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Is Bitcoin an exit option for recession stuck economies?

Right from its inception, Bitcoin’s development has been quick and promising. The world was quick to recognize its disruptive nature and Bitcoin’s adoption became fluid. While the status of Bitcoin as an adaptable universal currency still remains ambiguous, it surely has proven its utility. For economies that have been struggling, people have sought to Bitcoin as an alternate in more occasions than one. Let’s look into the situations where Bitcoin actually did better than just saving face in times of crisis:

Fears of Greece exiting Eurozone or Grexit:

In 2015, Greece was in severe recession and in a debt of nearly 1.5 billion euros to creditors. Defaulting on timely payment of the credit might have resulted in Greece leaving the Eurozone. The fears looming the Grexit prompted people to look for alternative methods to pay for Goods and Services. With the local currency inflating at phenomenal rate, there was a clear uptick in the Bitcoin trading. This was a direct result of people investing in Bitcoin so as to hold value against their currency.

Grexit Pushing prices higher and recently Argentinian policies increasing the volumes of trading

As an alternate to monetary reforms enforced, most cryptocurrency supporters argued that Greece could have opted a digital asset model. That is Government could have used decentralized currency to pay pensioners and Government servants initially. Government assets would back this currency and hence can be repaid later. Though Greece took a different path, it is evident from trading volumes that people took to Bitcoin in the time of crisis.

Argentina and Financial repression:

Argentina has experienced the crippling effects of 2008 housing collapse and continued to feel the jitters even in the next decade. Amid the downward spiral of economic decline, the government announced stringent financial restrictions in 2011. This restricts people from buying foreign currency and to send money overseas. This financial repression made some Argentineans to adopt the cryptocurrency as an escape route from government controls.

A pleasant Government change has lead to revoking of reforms,  accommodating better policies to save the country. While the economy is recovering, there is an increase in volume and number of companies operating with Bitcoin. While Bitcoin has supported people during the repressive phase, let’s see how it would help Argentina to reconstruct its economy.

Brazil and Kenya:

Rising volumes in Brazilian Bitcoin Trading
Rising volumes in Brazilian Bitcoin Trading

Brazil is the world’s largest exporter of soft commodities and it has been in recession for over three years. With its economy weakening, the exporters aren’t getting good value for their exports. Hence they have resorted to payments in bitcoin so as to maintain their value of profits. This resulted in the increased volumes during the harvest period of the soft commodities crop cycle.

Kenya has a high population of unbanked citizens and high micropayment transactions in mobile systems. While Government is tightening its hold on local businesses through tax monitoring, Bitcoin is instrumental in building a regulated system. Major wallets like Bitpesa are actually helping the Government to setup a regulated system. This would allow the businesses to flourish and also be monitored for tax irregularities, if any.

Hence we can see that Bitcoin indeed has been crucial in strengthening or restructuring weak economies in many cases.

Can Bitcoin be the saviour during the next Global Financial Crisis?

The housing collapse in 2008, that shadowed the global financial markets, has had gripping repercussions on the global economy.  With Greece, Venezuela and many other European countries still trapped in high recession, their economies are looking shaky and unstable. This is the consequence of the Great recession and countries are still feeling the ripples of it. As much as we don’t like it, another economic crisis is inevitable if the monetary policies aren’t very effective.

An economic crisis is a signal of how the existing monetary system has failed, which prompts for alternatives. Outside precious metals and the good old barter system, Bitcoin appears to be the best fit alternative to the existing system. Decentralized, border-less, peer-to-peer, and open-access digital currency surely seems to be a best fit in the face of calamity. Let’s look into how prepared Bitcoin is for the next Economic Crisis:

Sailing on both Tides:

An economic collapse can be of two types: Inflationary and Deflationary


Inflationary collapse or hyperinflation happens when an economy experiences very high and usually accelerating rates of inflation. This rapidly erodes the value of the local currency causing the population to minimize their holdings of local money. The population normally switches to holding relatively stable foreign currencies. Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value. The value of economic items remains relatively stable in terms of foreign currencies.

