• TennHedge

The Bitcoin Arms Race Has Begun for Nation States

El Salvador’s recent enactment of a law which makes bitcoin legal tender in that nation represents a huge triumph for the people of El Salvador, but more importantly marks the beginning of a new epoch for bitcoin, if not humanity itself. This new epoch can best be interpreted as the start of a “bitcoin arms race” at the nation state level.


Bitcoin is a unique monetary good in that the total supply of bitcoin that will ever exist is capped at 21,000,000, making bitcoin the only widespread money in recorded history to have a fixed supply. Not only does bitcoin have a fixed supply, it also has an issuance schedule that is set forth by computer code in a fixed manner, meaning that bitcoin's supply is inelastic to changes in demand. Unlike other monetary goods such as gold and silver, if there is a sudden increase in demand for bitcoin, more bitcoins cannot be mined in response to this demand; therefore, an increase in demand for bitcoin as a money has an outsized effect on the price of bitcoin, unlike any other money that has ever existed.


Considering bitcoin is the most scarce money and store of value in existence, adopting a bitcoin standard early on gives economic actors in the bitcoin market a sizable first-mover advantage, and presently there is an immense asymmetrical opportunity in bitcoin before it reaches widespread adoption. First movers can capture the maximum amount of purchasing power on the bitcoin network at the lowest cost basis possible, while secondary actors have a disadvantage in comparison due to being later to adopt bitcoin. In terms of nation state level economic competition, this is likely to lead to a ‘run’ on bitcoin at some point in the future. Unlike the current economic system, if A has more bitcoin than B, then there is not much that B can do in the traditional sense to ameliorate this situation. B cannot just create more bitcoin, for example, or perhaps go to war with A and physically steal their wealth. Therefore, the nature of bitcoin creates the incentive for nation states to acquire as many bitcoins as possible to have an advantage in purchasing power over their peers, and then only two ways for this to occur (outside of clandestine methods such as hacking bitcoin wallets) is through direct purchase and mining. Bitcoin is thus the fairest and most even playing field for money to have ever been conceived.


One can theorize that the immediate effect of the El Salvador law is newfound economic pressure on the nation state peers of El Salvador, such as Costa Rica, Panama, etc. This economic pressure is likely to scale in an upward direction, as smaller nations adopting bitcoin then finally leads to larger nations adopting bitcoin, a domino effect moving up the economic food chain, so to speak. An intriguing element of this is the amount of lag time between El Salvador adopting bitcoin as legal tender, and nations like the United States following suit. Will the lag time be five, ten, twenty years? This is an integral question as the price of bitcoin is concerned, so it seems.


In brief, a digital, economic supernova has just taken place in El Salvador. The principal question now becomes how quickly its reach will be felt in other parts of the world. One can posit that bitcoin is likely to slowly but surely spread within the geographical footprint of Central America, before rapidly being adopted all over the globe.


"Gradually, then suddenly."


-TH


You should always consider seeking financial advice from a licensed advisor before making decisions with your money, and you should not consider anything I write as financial advice but merely my opinion. Getting your financial house in order is a prerequisite for Bitcoin saving, in my opinion.



Disclosure: nothing in this article should be considered financial advice and I am not a financial advisor. Do your own research as everything in finance carries risk.