Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

Bitcoin for Microstates
How Iceland could adopt Bitcoin

Sveinn Valfells, PhD
linkd.in/wtaHi5

July, 2013

Sveinn Valfells, PhD (linkd.in/wtaHi5 )


July, 2013

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Outline

1

The Economic Consequences of Bitcoin

2

Iceland — A Microstate in Need of a New Currency

3

About the Author



July, 2013

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Outline

1


2


3

About the Author



July, 2013

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Satoshi Stands on the Shoulders of Giants
Isaac Newton and the Great Recoinage of 1696 [1]

Newton @ Royal Mint, 1696–1727
Signiﬁcant debasement of currency
(≈ 10–20%).
Old coins taken back by weight (not
face value).
Invented ridges on new coins to reduce
“clipping”.
Successfully prosecuted counterfeiters.
Supervised currency union of England
and Scotland.


Figure: Isaac Newton; Quarter Guinea
(1718).


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Bitcoin Is a Token AND a Network
Dual property: Store of value AND medium of exchange

Virtual currency economics
Token: Fungible, impossible to
counterfeit, prescribed supply, low
cost of carry, tested governance
model.
Network: Fast, inexpensive, open,
reliable.
Value of network increases faster
than number of users.
Winner takes all: Endstate is one
dominant network, 2–3 runners-up
[2].
Figure: BTC private key–public address
(top); peer-to-peer network (bottom).


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Bitcoin Has Large Addressable Markets
Virtual currencies can store and transmit value

“In an extreme case, virtual currencies could have a
substitution eﬀect on central bank money if they become
widely accepted.”
— ECB [3]

Global asset classes (value storage)
Private investment in gold >$1T [4].
London housing stock >£1T [5].
Global payment streams (value transmission)
Global non-bank payments in major economies >$609B (2011) [6].
Global m-payments ≈ $300B (est. 2013) [7].



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Bitcoin Will Grow Like Bacteria in a Petri-Dish
Money will rotate into virtual currencies from traditional assets, payment streams

Main scenarios:
Fast growth (+2σ)
Fast rotation into Bitcoin
from assets, payments.
Steady growth
Stead rotation into Bitcoin
from assets, payments
(expected case).
Contraction (−2σ)
Bitcoin stagnates, money
leaks out.


Figure: Growth of Bitcoin market cap modelled as
Geometric Brownian motion (µ = 50%, σ = 50%) [8].


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Bitcoin Is Not Fully De-Risked
Systemic risk is concentrated in mining, regulation

Positive shocks

Negative shocks

Major e-commerce company accepts
Bitcoins for payments.
A financial services provider
launches first bitcoin ETF.
Bitcoins are adopted by a sovereign
nation as (de facto or official)
currency.
Another banking crisis in a major
currency zone.

Security compromised at one (or
more) major exchange(s).
The Bitcoin network suffers a
sustained, co-ordinated attack by an
organization with substantial
computational resources.
Co-ordinated clampdown on
bitcoins by G20.

Positive and negative shocks will significantly influence Bitcoin
adoption


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Outline

1


2


3

About the Author



July, 2013

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Iceland Is A Wealthy, Literate, Digitised Nation. . .
Main exports are ﬁsh, energy and travel services [9]

Literacy: 100%.

Energy per capita: 130MWh/year.

Life expectancy: 82Y.

Fish catch per capita: 3t/year.

GDP per capita: $43K.

Inhabitants per km2 : 3.1.

Internet usage: 91%.

Tourists per capita: 2.0/year.

E-payments per capita: 328/year.

Sheep per capita: 1.5.



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. . . With a Broken Financial System
Iceland has far from adjusted from crash of 2008 [9]

Some financial facts:
Ringfenced economy (FX controls).
Large overhang of hot-money
(1.7×GDP gross, 0.5×GDP net).
Bloated banks, largest banks with
assets ≈ 1.6×GDP, down from
≈ 9×GDP in 2007-8.
Expensive banks, 2 − 3× higher costs
as % of assets than Nordic banks.
Central Bank QE-ed in 2006-8 on “love
letters” issued by private institutions.
Central Bank recapitalised in 2009 for
≈ 10% of GDP.
Icelandic krńa (ISK) depreciated over
o
50% since 2007.

Figure: Homer Simpson goes to Iceland,
finds banks closed.


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The Saga of the Icelandic Krńa (ISK)
o
An epic tale of value destruction

Icelandic krńa leads fiat currency “race to the bottom” [10]:
o
US$ has lost 92% of its value since WW2 (≈
£ has lost 97% of its value since WW2 (≈

1
12 )

1
30 )

[11].

[12].

Icelandic krńa has lost 99.99% of its value since WW2 (≈
o

1
10,000 )

[13].

