Speculative Attack (2014)
Bitcoin won't be eagerly adopted by everybody - it will be forced upon them by economic reality.
People will be forced to pay with bitcoins because no one will accept their worthless fiat for payments.
Good money drives out the bad, and this has already started as a small fiat bleed.
Historically, it has been good, strong currencies that have driven out bad, weak currencies. All of history's dominant currencies (the denarius, florin, and pound sterling, to name a few) became dominant currencies because they were consistent, stable, and of high quality.
Bitcoins are not just good money. They are the best money.
The Bitcoin network has the best monetary policy and the best brand.
We should therefore expect that bitcoins will drive out bad, weak currencies.
Slow Fiat Bleed
Bitcoin's current adoption model is one of exchange rate bubbles. Due to group psychology, newcomers arrive in waves fuelled by two main factors:
decreasing information asymmetry – more resources to learn about Bitcoin -> more people are coming to the realization that bitcoins are indeed the best money.
increasing liquidity – buying bitcoins is more convenient and has fewer fees attached today than many years ago.
These waves result in an extremely volatile Bitcoin exchange rate. Regardless, once the tide pulls back and the weak hands fold, the price is a few multiples higher than before the wave.
Speculative Attack
If one believes fiat will decrease in value and Bitcoin will rise in value, they are incentivized to take a loan in fiat and invest in Bitcoin, paying the loan back later and profiting from the difference - also called a carry trade.
The weaker the local currency, the more of a no-brainer it becomes to borrow it. In this process, banks create more weak currency, amplifying the problem.
The immediate effect of this is that:
the local price of Bitcoin goes up.
The higher local price incentivizes traders to perform arbitrage for profit - buy the cheaper bitcoin in foreign dollars, sell it for the more expensive local currency, then sell the local currency for dollars.
This additional sell pressure further weakens the local currency.
An U.S. based trader performing a speculative attack on the Peruvian currency through Bitcoin.
Bitcoin market cap at $22,000 - $424B
Peru GDP - $223B
In such a scenario, the local central bank is powerless. It has limited tools to deal with this that cannot be applied for a prolonged period of time.
Hyperbitcoinization
Such a speculative attack can be seen as a series of dominoes - it rapidly turns into contagion.
Hyperbitcoinization
It is through greedy investors - each pursuing their own self-interest - that mass adoption of Bitcoin happens.
When they see the price of Bitcoin rise, citizens of countries with stronger-but-still-weak currencies buy in too.
This action entails the same cycle of economic instability in their local currency. Rinse and repeat.
The feedback loop between fiat inflation and bitcoin deflation will throw the world into full hyperbitcoinization.
— originally posted on 2 minute bitcoin https://2minutebitcoin.org and https://2minutebitcoin.org/blog/bitcoin-speculative-attack-on-the-dollar-2014
Original Author: Pierre Rochard
Original Word Count: 2073
Original Posted Date: July 4, 2014
Original Source: https://nakamotoinstitute.org/mempool/speculative-attack/
In the digital age, things happen gradually, then suddenly fast. Hyperinflation, bank runs and crises all unravel at the speed of light. Bitcoin exists as a life raft - the solution to the money problem that is global QE.