The Inflection Point
The bitcoin price continues to soar and its steady exponential ascent upwards will soon approach a critical point of no return. This is the inflection point.
The inflection point is a point in time where the momentum encapsulated by the adoption of bitcoin is so great that confidence in fiat money (particularly in the worlds premiere reserve fiat money — the USD) is shaken beyond recovery. USD hyperinflation begins in earnest and fiat currency as we currently know it is set aside by the State, undesired by the populace. The State is forced to accept losses and to start offering a more competitive version of fiat.
Please take note that I define the State a little differently than the common definition.
Let’s explore with an arbitrary scenario.
In the price scenario shown, the USD/BTC price first experiences a decaying exponential rise (the present phase shown in blue) followed by a transitional and tangential phase in which the exponential curve inflects and begins to accelerate (shown in green) with the hyperinflation of the USD. This phase continues until bitcoin is worth infinite USD and the complete destruction and capitulation of fiat money is complete. Here I show that happening around the year 2040, though the timing and price are not what really matters, rather, the shape of the curve.
Is this curve likely? Will there be an inflection point?
I think there’s no other rational alternative.
Fiat money is inherently unstable and is actually a relatively new experiment with it being introduced in it’s current form after the Bretton-Woods system was terminated in 1971, a mere 50 years ago:
On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. At the same time, many fixed currencies (such as the pound sterling) also became free-floating.
A lot of bad shit has happened since 1971. In fact to claim that fiat money is unstable is a gross understatement.
With talk of negative interest rates looming, fiat money is well on it’s way to a spectacular self-implosion. Central banks (the distributors of fiat) having to compete with an alternative form of money is practically unprecedented, so a sounder alternative money like bitcoin is going to be a significant accelerant in fiat money’s existing crash course. Bitcoin simply offers an highly accessible exit door from central banking monopoly money and its meteoric price appreciation presents people with little reason to hoard fiat.
How will we recognize the inflection point?
In the early days of bitcoin’s price discovery the bull / bear price cycles were quite frequent. New all-time highs were followed by large >50% corrections, occurring within a matter of weeks and months. These cycles have since appeared to have lengthened into the years, though it is quite early yet to tell for sure if this is a actual trend or just variability.
Before bitcoin even had a price it was still valued by the earliest users. One could argue that during the period of Jan 3, 2009 — late 2010, when there was no listed price, the cycles could have been extremely short and frequent.
I certainly don’t know how long the cycles will extend and then contract, if they do at all, I just hypothesize the general trend below:
Note that this inflection point concept and cycle idea is incompatible with the popular S2F model, which is based on consistent 4-year pump cycles as scheduled by each halving every 210,000 blocks or ~4 years.
If the inflection point concept holds then there will be a time during the tangential transition from pre-inflection point to post-inflection point that the cycle durations will begin speeding up again. Well after the inflection point fiat inflates at accelerating rates until it becomes essentially worthless and unusable. Sort of like how the Venezuelan bolivar is acting today.
The BTC-USD price must inevitably strike a vertical asymptote (not shown) like a clown car hurtling into a brick wall. The timing of this will probably be somewhat dictated by the State with their introduction of a transitional, more competitive (sounder) fiat as I describe below. It could be instantaneous as people are required to redeem the existing fiat for the newly introduced fiat “improvement”.
If the inflection curve as I describe or anything similar plays out then I do not think we will be able to recognize it until some point in time well after the inflection point has been passed. Though it will become clear in hindsight if it does occur.
What happens after the inflection point?
Personally I believe that fiat hyperinflation is inevitable and that the State will soon be forced to issue a more competitive currency and transition today’s unreserved fiat back to a fractional or even fully reserved money.
Most likely the reserve will be something they already control with a long history, such as convertible notes redeemable for precious metals like gold or silver.
I think even now our statist policy makers can see the writing on the wall and can feel the mounting pressure. Their balls are in between the vice of looming negative interest rates and the subsequent risk of mass violent protests and uprising by the working class who are experiencing significant and unsustainable increases to their costs of living.
The State exists to create and distribute money. Under no circumstance can they yield that power as doing so willingly would be a highly unnatural and irrational behavior. Sort of like expecting someone to give up their shelter and means to put food on the table — good luck taking it from them willingly.
However that being said the State can indeed attempt to save their reproductive organs by conceding something and offering a sounder form of money. Bitcoin will force the State to take losses in order to maintain their ownership and control. This will only be temporary as Bitcoin will continue to be an erosive force against State assets.
So considering they already control the majority of the gold supply we can fully expect to see a gold reserved fiat make a return within one to two decades. I’d guess within 10 years after the inflection point and I’d even predict this will all occur before 2040.
In the meantime they will likely attempt to first ban or censor bitcoin to some degree before they concede anything and they will certainly apply impractical taxation to bitcoin users. But that’s a topic to be explored in another essay.
The post-fiat utopia.
A world on sound, deflationary money is a beautiful place.
I don’t think there’s any need for me to illustrate how such a sound money utopia may be embodied because Dr. Saifedean Ammous has already done a wonderful job exploring that idea in his seminal book, ‘The Bitcoin Standard’.
If you have been a bitcoin holder for any significant period of time then you are already starting to experience the wealth and health heralded by the sound money utopia. That feeling of looking at your hot phone wallet as it continues to increase in value even though you routinely spend from it has never been experienced in living memory.
To clue this up, when fiat money finally dies bitcoin will have to be priced in something else entirely. Goods and services will be priced in bitcoin, but bitcoin itself will be measured by something new altogether. We can predict it will be priced in hashes and / or in kilowatt-hours — the energy consumed in mining, both of which are easily measured. The kWh’s required to produce a bitcoin can be compared to the kWh’s required to produce any good, including a typical man-hour.
This is an idea I’ve been fascinated by for years and it has some interesting implications, such as an improved methodology for calculating the net present value of pollution. This is something I plan to write on in a future essay.
I hope you enjoyed this take, let’s keep an eye out for the inflection point!