⇒
Figure: One krńa in 1945 (left); 10,000 krńa in 2013 (right).
o
o



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Iceland Needs a New Currency
The current choice is between fiat and fiat

Currency
Liquidity
Store of Value
Cultural ties
Economic ties
Labor mobility

USD
Good
Middling
Good
Middling
Poor

EUR
Good
Unproven
Good
Good
Good

NOK
Middling
Middling
Good
Good
Good

CAD
Middling
Middling
Middling
Middling
Poor

Table: Rough comparision of some fiat alternatives to krńa.
o



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How Will Bitcoin Qualify as Currency for Iceland?
For Iceland, Bitcoin can meet several straightforward criteria

RFC: Criteria for a microstate (Iceland) to adopt Bitcoin
Market Cap Bitcoin market cap (≈$1B) must exceed monetary base needed by
comfortable margin (current monetary base ≈$0.6B) [14, 15].
Liquidity Bitcoin liquidity (≈$2B/year) must exceed Iceland’s gross imports
by comfortable margin (≈$7B/year) [14, 16].
Volatility Bitcoin volatility (σ ≈ 100% of avg. price in last 12 months) must
reduce to “fair weather” range of Icelandic kr´na σ 20%.
o
Mining At least two independent, reliable ASIC technologies deployed and
in operation for 3–5 years.
Exchanges At least two independent, reliable exchanges in operation in 1st
world jurisdictions for 3–5 years.
Governance Bitcoin Foundation agrees to board representation for sovereigns.
Mindshare A substantial part of the population must have gained trust in
Bitcoin.


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Bitcoin Has Partly Qualiﬁed To Replace ISK
Virtual currencies will eventually become credible alternatives for microstates

Conclusions:

Hackers make great central bankers!
Money from traditional asset classes &
payment streams will rotate into virtual
curencies, including Bitcoin.
The Icelandic kr´na is “walking dead”;
o
Bitcoin is on a fast trajectory to becoming a
credible alternative.
Buy some Bitcoins, experiment. . .

Figure: Satoshi Nakamoto
is a modern Isaac Newton.


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About the Author

Outline

1


2


3

About the Author



July, 2013

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About the Author

About Sveinn Valfells, PhD
linkd.in/wtaHi5

Some relevant previous predictions:
Iceland’s leading banks may go the way of Northern Rock.
— Letter to FT, March, 2008
Icesave deposit guarantee claims have “no legal basis”, Icelandic public will reject the
agreement between Iceland, UK and Netherlands to guarantee them.
— Today Programme, BBC Radio 4, April, 2011
Bitcoin can easily be projected to rise to $20 – $120 within 3 years.
— Communication with Pamir Gelenbe, January, 2013



July, 2013

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About the Author

References
[1]

Wikipedia. Isaac Newton. http://en.wikipedia.org/wiki/Isaac_Newton. Retrieved June, 2013.

[2]

Wikipedia. Network effect. http://en.wikipedia.org/wiki/Network_effect. Retrieved June, 2013.

[3]

European Central Bank. Virtual Currency Schemes. http://www.ecb.europa.eu. October, 2012.

[4]

Wikipedia. Gold reserve. http://en.wikipedia.org/wiki/Gold_reserve. Retrieved June, 2013.

[5]

Savills. UK Housing Stock Climbs [to] £5T. http://www.savills.co.uk. February, 2013.

[6]

Global Finance. Payments Volumes Worldwide. http://www.gfmag.com. Based on BIS report published January, 2013.

[7]

Eileen Yu. Global mobile payment transactions to surpass $235B. http://www.zdnet.com. June 4, 2013.

[8]

Wikipedia. Geometric Brownian motion. http://en.wikipedia.org/wiki/Geometric_Brownian_motion. Retrieved June, 2013.

[9]

Various sources incl. Central Bank of Iceland, Statistics Iceland.

[10]

Bill Gross. Sell currencies of serial QE offenders. Financial Times. February 27, 2013.

[11]

Information Please. The shrinking value of the dollar. http://www.infoplease.com. Retrieved, June 2013.

[12]

Ed Parry. Uk inflation calculator. http://www.moneysorter.co.uk. Retrieved, June 2013.

[13]

Hafsteinn Hauksson. Icelandic krona lost 99.99% of value since WW2. http://www.visir.is. December 20, 2010.

[14]

BitcoinCharts. Bitcoin charts / markets. http://bitcoincharts.com. Retrieved, July 2013.

[15]

Central Bank of Iceland. Statistics from the Central Bank of Iceland. http://statistics.cb.is/. Retrieved, June 2013.

[16]

Statistics Iceland. Various publications. http://www.statice.is. Retrived June, 2013.



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Bitcoin for Microstates: How Iceland Could Adopt Bitcoin

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