The first page of the cryptocurrency history book should open in the early 1970s, when the United States ceased to back the dollar with gold – thus ushering in an era of fiat currency. The status quo has hardly changed since, and to this day money continues to be printed via the issuance of public debt, without tangible limits. This is one of the key factors that has led to inflation and currency depreciation; ever since the 70s, the purchasing power of the dollar has slowly declined. It is a phenomenon that, among other things, incubated public and private desire for an alternative means to exchange value. The seeds for cryptocurrency were sown.

Over half a century after the demise of the gold standard, Bitcoin is making quite the noise across financial markets. This virtual currency serves as a form of payment beyond the control of any government.

Perhaps it is time to weigh up the pros and cons of advancing the world’s first cryptocurrency as a fully-fledged medium of exchange, be it for paying your mortgage, buying lunch, or investing in the stock market.

But don’t think of this as a rallying cry for Bitcoin. It is, rather, a thought experiment – taking us to the heart of our philosophies around the nature of money, the purpose it serves, and how new currencies are born.

Hyperbitcoinisation: A tantalising alternative?

Let us follow the thought. A scenario wherein Bitcoin replaces all traditional currencies has been referred to as hyperbitcoinisation (though the principle could be applied to any other virtual asset).

Against a backdrop of fiat inflation – and in some countries, hyperinflation – assets like Bitcoin “offer a striking contrast: a decentralised network beyond the control of central banks, with a fixed supply limited to 21 million tokens. This scarcity makes Bitcoin an inflation-resistant asset,” explained Charles-Henry Monchau, chief investment officer, Syz Group, in an interview with Finextra. “Deflation in cryptos occurs through two mechanisms: burning (coins are sent to a burn address (dead wallet) to permanently remove them from circulation) and capped supply (hard cap).”

Already, around about 89% of the total supply of Bitcoin is already in circulation.

Aside from its deflationary tendency, there are sundry other reasons hyperbitcoinisation should be taken seriously.

1.       The re-distribution of wealth

If Bitcoin became the world’s primary medium of exchange, fiat currency would be devalued, and we could be granted a deflationary economic outlook. This would turn upside down monetary policy, financial systems, and government. Indeed, a re-distribution of wealth would occur – favouring digital currency’s earliest adopters.

“The new economic framework may also strengthen the legitimacy of other cryptocurrencies by integrating them into the circular economy,” added Monchau.

2.       Reaching underbanked areas

Following on from this, hyperbitcoinisation would boost access to financial services for those who may have struggled to receive them under the fiat system. Naturally, all consumers require to make use of Bitcoin is a smartphone and an internet connection – without needing to defer to a middle-man financial institution.

As such hyperbitcoinisation could extend to the underbanked services such as credit, rapid cash transfers, access to global markets via wallets, participation in decentralised finance platforms, as well as peer-to-peer lending and borrowing.

3.       A war-time option

With war-fever rife, right or wrong, cryptocurrencies are proving an invaluable asset for many nations, by reason of their decentralised makeup.

With no third-party bank involved, citizens in Ukraine, for example, can shift monies around at speed with minimal transactional costs. In many instances, Bitcoin is acting as an intermediate currency for remittance across borders; to send much-need cash to family members who have fled the shelling.

At a governmental level, the nation also deployed digital currencies to funnel over $200mn in crypto to for pro-Ukrainian causes, reported The Financial Times. These funds helped pay for bulletproof vests, helmets, and walkie talkies.

The roadblocks to hyperbitcoinisation

Yet, before these benefits can be reaped in the public and private sectors, at least four key issues must be resolved:

1. Environmental Impact

The Bitcoin network is notorious for its environmental impact. A May 2024 report from Best Brokers has shown that that the halving of the Bitcoin block reward on 20 April resulted in a doubling of the power required to mine a single Bitcoin: “Currently there are 450 Bitcoins mined daily. This costs mining facilities a whopping 384,481,670 kWh of electrical power. That comes at 140,336 GWh annually – more than the annual electricity consumption of most countries, save for the 26 most power-consuming ones,” reads the report.

If that doesn’t sound significant enough let’s put it into perspective. Taking the United States’ annual electricity consumption for Bitcoin mining, alone, enough energy would be saved to power 5.1 million US households for 12 months; or charge every electric vehicle in the US 223 times.   

As yet, no research has been done to determine how fast we would flunk the Intergovernmental Panel on Climate Change (IPCC)’s warming target if hyperbitconisation happened right now. 

