a few blocks. Add the Lightning Network into the picture, and it can be fixed in seconds.
The greater the speculative liquidity around Bitcoin, the more value can be transacted in such a system between different jurisdictions to facilitate international trade. You don’t even have to be a sanctioned entity country to see the value in this. Settlement can be literally instantaneous. SWIFT can take days, or even weeks at times, depending on where the money is moving and what checks SWIFT executes on a payment. Bitcoin removes this delay and removes the possibility for a third party to prevent the payment from occurring. It boils down to the only exchange points between fiat and bitcoin in the respective jurisdictions in terms of counterparty risk to which both operators are exposed.
Even that, however, can be removed by directly holding and controlling the Bitcoin yourself. The only risk at this point is then the volatility of Bitcoin itself. This too can be treated. At the simplest level, a small portion of the bitcoin a company holds can be deposited on an exchange with futures products, and with leverage can be used to sell the price of bitcoin to hedge against volatility. . 10x leverage means you only have to put 10% of your Bitcoin on such a platform to cover that exposure. If the price of Bitcoin increases and your short is liquidated, the appreciation in Bitcoin price will compensate for this and leave you with the same amount of fiat value. If its value drops, the money you earn from the short position will offset the depreciated value of Bitcoin, and you will still have the same amount of fiat value.
Discreet Log Contracts (DLC) even offer the ability to hedge against Bitcoin price volatility natively on the network itself via a smart contract. This allows you direct control of Bitcoin, having contracts come back under your control in your own custody when it closes, and even allows the use of multiple price oracles so that trust is not placed in only one to honestly report the price of bitcoin.
People are acting as if Bitcoin needs to reach the point of hyperbitcoinization in order to become a major payment processing backbone in the world, or to become as important a system to the economy as SWIFT. It’s not. A market volume of a certain level means that this amount of Bitcoin is actively bought and sold. This means that the demand is there to regularly process Bitcoin buys and sells in this range of values during the time period you are analyzing. The same goes for futures markets, whatever volume is present is available to people who want to hold Bitcoin themselves instead of being exposed to counterparty risk to protect against that volatility, and not see their business ruined if the Bitcoin price suddenly crashes. to a massive degree.
Bitcoiners have become so focused on the notion of grassroots adoption – which in itself isn’t a bad thing, as it’s an absolutely necessary aspect of bitcoin adoption to truly become a true currency – but they began to lose sight of the other side of that coin. Great players, great value settlement. Bitcoin is ripe for massive disruption to systems like SWIFT, and at the rate the world is becoming both politically and economically unstable, I believe the time will come sooner rather than later.
I think Bitcoin and Lightning will start to be widely adopted by businesses as an alternative to SWIFT and other settlement systems before they are widely adopted as a means of consumer payment. It is simply easier to convince a few thousand companies of the added value and usefulness, and to do the work to fit in, than to convince hundreds of millions of people of the added value, and to do the work to integrate it there. It would also probably make the latter’s job easier if the former was accomplished first, since most people tend to follow in the footsteps of things that seem believable.
What could add more credibility in the mind of your average person than constantly hearing how Bitcoin is used to settle international trade payments and drive businesses away from conventional settlement systems?
This is a guest post from Shinobi. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.