Written by Colin Kwan, COO of Magnr/BTC.sx. Colin has over 10 years experience in investment banking, including senior management roles at UBS and Deutsche Bank. Colin also holds an MBA from the Australian Graduate School of Management.
Setting the Scene
At the time of writing, the Greece debt crisis appears to have been averted, or at the least delayed. A €50 billion bailout package has been offered, if the Greek parliament agrees to implement extensive reforms that have been demanded by the eurozone.
Although the risk of a Grexit has been reduced, it has not been eliminated. If the parliament votes to reject these reforms, then a Grexit remains a possibility. Nor does the package change the fact that Greece owes €320 billion to its creditors.
It should be no surprise that the crisis has provoked questions around the safety of government-backed currencies.
If Cyprus and Grexit are anything to go by, there are three solutions to the European debt crises. In each scenario, however, European citizens are left financially vulnerable.
Scenario 1 — A Member Country Defaults and Leaves the Eurozone
In this situation, the government’s pre-euro currency is reintroduced wholly. This would be implemented through a government purchase — or confiscation, from the perspective of the citizens — of euros for freshly minted local currency. The euros are then used to pay creditors. Unfortunately, a new local currency is likely to have incredibly weak purchasing power. In this case, citizens would not be able to afford to purchase as much with their local currency as they could with their euros.
Scenario 2 — A Member Country Reaches a Deal with Creditors
In this situation, the ailing country remains within the eurozone. However, this does not absolve them from their debt obligations. Indeed, with a weak bargaining position, a country in crisis will have significant reforms imposed. These are likely to include a Cyprus-style haircut,” in which a percentage of citizens’ bank deposits are used for debt repayments. In this case, citizens are left with fewer euros than before the crisis.
Scenario 3 — A Member Country Runs a Dual Currency
In this situation, the local currency is introduced to only purchase a proportion of their citizens’ euros. This is essentially a hybrid of scenario one and two. For European citizens, it means they both have a weak local currency and fewer euros in their bank accounts.
How Greek Citizens Are Responding to the Crisis
The primary concern for the Greeks at this point is wealth preservation. In investment banking, clients looking for such a scenario would be advised to purchase financial assets that are classified as stores of value. These assets include real estate, precious metals, precious stones and even collectibles.
While stores of value may not have tremendous utility, they are less volatile than other financial assets. This makes them good at preserving wealth.
Given the harsh capital controls restricting the flow of bank deposits, Greeks are looking to turn physical cash into stores of value. This means investing in jewellery, gold coins, appliances and even luxury handbags.
But the trade-off they make for low volatility is fungibility. Compared to currency, the stores of value being purchased by Greeks are more difficult to trade for goods or services. Just imagine trying to convince your supermarket to accept jewellery as payment for your groceries. Stores of value also do not come with the perceived security of bank deposits.
What the Greek citizens really need is a store of value that is safe from confiscation, can be purchased with cash and has similar properties to money.
The Bitcoin Price Response
The digital currency community believes Bitcoin meets these requirements. Or at least part of them. This, combined with huge media hype, has ignited a 37% rally over the past month. In contrast, gold — the world’s traditional safe haven — is down 0.5% over the same period.
Despite what the media claims, the rally has not been caused by Greeks rushing to buy Bitcoin. Capital controls make this next to impossible. Instead, the rally is caused by shift in perception that government-backed currencies are not as reliable as previously thought.
On our bitcoin trading platform, BTC.sx, we have seen a notable increase in activity from Eurozone countries during the climax of the debt crisis, as the following chart shows:
What we appear to be observing is that eurozone countries, which have experienced economic turmoil, are seeing the benefits of Bitcoin as a store of value. Essentially, they are going long on Bitcoin, with 10:1 leverage, to hedge against the risk of their own country experiencing a debt crisis. This has proved to be a profitable strategy in June.
Ultimately, a lot of traders believe that Bitcoin has become a viable store of value.
Why Bitcoin Is a Store of Value
Many people will be asking how a volatile asset could possibly be considered a store of value. Volatility is Bitcoin’s biggest weakness as a store of value right now. However, it beats other assets on numerous attributes. This makes holding Bitcoin a great wealth-preservation strategy during a crisis.
Let’s take a look at how Bitcoin stacks up against other stores of value being used in the Greece debt crisis.
As the above table shows, Bitcoin is a vastly superior store of value in terms of its low ease of confiscation, high portability, high divisibility and high security. These attributes stem from the digital nature of the currency. Anyone who owns their private keys has full ownership of their money. This makes Bitcoin a secure store of value against the threat of confiscation and looting.
For example, Greek citizens investing their wealth into jewellery make themselves targets to criminals. The pseudonymous nature of Bitcoin, however, means that their wealth would not be tied to their personal identity. The blockchain makes it next to impossible to steal or confiscate Bitcoin through brute force.
Overall, Bitcoin is an attractive store of value. Greek citizens looking to preserve their wealth should hedge against scenario one above by using Bitcoin, and hedge against scenario two by using other stores of value.
For all of Bitcoin’s strengths, one problem remains: accessibility. Unfortunately, capital controls in Greece make it incredibly difficult to purchase bitcoin. Those in Greece using Bitcoin as a store of value bought before the capital controls were put in place.
Nonetheless, accessibility to Bitcoin can only increase from here. What Bitcoin needs is further growth of Bitcoin ATMs and P2P marketplaces such as LocalBitcoins or Mycelium.
Hopefully, we will see further adoption of Bitcoin across Europe as citizens become more pessimistic about the euro, and buy stores of value before capital controls are implemented.
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