 “We live in a capitalistic world,” said Simon Yu, CEO of crypto cashback platform, StormX, in an interview with Finextra. “Once governments put tougher restrictions around coal mining, for instance, brown energy will become too expensive. Then, the blockchain network will have to convert to alternative energy to try and maintain its profitability. It's simply not financially or environmentally sustainable to maintain such toxic energy usage worldwide.”

Grant Blaisdell, creator, and co-founder of Copernic Space, believes that the carbon footprint of the chain is simply a function of its immaturity as a technology: “The first combustion engines were disgusting. These new technologies need a chance to refine.”

Aside from using cleaner energy at source in order to become more sustainable, bitcoin should transition from the current energy-intensive Proof of Work (PoW) model to a consensus mechanism, such as Proof of Stake (PoS), argues Monchau. “PoS relies on validators who are chosen to validate transactions and create new blocks based on the number of tokens they hold and are willing to ‘stake’ as collateral, thereby consuming less energy.”

2. Volatility

Perhaps the headline issue faced by Bitcoin today, though, is that it is far too unstable to be used for everyday transactions. “This volatility stems from a variety of factors, including fluctuations in supply and demand, regulatory actions, market news and events, shifts in market sentiment, and price manipulation,” argued Monchau.

Recent research from online crypto casino, Bombastic, ranked Bitcoin the most volatile cryptocurrency, in terms of its highest and lowest USD price over the last 12 months from January 2024. When analysing data for the largest 100 coins by market cap, Bombastic revealed that Bitcoin’s price skyrocketed from $20,195 in March 2023 to $46,936 in Jan 2024. It had the highest growth in dollar value compared to any other cryptocurrency over the last 12 months. Maker (MKR) and Ethereum came in at second and third most risky crypto currencies, respectively, with values soaring by over $1,000.

Nevertheless, institutional interest is holding steady. Digital assets hedge fund manager, Nickel, recently showed that of its institutional investors and wealth managers in the US, UK, Germany, Switzerland, Singapore, Brazil and the United Arab Emirates – who collectively manage $816 billion in assets – 63% ranked cryptocurrencies among their top five assets offering the best risk-adjusted returns over the next five years. That compares with 60% selecting US equities and 55% selecting European investment-grade debt. Just 54% selected European equities among their top five.

Increased liquidity, reduced transaction costs and further adoption from institutional investors will be needed more broadly to bring volatility closer to what we see in traditional currencies.

3. Transaction capacity

Even if volatility was subdued, Bitcoin would not be able to handle the billions of transactions that would inevitably fly around in a world of hyperbitcoinisation – at least not as it stands. This is referred to as the Bitcoin scalability problem and is attributable to the fact that the blocks on the chain are limited in size and frequency.

Indeed, on-chain transaction processing capacity of the network is limited to the block size limit of 1 megabyte and an average block creation time of 10 minutes. These numbers constrain the network's throughput. As such, transaction processing capacity is estimated to be between 3.3 and 7 transactions per second.

There are several proposals to address this, such as Schnorr signatures, to act as a scaling solution; Merkelized Abstract Syntax Trees (MAST), to reduce the size of smart contracts; and Layer 2 protocols, which boost Bitcoin's scalability and speed.

“While Layer 2's Lightning Network has improved the speed and scalability of Bitcoin transactions; instant processing of billions of transactions remains, for the time being, out of reach,” confirmed Monchau. 

4. Uptake

There are plenty of statistics out there that spotlight the boom of crypto adoption. Indeed, cryptocurrencies have been ascending in popularity in recent years – with ownership bloating from 432 million to 580 million in 2023 alone.

Businesses around the world are waking up to it too: “over 15,000 global entities, including giants such as Apple, Walmart, and Disney, now accept payments in cryptocurrency,” observed Monchau.

But these figures do not tell the whole truth. While ownership of virtual currency is indeed on the up, the health of its perception is dubious. According to Chainalysis, over 460 million bitcoin wallet addresses have been created, though 90% are inactive – leaving just over 46 million wallets with at least $1.

Mass adoption, when it comes to daily transactions, is critical if we are to realise hyperbitcoinisation.

Managing a decentralised financial system

The regulatory government of a virtual currency is a minefield in and of itself. New laws and regulatory frameworks would need to be devised to boost investor confidence and limit market manipulation.

Some measures have already been put in place, such as the European Commission (EC)’s Markets in Crypto-Assets Regulation (MiCA), which seeks to support market integrity and financial stability by regulating public offers of crypto-assets. Other countries and jurisdictions, such as the US, Japan, and Switzerland, have issued their own inflexions.

