30.01.2020 | Political and economic shock triggers interest in Bitcoin

The currency’s new-found low volatility strengthens its ‘digital gold‘ credentials.

Click here to read the Alaco article in ValueWalk.

 

 

Trading volumes in Bitcoin have been soaring in jurisdictions facing political and economic stress, as people fearful of financial loss turn to the borderless digital currency to safeguard the value of their cash and investments.

Historically, there has been no clear relationship between the price of Bitcoin and major geopolitical events, limiting its potential as a safe-haven asset – despite growing clamour for it to be recognised as ‘digital gold’. 

By and large Bitcoin’s price has been unaffected by external events.  Drivers have instead been contained within its own ecosystem, including, most notably, the collapse of the Mt.Gox exchange in late 2013 and a period of intense retail speculation throughout 2017.  All this has traditionally left Bitcoin a volatile asset to hold.

Yet there are growing indications that this is changing.  As more data becomes available, it appears that Bitcoin is being treated and used in ways across the globe which would leave its creator Satoshi Nakamoto increasingly satisfied with his legacy.  For one thing, Bitcoin’s volatility is nearing all-time lows, a trend that has been evident since the indicator peaked in late 2011.  Lower volatility makes it more attractive for institutional investors and for those looking for a safe-haven asset. 

With the inevitable onset of a global regulatory framework for cryptocurrencies, institutional investors have warmed to them.  This trend will likely continue, but there are more interesting inferences to be drawn from recent trading data.  Chief among these is that jurisdictions which have faced monetary devaluation or sudden economic shocks are increasingly turning to Bitcoin as a store of value. 

Take Egypt for example: on 3rd November 2016, the Egyptian pound was devalued as part of an economic reform programme tied to a three-year, $12 billion loan from the IMF.  Data from LocalBitcoins, a peer-to-peer Bitcoin marketplace, shows an overnight spike in the traded volume of the digital currency in Egypt.  Since then, the Egyptian pound has stayed relatively steady, while Bitcoin trading volumes in Egypt have trebled.

Data maintained by Coin.dance shows similar trends across South America, where almost every country has seen significant political and economic upheaval in recent years.  Venezuela is perhaps the starkest such example.  Since the country’s economic implosion in late 2018, Bitcoin trading volumes have skyrocketed, with reports emerging last year that the price of Bitcoin was doubling every 18 days in the country.

Subsequent reports suggest interest in Bitcoin has been exacerbated by moves from the Venezuelan government to ‘airdrop’ (or grant) public workers and pensioners small amounts of its own cryptocurrency, known as the Petro.  Since then, Venezuelans have reportedly begun listing their Petro on LocalBitcoins at a 50% discount to the government mandated price, potentially in exchange for Bitcoin.

Coin.dance data confirms Chile and Peru as following similar patterns.  So too Argentina, where the dollar value of Bitcoin traded has trebled since August 2019 when then-President Mauricio Macri was defeated by the populist Frente de Todos ticket of Alberto Fernández and Cristina Kirchner. 

While these trends are undoubtedly exacerbated by sharply devaluing domestic currencies and ballooning inflation, there has nevertheless been a corresponding uptick of interest in Bitcoin.  In the last year, searches for ‘Bitcoin’ on Google have doubled in Venezuela; similar increases have been seen in Argentina in the last quarter as the implications of Macri’s defeat were digested.  

In Iran too, interest in Bitcoin has grown as the country underwent a series of political and economic shocks.  President Trump’s October 2017 announcement that the United States would not certify the Joint Comprehensive Plan of Action, otherwise known as the “Iran nuclear deal”, marked the first step towards the US’ withdrawal from the deal in May 2018.  Over the next two months, LocalBitcoin volumes spiked seven-fold in Iran. 

News reports at the time spoke of Bitcoin as the only practical way to transfer funds out of the country.  Mohammad Reza Pourebrahimi, chairman of Iran’s economic commission, later confirmed that more than $2.5 billion had flowed out of the country through cryptocurrency-related transactions over the course of 2018, a tacit admission of its attractiveness in times of economic turmoil. 

Central to Bitcoin’s role as a safe haven is its ability to transcend state barriers.  Its use cannot easily be curtailed or stopped by oppressive regimes and its lack of any governing body means that it will continue to proliferate in jurisdictions experiencing economic hardship and political turmoil.