While flight to safety investing has traditionally been directed towards investments with low risk-return profile, it is interesting to see how the events around the world have turned people to bitcoin, which is typically synonymous with high risk-reward.
Bitcoin’s unique ability to be used either as a store of value or medium of exchange has attracted people to choose it to park their money. Here’s a look at how bitcoin is becoming a solution to multifaceted problems in different parts of the world.
In the past months, several institutions in the Caribbean Islands have seen the termination of Correspondent Banking Relationships (or simply CBRs) by global banks; the number was at 16 across five countries as of May 2016, per an IMF report.
While the full impact of such an exodus isn’t easily quantifiable, IMF chief Christine Lagarde’s statement reflects its deep impact; she says, “Correspondent banking is like the blood that delivers nutrients to different parts of the body.” The immediate effect of CBR withdrawal is loss in business confidence and a discomfort in basic transactions such as sending money in and out of the region.
In the face of such problems, regulatory authorities have shown openness towards cryptocurrencies in select countries of the region. In November 2015, the Central Bank of Barbados released a working paper titled, “Should Cryptocurrencies be included in the Portfolio of International Reserves held by the Central Bank of Barbados?” It analyzed the potential role of the cryptocurrencies such as bitcoin as part of the portfolio of external assets held by a central bank.
In February of 2016, Bitt, a fintech start-up in Caribbean launched a digitized Barbadian Dollar on the bitcoin blockchain. Bitt is working to digitize all fiat currencies in the region by making them transactional for bitcoins to overcome the inefficient exchange and settlement system.
In April, it received an investment of $16 million from retail giant Overstock.com “to further its goal of building a financial ecosystem in the Caribbean that remedies the issues which people in the region experience daily.”
In addition, a Jamaica based start-up Caricoin is actively working to integrate bitcoin with the banking system to solve the problem of CBR. Its app supports all Caribbean currencies to allow anyone to make payments in local currency just using bitcoin as the store of value.
“Many businesses and professionals are genuinely scared about what they will do if they lose their bank accounts because of the CBR issue and are looking to bitcoin-based solutions as possible alternatives. But many others also see it as a business opportunity,” said Karsten Becker, Head of Compliance, Caricoin.
India has been a fertile ground for virtual currencies such as bitcoin. It is home to 1.25 billion people with 38% in the age bracket of 20-44, it is the second largest smartphone market in the world with 35% of its population having access to internet, a figure likely to double by 2020. It is backed by government initiatives such as Digital India and a strong push towards a cashless economy. Despite all this, bitcoin was not widely adopted until Modi government’s demonetization drive.
Since the announcement of banning of INR 500 and INR 1,000 currency notes to uncover India’s parallel economy, which is approximately one-fourth of its GDP, the interest in bitcoin has spiked. The positive factor is that such interest is despite a mandatory PAN card disclosure and banking transactions to purchase bitcoins. In other words, “cash” cannot be directly used to buy bitcoins.
Bitcoin prices on Indian exchanges jumped to a 25% premium compared to its U.S. counterparts in the initial days after demonetization, which has now come down to about 10% premium.
“Bitcoin adoption in India is growing exponentially. At Zebpay, we are doubling the number of new users every 2-3 months. This trend has become more robust post demonetization” said Sandeep Goenka, Co-founder, Zebpay.
Venezuela is in a deep economic crisis led by the collapse in global oil prices and inadequate macro and microeconomic policies. The country is facing major stagflation, with inflation touching 181% in 2015 alone, while its GDP is expected to shrink by more than 10% in 2016. In the last month, its currency has further depreciated by 60% against the U.S. dollar in the black market which “makes the largest-denomination note of 100 bolivars now worth less than 3 U.S. cents in the crisis-hit OPEC nation” as per Reuters.
Amid such a dismal state of its economy and a fast depreciating currency, bitcoin has emerged as an option to cash out of bolivar. Surbitcoin is Venezuela’s first and prominent bitcoin exchange. In addition, Xapo, a bitcoin wallet, has reported high number of users in Venezuela for its bitcoin based app. The graph below reflects the weekly volumes on LocalBitcoins in bolivar.
Further, amid ailing and fragile economic conditions, people in countries such as Nigeria, Zimbabwe, Argentina have embraced bitcoin which is reflected by the high volume of trading in bitcoin. In the U.S., bitcoin prices have remained firm amid a charged political atmosphere and subsequent victory of President elect Donald Trump.
Although bitcoin provides a solution to many economic ailments, it suffers from regulatory ambiguity, links to nefarious activities and volatile price movement. However, bitcoin is slowly overcoming the negativity built around it and is playing the role of a savior for many in different parts of the world.