However, issues abound. Research has revealed that almost $400 million worth of cryptocurrency has been lost to hacks in 2024 so far. The most targeted blockchain in 2024 is the Ethereum chain with 33 incidents. Bitcoin came in at fifth place, with two incidents. Clearly, regulations must be tightened to give confidence to users.

A spokesperson from Smart Betting Guide added that “hacks, scams and rug pulls not only pose a threat to individual investors but cast a shadow on the broader narrative of cryptocurrency as a revolutionary force in finance. They erode trust, stifle innovation, and impede the progress towards a more inclusive and decentralised financial future. The task at hand goes beyond personal security; it is a shared responsibility to fortify the foundations upon which the future of finance stands.”

The governmental reaction

To maintain influence on monetary policy, governments have pushed for the creation of a central bank digital currency (CBDC) – a digital form of a country's fiat currency, regulated by its central bank.

The objective is to weaken cryptocurrencies, but Monchau believes it may have the opposite effect: “The introduction of government-controlled digital currencies, such as the digital yuan, raises concerns about privacy and personal security, and could ironically drive people towards Bitcoin, seeing it as the only true form of independent money.”

In terms of CBDC adoption, “China is leading with its digital yuan, it has been actively tested, and used in pilot programs,” added Monchau. “The European Central Bank (ECB) is currently in a two-year preparation phase of its CBDC…while the United States is still in the exploratory phase, with debates ongoing about the feasibility and implementation of a digital dollar.”

Russia, for its part, is working to ban cryptocurrency entirely, despite sizable profits of its crypto miners. Data from Triple A shows this could negatively impact 8.7 million Russians.

A spokesperson from CryptoCasino noted that this “shouldn’t be too big of a concern for the global market as it isn’t the first time countrywide bans have come into place, with China being the largest country to enforce such laws, in 2021. Since then, Bitcoin has continued to rise in price, and the market has continued to grow.”

Legislator action, which is clearly needed in this space, has come from other geographies, too. Back in Brussels and Strasbourg, a set of Anti-Money Laundering Regulations (AMLR) updates were introduced in April to include Crypto Asset Service Providers (CASPs) – who are now obligated to verify the identity of all customers, store data on cross border transactions, and report suspicious activity to the relevant authorities.

On top of this came the Digital Token identifier (DTIF) text in May, which is referred to for the regulatory reporting of digital asset derivative trades across the Group of Twenty. This marks a significant milestone in the regulation of digital assets. Up to this point, derivatives reporting focused solely on traditional financial instruments.

The financial sector's reaction

So, where does this leave the financial sector?

Analyst at Deutsche Bank Research, Marion Laboure, has said: “I could potentially see Bitcoin becoming the 21st century gold.”

It seems the rest of the bank is embracing Laboure’s attitude, having recently joined the Monetary Authority of Singapore’s (MAS) Project Guardian, an asset tokenisation project for wholesale funding markets and decentralised finance applications. Through this partnership, the bank will test an open architecture and interoperable blockchain platform to deliver tokenised and digital funds.

Similar tokenisation projects abound – from the likes of Hamilton Lane, Franklin Templeton, Siemens, Credit Suisse and BlackRock.

In March, the international messaging network for payments got in on the action, too. With Swift’s latest connector, financial institutions may undertake a wide array of financial transactions using CBDCs, as well as other forms of digital tokens.

“This is an example of how legacy financial technology can benefit from adopting newer approaches such as event-driven payment processing and blockchain-based ledgers, without the need to make significant upgrades to infrastructure,” said Tom Fairbairn, engineer, Solace.

This news may have a positive impact on central banks, as it could reduce the attraction of cryptocurrencies for immediate cross-border payments, added Fairbairn.

A lay of the crypto land  

Who are the frontrunners in the journey to hyperbitcoinisation (or, at least, a hybridised version of it)? The recent survey from CryptoCasino, of cryptocurrency adoption globally, revealed just that. Researchers analysed each country against four key metrics: percentage of the population holding cryptocurrency, the cost and profit of mining one Bitcoin, and search volume per 100,000 population for crypto-related keywords.

In this ‘crypto-friendly’ ranking, Argentina came in at the first spot, with almost one in ten of its citizens holding crypto assets. The cost to mine a single Bitcoin was calculated to be $14,647 – against a profit of $51,261 per coin mined. In at second and third place on CryptoCasino’s league table was the United States and Columbia, respectively.

The work is cut out for these regions, with increasing calls for more comprehensive legal frameworks, better consumer protection, and improved global standardisation.  

This is the vanguard. Time will tell how far toward hyperbitcoinisation we dare push.