Emerging market currencies are sliding… Is Bitcoin jumping in at all?

Bitcoin has long been touted as a great way for citizens to hedge against the economic environment and policies of their country: Bitcoin would hold value much better in a currency devaluation scenario, would still be accessible in case of current account freezes or bank runs, and would likely not be included in exceptional taxes on domestic deposits (denominated in local or foreign currency). These arguments are strong, and Bitcoin is indeed a useful tool for available to these populations.

Technically, Bitcoin fits the bill

  • Transaction cost is a bit less than ~$1 per transaction today. That is lower than buying US equities from Argentina or Turkey; or much more accessible than buying real estate in Miami, New York or Vancouver.
  • Transaction time is great compared to any other way to gain exposure to other currencies: ~60 minutes for a transaction to be final, seconds to buy Bitcoin on an exchange.
  • Accessibility is decent (certainly not great): all these countries have access to fiat-to-crypto exchanges; in-person transactions are also reasonably popular and accessible.
  • Convertibility is high: Bitcoin can easily be exchanged for USD, EUR, YEN and many other currencies.
  • Storage is cumbersome, but flexible: it can be stored on paper, on an encrypted drive, in an exchange, in a laptop/mobile wallet, on a hardware wallet.

The typical counter-arguments against this use of Bitcoin are not very strong

  • Price volatility of Bitcoin is certainly a concern. However, a typical devaluation event leads to losses in wealth of 20-30% and sometimes much more: Russia’s Ruble declined by ~50% against USD in 2014, the Turkish Lira lost ~40% since the beginning of 2018. Bitcoin prices have had a pretty rough year to date -50% in Q1, -8% in Q2, +15% in Q3 so far. But that doesn’t look much worse than the Argentinian Peso’s devaluation of 50% so far this year. Citizens of one of these countries who own a share of their wealth in Bitcoin to hedge against their country’s economic environment are also exposed to upside when prices rise. We haven’t done the analysis (for a later post), but our hunch is we can prove, using portfolio theory, that every citizen from countries at risk of significant devaluation would benefit of having a percentage of their wealth (1-5%?) invested in Bitcoin, i.e. a higher return for a given level of risk, or lower risk for a given return.
  • There are better alternatives already: why not just use USD or EUR to hedge against these issues? From a financial perspective, this makes perfect sense. In fact the expected return of holding USD or EUR is almost certainly positive if a country is on a path to devaluation. The main issue that approach doesn’t solve is that holding USD and EUR in a domestic bank account is a widespread behavior, and typically one of the first targets of account freezes. Holding USD and EUR offshore is also a great strategy, but it is only accessible to the wealthiest.

Are Turkish, Argentinian, Russian citizens flying to Bitcoin as a hedge? So far, not really

So far, there is little evidence this is happening. For example, if we look at the reported volumes on Turkish fiat-to-crypto exchanges Paribu, BtcTurk and SistemKoin we do see a significant increase of volumes around mid-August, when the troubles of the Lira started to expand. On BtcTurk, the 20-day daily volume average was 350 BTC against the Lira on August 18th, more than 2x the 20-day daily volume of a month earlier.

However, these volumes are tiny. The example mentioned above represents $2.5M per day. We are missing part of the picture because citizens might be buying Bitcoin through other avenues (e.g. using debit or credit cards on offshore exchanges), but if there was a massive flow, we would certainly see it on domestic fiat-to-crypto exchanges. And overall these volumes are still much lower than at the peak of the Bitcoin craze (600 BTC 20-day daily average in early January for BtcTurk). In Argentina and Russia, the picture appears similar.

money.disrupted is about to launch a research project to better understand what is happening, and gather data on what the main reasons are. Our research on Bitcoin, proves that it is not an awareness issue: between a third and half of the population in these countries know about Bitcoin. There is also a clear trend of Bitcoin being perceived more favorably in countries that have a history of currency crises. Some of the reasons we are testing are: availability of alternatives, lack of trust in Bitcoin’s ability to sustain prices, difficulty to use exchanges, lack of awareness around how to store Bitcoin safely.

Please check back on our blog for our findings on the subject!

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