With the advent of the Lightning Network, the notion of bitcoin as a medium of exchange has taken off in recent years in terms of the dominant narratives in this space. Ultimately, this is a necessary component of something that aims to become money. Storing value makes no sense in the context of money without the ability to trade it easily, and Lightning is the most promising tool at this point to really scale the ability to do so.
Conceptually, however, most of the focus of media as a functionality has been around consumers: meeting the needs of the average person and their daily needs in buying groceries, shopping online, paying for services, etc. This is not the only trading ladder 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 large scale and face the complexity of foreign exchange trading between many different national currencies.
Medium of exchange doesn’t just mean people paying for their coffee, the entire medium of exchange function happens at every level and scale of the economy for purchases of much greater value than your daily Starbucks latte.
This is where bitcoin will start to truly sustainably shine on a large scale as a medium of exchange, not Joe who buys his coffee every day. SWIFT processes about $ 5 trillion in payments every day, about $ 1.25 trillion annually. There is no need to look beyond the numerous Russian banks 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 the overall processed payments represent 95% of the value and the vast majority of payments are for much lower amounts (average payments are ~ $ 400,000 and median of ~ $ 5000 in October. 2010). So very high value payments account for the vast majority of the value passed through the network, but that small remaining percentage of the value is distributed among a large variety of individual players making small payments who are still in the big scheme not a small amount of money. This distribution actually shows why SWIFT is ripe for Bitcoin’s break in the latter category.
As I mentioned in this article in March discussing this same topic in the context of explicit sanction evasion, the key limiting factor of using Bitcoin to process conventional payments denominated in fiat currencies is liquidity. I explained how even if 100% of the mining hashrate in Iran, which is 5% of the network, were fully owned by the government and they were withholding 100% of the proceeds, they could acquire $ 700 million worth of Bitcoin annually. to pay for imports. This is in the grand scheme not really much. Iran imported $ 38 billion worth of goods in 2020 – $ 700 million is only a fraction of that.
This dynamic changes when you start looking at a country with a thriving fiat market for Bitcoin. The situation with Iran was that they considered burning oil instead of being able to export it directly for sale and using Bitcoin mining to fill this gap. The problem is that it’s limited by the amount of mining hardware they can get their hands on. Consider a country that is not that heavily sanctioned, but potentially at risk, that can still export stuff and has a thriving Bitcoin / fiat market with a volume of around $ 10 million per day. If people from all over the world were willing to pay for exports from that country with Bitcoin, there is a $ 10 million a day market that could convert it into fiat every day. There is potentially $ 10 million worth of money entering the country every day to pay for exports (I know … this is an oversimplified analysis, ignoring changes in market conditions, how this will affect the liquidity of the market, the consistency of Bitcoin demand, 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, which is about $ 36 billion per day. That’s almost Iran’s annual imports since 2020.
Now imagine that last 5% of the value processed by SWIFT which makes up 95% of all individual transactions. Imagine all the different companies and individuals making international payments that fit that bucket of payments. As long as the country of origin has liquidity in a fiat / Bitcoin market to allow someone making a payment to buy it, and the destination country has enough liquidity to allow the recipient to sell it, Bitcoin is a perfect vehicle to process that international payment with. minimum slippage / fees and settle it within a few blocks. Add the Lightning Network to the image and this can be fixed in seconds.
The greater the speculative liquidity surrounding Bitcoin, the greater the value that can be processed in such a system across different jurisdictions to facilitate international trade. You don’t even need to be a sanctioned country to see the value in this. Settlement can be literally instantaneous. SWIFT can take days, sometimes even weeks, depending on where the money is going and the checks SWIFT makes on a payment. Bitcoin removes that delay and removes the ability for a third party to stop paying. It reduces things to just the two points of exchange between fiat and Bitcoin in their respective jurisdictions in terms of the counterparty risk the two operators are exposed to.
Even that, however, can be removed by simply storing and controlling the Bitcoin directly. The only risk at that point is therefore the volatility of the Bitcoin itself. This too can be addressed. At the simplest level, a small portion of the Bitcoin that a company holds can be deposited on a stock exchange with futures products and with leverage it can be used to short the Bitcoin price in order to protect itself from 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 goes up and your short is liquidated, the appreciation of the Bitcoin price will compensate and leave you with the same amount of fiat value. If it falls in value, the money you make with the short position will offset the depreciating value of Bitcoin and you will still have the same amount of fiat value.
Discreet Log Contracts (DLC) also offer the possibility to hedge against Bitcoin price volatility natively on the network itself through a smart contract. This allows you to control Bitcoin directly, bring back contracts under your control in self-custody when it closes, and even allows for the use of multiple price oracles so that no one is trusted to honestly report the price of Bitcoin.
People behave as if Bitcoin has to reach the point of hyperbitcoinization to become a major backbone of payment processing in the world, or to become an important system for the economy like SWIFT. It is not so. The market volume of a certain level means this that amount of Bitcoin is actively bought and sold. This means that the demand is there to regularly process Bitcoin purchases and sales within that range of values during whatever time frame you are analyzing. The same is true for futures markets, whatever volume is present, it is available for people who want to keep Bitcoin alone instead of being exposed to counterparty risk to protect themselves from such volatility and not ruin their assets if the price of Bitcoin suddenly collapses to a massive extent.
Bitcoiners have become so focused on the notion of basic adoption – which is not in itself a bad thing, as this is an absolutely necessary aspect of Bitcoin adoption to truly become real money – but they have started to lose out on. view the other side of that coin. Great players, great value settlement. Bitcoin is ripe for a massive disruption of systems like SWIFT, and as 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 companies as an alternative to SWIFT and other settlement systems before we see widespread adoption as a means of payment for consumers. It is simply easier to convince a few thousand companies of added value and usefulness, and get the work done to integrate it, than to convince hundreds of millions of people of the added value and get the work done to integrate it there. It would probably also make the second’s job easier if the first were done first, as most people tend to follow in the footsteps of things that seem believable.
What could add more credibility to the average person’s mind than constantly listening to how Bitcoin is being used to settle international business payments and drag business away from conventional settlement systems?
This is a guest post from Shinobi. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.