The idea is simple - people borrow fiat and buy bitcoins. This process creates a self-feeding doom loop which erodes fiat's value and propels Bitcoin's value.
As the expected value of bitcoins solidifies in people's minds and fiat continues to be debased in front of them, it becomes appealing to borrow fiat via a loan whose value they believe will erode at a faster rate than the interest rate they're paying.
At that point, it becomes a no-brainer to perform a carry trade - borrow the weak local currency using whatever collateral a bank will accept, invest in a strong foreign currency like Bitcoin, and pay back the loan later with realized gains.
In this process, the banks create even more of the weak currency, amplifying the problem.
The effect of people, businesses, or financial institutions borrowing their local currency to buy bitcoins is that the bitcoin price in that particular currency would go up relative to other currencies.
EXAMPLE: Let's say that middle-class Peruvians trickle into bitcoin. Thousands of buyers turn into millions of buyers.
They borrow Peruvian Sols using whatever unencumbered collateral they have – homes, businesses, gold jewelry, etc. They use these Sols to buy bitcoins. The price of bitcoins in Peruvian Sols goes up, - a premium develops relative to other currency pairs.
A bitcoin in Peru might be worth $23k, while in the U.S. it trades at $22k. Traders would buy bitcoins in the U.S. and sell them in Peru for a $1k profit. They would then sell their Peruvian Sols for dollars.
This would further weaken the Peruvian Sol, causing import inflation and losses for foreign investors.
The Peruvian central bank would have to either increase interest rates to break the cycle, impose capital controls, or spend their foreign currency reserves trying to prop up the Sol's exchange rate. Only raising interest rates would be a sustainable solution, though it would throw the country into a recession.
As of February 2023, Bitcoin's market cap was $424B and Peru's GDP was $223B. Who would win that fight?
There's a huge problem with the Peruvian central bank raising interest rates: bitcoin's mean historical return is 93.8% per year (as of 2023). Even if investors expected future return is 1/3 of that - 31%, the central bank would have to increase interest rates to unconscionable levels to break the financial incentives of the attack. There's no way the Peruvian economy would be able to sustain an interest rate greater than the mean historical return of Bitcoin.
The result is evident: everyone would flee the Sol and adopt bitcoins, due to economic duress rather than technological enlightenment.
This example is purely illustrative, it could happen in a small country at first, or it could happen simultaneously around the world.
Who leverages their balance sheet and how is impossible to predict and it will be impossible to stop when the dam cracks.
But it doesn't stop there - a speculative attack such as this is prone to spread and cause contagion.
Because it pushes the price of Bitcoin up dramatically, different citizens with slightly-stronger local currencies are incentivized to perform the same sort of attack, especially after seeing that such a thing worked out. They may buy bitcoins simply because they want to speculate on their value, but the reflexivity of this action works such that the reduction in demand for their local currency would actually cause higher-than-expected inflation and thus begin creating a problem with it.
The feedback loop between fiat inflation and bitcoin deflation will throw the world into full hyperbitcoinization.
![](https://i.imgur.com/nEoBGgM.jpg)
-- an excerpt from Speculative Attack (2014), its 2-minute version can be found here: https://2minutebitcoin.org/blog/bitcoin-speculative-attack-on-the-dollar-2014