This article was originally published in Bitcoin Magazine.
As we navigate the uncharted waters of the digital revolution, bitcoin is increasingly finding its footing in economies grappling with currency crises. Countries such as Turkey, Lebanon, Nigeria, and Argentina are already seeing Bitcoin reach, or start to approximate, new all-time price highs, signaling a shift in wealth preservation and financial sovereignty. The thrust behind this trend is multifold, encompassing inflationary pressures, the global dominance of the U.S. dollar, and the unique attributes of Bitcoin.
A quick Google search for bitcoin against so-called “weaker” currencies in emerging markets, over a five-year time horizon, paints a clear picture.
Source: Google
I have shared these observations before in a Twitter thread and discussions on Elon Musk’s platform have been lively on the subject. Some folks understandably see this as bullish and exciting, but it’s important to realize that such extreme price action essentially stems from deep-seated currency failures and often involves anxious suffering for people on the ground. Others point out that these flailing currencies aren’t really a benchmark for anything substantial, but such thinking only betrays hubris. It’s good to remind ourselves that some 85% of the world’s population lives in emerging markets — far from peripheral, the reality in these countries is the dominant experience and constitutes the mainstream.
Understanding 'Weaker' Currencies
To comprehend the Bitcoin phenomenon in these emerging markets, we must first understand the concept of "weaker" currencies. These are national currencies often characterized by high volatility, recurring devaluations, and significant inflation rates. Such susceptibility is generally rooted in unstable domestic fiscal policies, including excessive government borrowing and overproduction of the money supply. However, the consequences of such monetary policy aren't contained within national borders; they ripple across the global socio-economic landscape, including in the form of migration and exacerbating inequalities.
Inflation erodes the value of money, diminishing purchasing power and fostering economic uncertainty. When combined with external factors such as the implications of the U.S. dollar's status as the global reserve currency, the impact is even more profound. Despite increasingly-loud objections from across the world, with ideas of a “BRICS currency” floating around, the U.S. dollar is still the world's primary reserve currency and holds significant sway over global economic stability.
The greenback’s dominance means that many emerging markets are inherently linked to the U.S. economy. When the U.S. changes its interest rates, engages in quantitative easing or when Jerome Powell initiates another rate hike, the ripple effects are felt far and wide. Emerging markets may experience outflows of capital, instability and increased borrowing costs, intensifying economic challenges on the ground.
A Digital Lifeline
Amid these complexities, bitcoin has gained significant momentum. The reasons? It offers an escape hatch from economic volatility and a new way to store value. The case of Venezuela, where bitcoin adoption has been making headlines for years now, offers a vivid illustration. Hyperinflation has rendered the Venezuelan bolivar virtually worthless, pushing its citizens toward Bitcoin as well as USD-pegged stablecoins for everyday transactions and wealth preservation.
However, the value of Bitcoin extends beyond its role as an inflation hedge. Its permissionless and peer-to-peer nature is also a game changer. Bitcoin is decentralized and requires no intermediary for transactions, making it accessible to anyone, anywhere, at any time. This characteristic is particularly appealing in regions where banking services are limited or non-existent, fostering financial inclusion.
For migrant workers sending remittances back home, bitcoin — using the Lightning Network — can make the process faster, cheaper, and more efficient. It bypasses traditional banking systems and remittance service providers, which often charge exorbitant fees and are plagued by slow transaction times. The use of Bitcoin for remittances can stimulate economic activity in these emerging markets, contributing to its growth and development.
Beyond Speculation: A Tool For Financial Empowerment And Stability
The rising acceptance of Bitcoin in emerging economies serves as a testament to its potential to transform weak-currency environments and create more resilient, people-centered financial ecosystems. These trends point to an interesting paradox: While developed economies grapple with the question of Bitcoin's role, in part driven by a speculative bias born from the luxury of excess capital, people in emerging markets are already embracing its potential to redefine their economic landscapes, precisely for the reason it was created in the first place.
Nonetheless, the journey of Bitcoin in these emerging markets is just beginning. Challenges remain, including those around regulatory uncertainties, digital literacy and technological infrastructure. But, if anything, the surge of bitcoin in these economies signifies that when faced with adversity, the innovation pioneered by Bitcoin has the potential to chart new pathways to prosperity.
In essence, Bitcoin's rising influence in emerging economies underlines its versatility, not just as a speculative asset, but as a tool for financial empowerment and stability. The interplay between inflation, the U.S. dollar's global dominance and Bitcoin's attributes paints a compelling narrative of how the global economy's future may be reshaped by the digital currency revolution.