Crypto Adoption in Uncertain Political Climates
Economic crises and hyperinflation such as that experienced in Greece and Venezuela are amongst the factors driving the demand for a new store of value. In this article, we explore the correlation between the price of Bitcoin and the strength of a sovereign currency, and we suggest that Bitcoin adoption is higher in countries where a sovereign currency is weakening or under threat of independence.
Have you ever seen how people react when a sovereign currency declines in value? In that situation, what can citizens do to preserve their personal wealth?
Experts believe that nations suffering from hyperinflation, or a weakening national currency are more likely to adopt Bitcoin earlier.
In order to protect the value of their monetary assets, people in unstable economies sometimes minimize their holdings in local currency, switching to more stable stores of value such as foreign currencies, commodities, or real estate. At times, these activities result in fees or taxes. When they need access to funds, they then exchange the sum or part of their stores of value for local currency to meet daily needs.
It is happening today that in the midst of an economic crisis in a country, people are changing their money into Bitcoin and using Bitcoin as a store of value to protect their purchasing power. In most jurisdictions, this is a non-taxable event and it is becoming easier and easier to legitimately enter the cryptocurrency market. Technology is also now available that allows the purchase of goods and services with a debit card which is backed by crypto assets. We are not far from the day when people, particularly in unstable economies, say goodbye to Fiat currency and permanently move their wealth into Bitcoin.
During the Greece economic crisis a decade or so ago, Greeks bought Bitcoin to preserve their wealth. Now, in Venezuela and Argentina, where people are experiencing high inflation, some Venezuelan and Argentinean citizens not only save the value of their monetary assets, but also use Bitcoin for their daily needs.
Crypto adoption and how the Greek debt crisis affected the price of BTC
The Greek debt crisis began in late 2009 in the aftermath of the global financial crisis of 2007/08. The structural weaknesses and lack of monetary policy flexibility in Greece posed significant financial problems for the country and the EU. In 2015, Greek debt levels had reached €323 billion, and the risk of a ‘Grexit’ was high. Greek officials were forced to accept reforms imposed by the EU.
The main concern of Greek citizens at this point was wealth preservation as they were rapidly losing their purchasing power. The Greeks sought a store of value that was safe and fungible. Bitcoin met these requirements.
Data from 2015 (below chart) shows a notable growth in BTC trading activity across Eurozone countries during the climax of the debt crisis. During that time, Bitcoin was accepted as a viable store of value and the increasing demands for Bitcoin affected the price.
% Change in Activity
Argentineans paid $2000 more for Bitcoin
Argentina currently suffers from rampant inflation. Annual inflation has more than doubled from around 25 % in 2015 to 54.5 % over the past 12 months. Now, Argentina’s 12-month inflation is running at 54.4%, according to the national statistics agency. Argentina’s peso lost 18% of its value in a week in August 2019. When people lose faith in a currency, the normal response is to begin to use another currency, typically a stable one such as the U.S. dollar.
Recently President Mauricio Macri announced he would reinstate restrictions on foreign currency purchases. The controls prohibit Argentineans from purchasing more than $10,000 U.S. dollars per month without permission from the central bank, the Washington Post reported.
As a result, Argentineans swarmed the Bitcoin market. In September 2019. after the President Macri’s announcement, the price of Bitcoin exploded in Argentina, increasing from $10,750 to $12,750.
It seems Argentineans find Bitcoin more advantageous than fiat currency, likely because the central bank doesn’t have control over it and because Bitcoin can now be easier to obtain than other fiat currencies. For example, it can be bought and sold via Bitcoin exchanges online as well as through indirect transactions by means of some websites.
The case in Venezuela
Venezuela’s economic policies, political problems, and sanctions imposed by the U.S. caused the country’s disastrous decline, marked by runaway hyperinflation reaching a million percent in 2018. In April 2019, the International Monetary Fund estimated that inflation would reach 10,000,000% by the end of 2019.
The value of the national currency, the Bolivar, has completely crashed. A cup of coffee cost one million Bolivar in 2018. Venezuelan citizens have resorted to alternative stores of value, especially Bitcoin. Its trading volumes continue to grow at a rapid pace. A recent week in September, they spent 120 billion Bolivar on purchasing Bitcoin.
Bitcoin was designed to be nearly inflation-free and also offers an opportunity for mining revenue to be earned even though the economy is troubled. Taking advantage of the country’s low electricity rates, Venezuelans have also become among the world’s most prolific miners of cryptocurrencies. Cryptocurrencies are so popular in Venezuela that the country even launched a national cryptocurrency, the Petro.
On the other hand, Nicolas Maduro’s stubborn government has prevented the entering of humanitarian aids to the country. Recently a non-profit organization, Bitcoin for Venezuela Initiative (BFVI) is facilitating the much needed assistance. Through Bitcoin, BFVI enables worldwide contributions in an effort to curb starvation in the country, supporting thousands of hungry residents of the country.
Crypto adoption: Shop in France with Bitcoin
Crypto experts predicted that crypto adoption would only take place in countries suffering from economic crisis, such as Venezuela where people use cryptocurrencies in their everyday life. However, recently several digital payment providers announced they will expand Bitcoin adoption to over 25,000 locations in France. According to Le Figaro, Bitcoin will be available at some 30 franchises in France, including big names like Foot Locker, Decathlon, Conforama, Sephora, and Intersport. The massive expansion is planned to take place by 2020.
Other payment networks are also evolving to include both Bitcoin and Litecoin, including the recent announcement that you can now pay for AirBnB transactions in Bitcoin and Litecoin.
What do you think? Do you think crypto assets are only for people of nations with weak currencies or political instability, or do you think crypto is actually in the process of going mainstream?
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