Deflationary collapse or Deflationary spiral happens when a period of decreasing prices leads to a situation whereby the economy collapses. Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods and services than before with the same amount of money. Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt. This may aggravate recessions and eventually lead to a deflationary spiral.

How Bitcoin would fare under both circumstances:


Inflationary collapse:


In an inflationary collapse, people would be scrambling to buy bitcoin and other solid assets such as gold. This would be in an effort to preserve their savings from the debilitating effects of inflation. But for Bitcoin to be favored over other assets, the adoption level of Bitcoin should be very high. The digital currency should evolve to a stage where it can be used for all day to day transactions. This is prevalent in countries like Argentina, Venezuela and Greece. Users are actually looking at Bitcoin as an alternate to acquire foreign currencies and goods.

Deflationary collapse:


In this case, for Bitcoin to actually be preferred as an escape option, the currency should see mainstream adoption. The central banks and lenders should be able to accept Bitcoin in exchange for debt in fiat currencies. Unless the scenario is that positive, you’d see a massive selloff of bitcoin. This is because people would want to get as much USD as possible in order to pay debts.

In a financial crisis, there are limited tools available to sovereign entities to stem the crisis. Devaluation, bail-ins and capital controls are the go-to tools, Bitcoin counters them all. Bitcoin extends the basic properties of good money with extreme, no-cost portability, security and stealth. These properties are extremely valuable in cataclysmic financial collapse. However its utility majorly depends on adoption of the cryptocurrency before the impending crisis.

Decentralized vs. Fiat Currency: Identifying Failure

Decentralized Currency

Critics have cited Bitcoin’s decentralized nature as problematic to long-term investment, but this criticism deserves deeper analysis.  Notable dissenting voices include investor Warren Buffet and economist Paul Krugman.  Critics are entitled to their opinion.  In considering the potential demerits of Bitcoin, however, investors should be aware of the benefits associated with its decentralized character.  The intent of this post is to explore the failures of historical fiat currencies.  (For reference, fiat currency describes government issued and/or authorized money, lacking intrinsic value.) From fiat currency failures, the benefits of a decentralized system become clearer.

Currency Failures of the Past

Fiat currencies, similar to Bitcoin, are susceptible to shocks in value.  Since they lack intrinsic value, immaterial forces can dramatically influence their worth.  This post examines the failures of the German Papiermark, the Argentine Peso, and the Zimbabwean Dollar.

After Germany’s World War I defeat, the Treaty of Versailles mandated Germany provide war reparations to allied nations.  When Germany neglected payments, France and Belgium occupied areas of German production, which forced the German government to print papiermarks for salaries.  As the quantity of currency increased, the value of the currency decreased.  This induced a spiral of hyperinflation.

Following the 1973 OPEC oil embargo, Argentine budget and trade deficits threatened to collapse the economy.  In response to growing debt and civil unrest, the Argentine government printed money.  The value of the peso drastically decreased, until the government established a new peso to stabilize the economy.

The situation in Zimbabwe echoed that of Argentina and shutterstock_482075365Germany.  Excessive government spending and economic problems led the government to overissue currency.  The government printed Zimbabwean dollars in higher denominations as the value of the dollar plummeted.

Lessons Learned

Each of these cases shares a common denominator.  Social, geographic, and political forces contributed to devaluation, and eventual collapse, of each of these currencies.  Bitcoin is exempt from these sources of error.  As an independent, decentralized currency, Bitcoin will not face pressure from foreign governments or internal unrest.  Monetary supply is fixed, which means that supply will not respond to changes in the world.  Effectively, Bitcoin removes the element of human error.

The argument of this article is imperfect for several reasons.

  1. Historical currencies are tested under harsher conditions than Bitcoin through wider use and longer duration.
  2. This piece overlooks the benefits of monetary policy, which have been used to stabilize economies.
  3. Hyperinflation, which is the common source of failure among these currencies, could still occur to Bitcoin.

Despite these imperfections, the trend in other intrinsically valueless currencies points a finger at geo-political variables as the culprit for currency failure.  Since Bitcoin avoids geo-political variables, it may be less prone to failure.