How can fiat currency crises drive countries to crypto?
The prolonged and severe crises experienced by countries such as Iran, Venezuela, and El Salvador resulted in increases in unemployment and housing costs, hence increasing their potential to produce more goods and services. Some citizens in these countries are increasingly reliant on bitcoin as a means of doing business and preserving their financial security.
Some economic analysts predict that bitcoin and other cryptocurrencies would suffer as a result of this. The post In What Ways Do Fiat Currency Crises Push Countries Toward Cryptocurrency? appeared first on Bitcoinist.com. This article first appeared on The Inspiring Journal.
Before bitcoin became famous among mainstream investors, people in Venezuela were already taking an interest in the digital currency. Following the imposition of capital controls in Venezuela in 2003, the United States slapped economic sanctions on the country, which have had a stifling effect on the country’s economic growth. According to the World Bank, Venezuelans have turned to cryptocurrencies such as bitcoin as a handy means of storing money since volatility has played a significant role in the country’s economy for decades.
It is not known how many Venezuelans have utilized cryptocurrency from the beginning of their lives. An article from the Cointelegraph in 2018 claims that the country “already [had] at about several hundred bitcoin lovers” by October 2014, according to the magazine. 1 As interest in bitcoin and other cryptocurrencies has grown over the years, numerous prominent companies, like McDonald’s and Pizza Hut, have begun to accept bitcoin and cash payments.
Even the Cuban government is attempting to cash in on the cryptocurrency craze by selling bonds that are tied to cryptocurrencies. It was revealed by Cointelegraph in April 2021 that the Venezuelan government is developing a state-run mining pool and Treasury mining farm, even though the Petro cryptocurrency has struggled to acquire popularity in the country.
Because of soaring inflation, financial restrictions, and a desire for secrecy, Bitcoin has becoming more popular in Venezuela. In Iran, a similar large rise in the value of the national currency has happened, with inflation anticipated to reach 35 percent by 2020, on par with the United States. Despite this, its inflation rate is far lower than that of Venezuela. Iran’s government may have fanned a part of the country’s interest in cryptocurrency via their actions.
Because of the rapid increase in inflation over a few months, The corporation announced plans to launch a state-run cryptocurrency over the summer months. The Iranian government has nevertheless made considerable inroads into the cryptocurrency business, forcing President Rouhani to adopt a regulatory framework by June 2021 to govern bitcoin transactions in the country. Iran’s government has lately imposed six more prohibitions on bitcoin mining, in addition to its concerns over the cryptocurrency’s energy use.
El Salvador is a country in Central America.
It is the first time that a government has shown an interest in cryptocurrencies, with lawmakers drafting a bill that would make cryptocurrencies official legal money in the country’s currency. El Salvador, in contrast to the bulk of Latin American nations, does not have its own banking system. El Salvador believed that accepting bitcoin as legal tender will aid the country in reaching economic stability from either the United States of America or the European Union (European Union).
In a speech supporting his proposal, El Salvador’s president, Nayib Bukele, indicated that bitcoin payments would make it easier for Salvadorans living abroad to send money back home. According to official figures, emigrants from El Salvador send almost $700 million home each month on average, paying substantial wire transfer fees in the process. Numerous bitcoin proponents believe that bitcoin is well-suited for international transactions due to the fact that it does not charge foreign transaction fees. In order to make bitcoin adoption more accessible, many wallet and ATM businesses have partnered with the Salvadoran government to provide the necessary infrastructure.
Currency usage has surged in various nations throughout the globe as a consequence of the rapid depreciation of their respective currencies. Were these and other examples of economically challenged nations witnessing an increase in bitcoin to lead us to the conclusion that digital money is on its way to become the de facto currency of choice on a worldwide scale? This is not always the case, however, due to the fact that these countries are in such contrasting circumstances. In spite of the fact that bitcoin has shown to be a useful tool for certain residents of economically challenged nations, it has not been demonstrated to be a panacea for the whole world’s problems.
In addition to the United States, Zimbabwe is a developing country with its own economic challenges. Zimbabwe formally abandoned its own national currency (the Zimbabwean dollar) in 2009, following the introduction of a trillion-dollar note and after the currency had survived ten years of hyperinflation, with the rate of inflation reaching as high as 231,000,000 percent in July 2008 and a trillion-dollar note being introduced.
As a result, many other currencies, including the United States dollar, South African rand, and euro, are now authorized to be used. However, this dramatic approach has created its own challenges, such as severe shortages of foreign currency. In order to address this, the Zimbabwean government has implemented capital restrictions, with the most recent restriction taking effect in May, when the central bank capped the amount of US dollars that citizens may withdraw from ATMs and transfer out of the country to $1,000 per month.
