Global Bitcoin adoption is “still in its infancy,” but here’s how it could accelerate

Bitcoin (BTC) adoption by governments and companies remains a moot point, and the “digital gold” thesis proposed by proponents faced harsh critics after Tesla sold 75% of its stake in the second quarter of 2022.

Larger entities that buy or sell Bitcoin have always moved the needle on how close countries are to using cryptocurrencies as a store of value. Currently, the average purchase price for El Salvador’s Bitcoin holdings is $45,000, making it a fairly unprofitable investment.

Regardless of how long adoption by the major institutional holders will take and its subsequent impact on price expectations, it is possible to roughly estimate a minimum price per BTC based on each country’s foreign exchange and gold reserves.

El Salvador may have been the first country to adopt Bitcoin as legal tender, but its 2,381 BTC position represents less than 2% of the country’s total reserves. More importantly, the South American republic is not among the top 100 countries in terms of gross domestic product.

Jamaica, on the other hand, has a population 56% smaller than El Salvador, and its international reserves are 30% higher at $4 trillion. Even Trinidad and Tobago, a small island nation in the Caribbean with the same population size as San Diego, California, has $6.9 trillion in reserves.

What becomes clear is how small (financially) El Salvador is compared to the combined $15 trillion held by the 160 countries included in the World Bank’s data.

Would it be possible for other economies to buy their reserves at Bitcoin’s current price of $20,000 and how many coins could each country potentially acquire depending on the price of BTC?

Can every government match its reserves with BTC?

First, $15 trillion is 39 times larger than Bitcoin’s market cap of $385 billion at the current $20,000 per coin. Theoretically, 750 million BTC would be required for each country to replace its holdings of gold and foreign currency. Even a conservative allocation of 3% would represent 22.5 million BTC, which exceeds the total number of coins in circulation.

Furthermore, not every Bitcoin is available for sale, and an estimated 3.7 million BTC coins have been lost since 2009, according to blockchain investigative firm Chainalysis.

This brings the current supply closer to 15.5 million coins, making the 3% allocation using foreign reserves even more impossible at the current price of $20,000.

Assuming every holder is willing to sell their coins, the minimum average price would be $29,000 for a 3% allocation, equivalent to $450 billion.

However, a more realistic approach is needed as 3.8 million BTC coins have not moved over the past three years, meaning the owner held during the crash below $4,000 in March 2020 and the $69,000 peak in November 2021. Thus, the adjusted floating coins currently in circulation are 11.7 million, which means that the minimum average price for an allocation of $450 billion will reach $38,500 per Bitcoin.

Here’s Why $38,500 Per BTC Would Be A “Good Deal”

The prisoner’s dilemma is a typical example of the game theory study that shows why two rational actors can refuse to cooperate even if it appears to be in their best interest. Betrayal is the dominant strategy for both sides, which is the most likely response in all scenarios.

For example, Switzerland alone has $1.1 trillion in foreign and gold reserves, meaning their 3% allocation would amount to $33.3 billion. It is inconceivable that any device will be able to take over 1 million coins without warning. The remaining countries will find it more difficult to find large quantities at similar price levels.

For example, on October 8, 2020, the Bitcoin price surged close to $11,000 after Square announced a $50 million BTC purchase. More recently, on February 8, 2021, Bitcoin surged nearly $3,000 within minutes when reports surfaced that Tesla had purchased $1.5 billion worth of BTC.

Moreover, the Prisoner’s Dilemma theory indicates incentives to suppress coordination efforts in the form of a price or allocation ceiling. Either a country will lead others by buying ahead of the group or exceed the proposed 3% allocation to further protect the balance.

Assuming countries respect the $38,500 price limit and every Bitcoin coin that has moved in the last three years is offered for sale, the holdings – taking into account foreign and gold reserves – per country will amount to 2.67 million BTC to China and 1.1 million BTC to Japan. Switzerland would have 864,800 BTC and the US would be in possession of 558,000 coins.

Note that US foreign exchange holdings are not included in the World Bank data, but the Federal Reserve currently has $8.8 trillion of assets on its balance sheet.

Ultimately, El Salvador’s investment was a drop in the bucket, and Bitcoin adoption as a global store of value is still in its infancy.

Game theory would also provide incentives for countries to exceed any agreed limit and not adhere to price caps, making the theoretical estimate of $38,500 far too conservative.