How The Geopolitics Of 2021 Will Shape The Year Ahead For Bitcoin

Magazine

This past year was certainly a unique one for bitcoin. We saw the first bitcoin exchange-traded fund (ETF) get approved in the United States, the largest-ever Bitcoin conference in Miami, the much anticipated Taproot upgrade, all-time highs nearing $70,000, oh, and a nation state made bitcoin legal tender. Despite all this exciting news, some things never change — the FUD was as prevalent as ever. Bitcoin saw a variety of bans throughout 2021 and, to no one’s surprise, China stole the show in this regard.

Below is a list of bitcoin bans in 2021 alone:

With 2021 nearly in the rearview mirror, I’ve been thinking a lot lately about what geopolitical bitcoin moves will occur throughout 2022. Below, I offer up a few questions to think about as we approach the new year:

On a global scale, will we see bitcoin regulation turn friendly or grow increasingly hostile?
Will hash rate continue to accumulate in the U.S. (possibly eclipsing a 50% share) or will we see a greater distribution moving forward?
Will another country adopt bitcoin as legal tender? And if so, which one? There couldn’t be multiple throughout 2022, could there?

These questions fall into three categories: hash rate, regulation and adoption. I’ve addressed each below in more detail.

Regulation

If we step back and look at 2021 regulation on a global scale, would you think the overall trend was friendly or hostile? Even with the passing of El Salvador’s Bitcoin law, I’d say the global regulatory environment is still quite hostile toward Bitcoin. Iran, Turkey and Nigeria all made hostile moves in 2021. India and the State of New York considered hostile regulatory action as well. We all know what happened in China.

While the news of bans and corresponding FUD was prevalent, there is still a sense of optimism in the air. After the dust settled post-El Salvador’s bitcoin law, the obvious next question was: Who’s next? Many assumptions have been made about it being another Latin American country. This certainly makes sense.

In retrospect, El Salvador was almost the perfect country to make this huge leap. It is a small nation that has struggled economically and doesn’t have autonomy over its currency. As a dollarized country, Salvadorans are subject to the whim of the U.S. dollar and the Federal Reserve. I’m not going to debate whether severing ties with the colón in 2001 was the right move (Alex Gladstein covered that topic well here), but I certainly think taking a step toward a Bitcoin standard was.

El Salvador, like many countries in Latin America, is often harmed by U.S. foreign policy and International Monetary Fund (IMF) intervention. The Cantillon effect created by the U.S. hurt the people of El Salvador by inflating their local currency (and any benefits accompanied by this hidden tax are not seen by Salvadorans), enacting sanctions and controlling trade policy. The IMF harms the people of El Salvador by keeping the country indebted and degrading its credit quality to ensure unfavorable terms for future loans (or even holding hostage future lending prospects).

“El Salvador bond spreads to U.S. Treasuries hit a record high on Thursday on growing investor fears the Central American nation will not reach a potential $1 billion loan agreement with the International Monetary Fund and faces negative credit implications linked to its use of bitcoin.”
–Reuters

So, what did El Salvador do about this? It opted out (though not completely). It took a step in the direction of financial sovereignty and a corresponding step away from nefarious U.S. statecraft and IMF financial tyranny. But El Salvador is not the only struggling, dolarized country in Latin America. So, again I’ll ask, who’s next?

Politicians across Latin America have been equipping their laser eyes, starting to engage with the bitcoin community and proposing pro-bitcoin legislation. Little has materialized as of this writing (on the surface, at least), but we all know bitcoin acts “gradually, then suddenly.”

Congressman Carlitos Rejala of Paraguay, Mexican lawmaker Eduardo Murat Hinojosa, Panamanian congressman Gabriel Silva and Brazil’s Federal Deputy Aureo Ribeiro have all signaled support for bitcoin in one way or another.

It very well could be one of these countries that becomes the next Bitcoin hub, whether it be via a legal tender law or otherwise friendly regulation. And just maybe, we won’t be talking about another single country making bitcoin legal tender, but a handful when we look back at 2022.

Even if Alexander Höptner’s prediction of five more developing countries adopting bitcoin as legal tender by the end of 2022 turns out to be accurate, there will still be FUD (there will always be FUD). We likely haven’t seen the last of Bitcoin bans and they may become more sophisticated and more strictly enforced as financial elites across the globe feel the increased pressure put upon them by this new freedom money.

“In reality, U.S. economic statecraft is alive and well in the region, and helped foment the dire conditions that sparked the recent wave of uprisings.”
–Alexander Main, director of international policy at the Center for Economic and Policy Research, on recent protests across Latin America

Hash Rate

In the fall of 2019, Mainland China controlled approximately 75% of the global Bitcoin hash rate. That number fell, but was still over 50% as we kicked off 2021. Now, in the early days of 2022, it sits at 0%.

This was one of the best stories in bitcoin in 2021. Sure, the FUDsters were sounding the alarm when China banned bitcoin mining this past summer, but that was to be expected and they failed to zoom out. China enacting a legitimate and all-out ban on bitcoin mining certainly hurt the overall hash rate at the time, so the price dropped accordingly. Alarms were sounded. Articles were written. The death of bitcoin was yet again declared.

Not so fast. Many bitcoiners knew this would actually be a good thing. It may not have been obvious from the outside looking in, but it was clear as day to those who get it. A mass exodus of bitcoin mining from China would result in a greater distribution of global hash rate. This is a huge deal. Not to mention that this does away with one of the most prominent anti-bitcoin arguments — that China has too much control of Bitcoin infrastructure or might co-opt the network by a hostile miner takeover.

As is evident in the below visual, many countries benefited from the China mining ban: Russia, Kazakhstan and the United States chief among them. The U.S. started the year with roughly an 11% share of the global hash rate. This number (as of August, per the most recently available data) sits at 35%. What are the odds this number continues to grow? When does it go from something to celebrate to a point of concern?

Image source

As an American, I was happy to see miners coming to the U.S. However, stepping back and recognizing just how fast the U.S. tripled its hash rate, I believe there’s some cause for concern. I wouldn’t want any one country to lay claim over China’s vacated throne of the dominant player in global hash rate. Is it possible that 75% of the hash rate being in the U.S. would actually be worse than when that same concentration was in China?