With such limitations, Bitcoin prices on the Zimbabwean Golix exchange increased at a rate that was above the world average in the end of 2017, with the price even more than doubling in November as residents tried to purchase money that was not regulated or limited by the government. Another milestone was reached by Golix in November, at a time when the nation was being destabilized by new dollar shortages, 50 percent inflation, which was impacting the new bond notes presented by the government in November 2016, and a military takeover. Thus, Golix experienced a rise in monthly trade volume to $1 million, which was an outstanding achievement given that the company only handled a total of $100,000 in transactions during the whole year of 2016!
A similar picture has developed from more recent Turkish history, with inflation difficulties prompting a comparable — though not quite as dramatic — shift away from fiat currency and toward cryptocurrency…. These problems became acute when the inflation rate of the Turkish lira (TRY) reached 11.9 percent in October 2017, as a result of the nation’s banks taking on risky levels of private debt, as foreign investors withdrew from the country, and as President Recep Tayyip Erdoan refused to raise interest rates as a result.
Turkish citizens started to get interested in cryptocurrency as a result of this, however the quantities traded at the time were not considerably higher than those of other countries with comparable GDPs. For example, in the week ending on November 4, 2017, 41 Bitcoins were traded for Turkish lira on the LocalBitcoins exchange, while in Mexico — which has a similar GDP to Turkey but an inflation rate of around 4.5 percent — 38 Bitcoins were traded for Mexican pesos on the LocalBitcoins exchange during the same time period. As a consequence, although relatively strong inflation might provide a minor boost to cryptocurrency adoption, the phenomenon is unlikely to result in a significant rise (for example, 303 Bitcoins were exchanged for Venezuelan bolvars during the week ending on November
Although Turkey has entered a nascent crisis, there has at least been the danger of hyperinflation this year, with inflation rising to 15.39 percent at the beginning of July, indicating that the country is on the verge of becoming a catastrophe. There was a 131.9 percent rise in trading volume on the LocalBitcoins exchange between the beginning of July and the beginning of August, with the BTC transaction volume in Turkish lira increasing from 327,295 to 759,026 between the week ending July 7 and the week ending August 11.
Argentina and reserve currencies are two topics that come up often.
Argentina tells a narrative that is quite similar. Argentina now has the highest inflation rate of any medium sized economy, according to the International Monetary Fund (IMF), and as may be concluded from such a number, cryptocurrencies should be gaining traction in the South American country.
In spite of early predictions that Argentina would be a hotbed for Bitcoin adoption, it seems that the country’s populace is not presently engaging in significant cryptocurrency trading. According to data from the LocalBitcoins exchange, the maximum number of Bitcoin purchased in 2018 using Argentine pesos in a single week was 31, which occurred during the week ending on July 7, 2018. Even though Sweden, according to the International Monetary Fund (IMF), has the 23rd biggest gross domestic product (GDP), several Bitcoins — 112 to be exact — were sold for Swedish krona during the week ending July 7th.
The country of Argentina, according to CryptoCompare, is just the 45th largest Bitcoin market in the world (Sweden is the 31st largest), despite having the world’s sixth highest rate of inflation. Argentina has not had strict capital controls since 2015, when incoming president Mauricio Macri lifted the controls imposed by his predecessor, Cristina Fernandez de Kirchner, in 2011. As with Turkey, a large part of the explanation for this can be traced to the fact that Argentina has not had strict capital controls since 2015.
This allows Argentines to have access to US dollars and other currencies, which eliminates the necessity for cryptocurrencies as a form of store of value in the country.
Bitcoin remains a significant presence in Argentina, even though there has been no recent increase in crypto trade or ownership there. Aside from the fact that an Argentine bank has just began to use Bitcoin for cross-border payments instead of the SWIFT network, the nation was also one of the early users of Bitcoin between 2011 and 2015, despite the fact that capital restrictions were in effect at the time. By the beginning of 2016, according to Tom Jeffreys, Bitcoin was already accepted by 145 shops in the city of Buenos Aires alone (it is currently accepted by 194), indicating that the cryptocurrency was not just a store of value but also a means of payment:
The practical, daily applications of bitcoin in a nation like Argentina are, in the eyes of many, the early lab tests of a radical financial makeover that might have ramifications for the rest of the world.”
Unimaginably bad outcomes
Throughout all of the cases above, the following is the lesson that can be drawn: If used as alternative payment systems and value storage during financial crises, cryptocurrency has enormous potential. While world reserve currencies, such as the U.S. dollar and the euro, remain stable, and while people living in unstable countries have access to such reserves, no cryptocurrency is likely to gain widespread adoption and use in that country — at least not as a result of inflation, which is what happened in Venezuela in 2014. Simply said, as long as the United States dollar is strong, there will be no hyperbitcoinization.
As Coin Dance’s data for markets on LocalBitcoins demonstrates, trade volumes are greatest — and rising at the quickest pace — in countries with limited access to a dependable fiat currency, as well as in emerging economies. Because of this, not just inflation, but also a scarcity of US dollars and other old foreign currencies is required to spur widespread acceptance of cryptocurrency in any one country.