Bitcoin's greatest value is in the world's least stable economies

By Michael Carney , written on July 12, 2013

From The News Desk

Bitcoin has faced its fair share of regulatory and reputational obstacles in the US, where the Department of Homeland Security, the IRS, and the DEA have each taken separate action against the crypto-currency. This is certainly an issue for those who hope that bitcoin could one day become a truly universal currency, accepted everywhere yet devoid of central regulation and government manipulation. Regardless of how things play out in the US, however, bitcoin holds enormous potential as a safe haven for those living in countries with unstable national currencies.

Economic observers in Argentina estimate that inflation is currently raging at 20 percent or more annually, a fundamentally untenable level for the average citizen. Not surprisingly, bitcoins have surged in value there, rising 30 to 40 percent above their value in neighboring Uruguay. In situations like this, faith in government-backed currencies can fall precipitously. For Argentineans, the search for alternatives has already begun, as demonstrated by a recent meetup organized by Foundación Bitcoin Argentina which brought 180 delegates to the nation’s capital to discuss the role of the technology in their national economy.

In Kenya, a large volume of local commerce is already conducted using SIM card-powered M-Pesa digital currency. But this technology only works within the country. The large number of Kenyans who work abroad, and remit the equivalent of $99 million each month to family back home, face onerous bank and wire transfer fees. But bitcoin, with its ability to transcend borders and operate outside the traditional banking system, represents a solution. Earlier this month, the launch of a mobile wallet company called Kipochi enabled users to for the first time quickly and easily buy, sell, and transfer bitcoin using M-Pesa. The service charges a 2 percent fee, a significant savings over existing international money transfer options.

At the Bitcoin London conference in early July, Icelandic angel investor and virtual currency expert Sveinn Valfells proffered a radical suggestion: Iceland should adopt bitcoin as its national currency. He may be in the minority, but his view is rooted in generations of experience suggesting that the Icelandic government is ill-equipped to manage its national currency. In the 1970s and 1980s, Vallfells’ father arrived at a similar conclusion amid double- and triple-digit national inflation rates. Valfells, Sr. chose to take action by creating an alternative currency in the form of vouchers denominated in cubic meters of concrete. The vouchers, which were handed out to construction employees on payday, were eventually accepted by the federal government as payment for taxes and helped many citizens weather the otherwise brutal economic period. Valfells is hoping that bitcoin could prove a more official and robust analog to his father’s vouchers.

Perhaps most famously, the largest price surge in the history of bitcoin coincided with the collapse of the Cyprus banking system earlier this year. As citizens of the country and other wealthy Europeans and Russians who held deposits there sought to extract their holding from the country’s failing banks, bitcoin became the popular choice for storing that wealth. As a result, the value of a single bitcoin surged from approximately $30 prior to the banking collapse to $265 at its highest, before settling in the range of $80 to $120 over the last three months. It was a tumultuous time for many in the bitcoin ecosystem, but for those affected by the Cyprus situation, it proved to be a savvy financial decision.

A study from The Genesis Block bitcoin foundation offers insights into the global adoption of bitcoin, relying on proxies such as measuring the size of bitcoin meetups in respective countries and also the size of connected nodes within the bitcoin network. The takeaway from these two analyses is that the US still dominates the bitcoin ecosystem, but that Israel, Canada, UK, Germany, China, Russia, Argentina, Spain, and the Nordic countries are all significantly represented.

The study determined:

There is a correlation of 0.7 between a country’s bitcoin [software] downloads per capita and internet penetration... [Further] USD as a share of total bitcoin trading volume has fallen from near 100% to approximately 80% over the past two years. The most notable gain from is from CNY (Chinese Yuan), which grew from approximately 0.4% of total volume in April 2012 to an impressive 4.7% in April 2013.
Also, despite the recent US government actions against bitcoin, adoption rates in America have continued to increase, although at a slower rate than earlier in the year. The US just recorded its 1 millionth download of the bitcoin client software, The Genesis Block reports.

Bitcoin has shortcomings, not the least of which is price volatility driven by its still limited circulation and popularity among speculators. But in places where the prevailing fiat currency is equally if not more unstable, and where the powers that control that currency regularly cannot be trusted, bitcoin often provides the most attractive and accessible alternative. Lamassu, the company behind the soon to be released bitcoin ATM, announced earlier this month that it received requests from 40 different countries for delivery of the $4,000 devices that can convert over 200 paper countries into digital currency in 15 seconds.

The actions of leading superpowers like the US could still undermine the broader bitcoin ecosystem, by, for example, seizing the assets of major international exchanges such as Mt. Gox. But the bitcoin infrastructure is widely distributed, and the underlying technology is part of the public domain. So long as a significant number of people around the world choose to hold their wealth in bitcoin, the system is unlikely to collapse. And as this number of participants in the bitcoin economy grows, so too should the stability and viability of the currency as a store of wealth.

Interestingly, multiple decades of research by the World Bank indicates that the strength of any economy can be traced back to the trust that exists in its economic transactions. “If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia,” says World Bank senior economist Steve Knack. To the extent that bitcoin can alleviate mistrust within the world’s destabilized economies, it has the potential to have a meaningful impact on worldwide prosperity.