Bitcoin and Financial Crisis
To many, Bitcoin might be a plaything – a fun way to explore the world of cryptocurrency, or perhaps to purchase things online that you’d preferably don’t want people to know about. But others are perceiving it as an earnest haven in a financial turmoil.
Countries that are in the middle of a financial mess often stiffen the financial thumbscrews, inflicting capital controls on their residents that stop them doing even necessary things like withdrawing cash from the bank.
Could bitcoin be a way out for people in such economies?
The latest country facing a financial meltdown as at the time of writing, is Greece. The country became a member state of the European Union in 1981 and adopted the Euro as its official currency in 2001, but it has since been one of Europe’s poorest countries. Greece suffered heavily when the 2008 global financial crisis threw countries into recession. It has racked up massive debts and has spent the last few years getting help from the European Central Bank, among others.
Greece’s government has become more irritable about the harsh conditions inflicted on it by its creditors, and in June 2015, discussions on the latest round of bailouts ultimately collapsed.
The country entered a referendum to see if it would stay in the euro or completely exit altogether. In the meantime, the government tried to circumvent a run on the banks – in which frightened clients take out all of their funds – by simply shutting them down for a week.
Leaving a Sinking Ship
If people no longer believe in a currency, the usual reaction is to begin using a different one. As a rule, money has simply drifted to the most stable currency, which has typically been the US dollar. But considering the economics of bitcoin, it has quite a lot of advantages over traditional fiat currencies.
The first benefit is that like most global cryptocurrencies, no central authority has control over it. In countries where people are incessantly suspicious of how governments and central banks manage the economy, bitcoin may appear to be a more reasonable alternative.
The second advantage is that it may be easier to obtain bitcoin than other fiat currencies. It can be purchased and sold through cryptocurrency exchanges online, but also indirect transactions on peer-to-peer sites like LocalBitcoins.
Data infers that during times of crisis, people are frequently looking to bitcoin as a viable option to their own troubled local currencies. As the Greek crisis worsened, bitcoin exchanges recorded a healthy boost in volume as people traded the digital currency around the world. The lion’s share of the rise came from clients in Greece.
The price of bitcoin also increased significantly as the Greece crisis intensified, lending further belief in the notion of Bitcoin as a ‘panic’ currency.
A History of Panic Buying
Price hikes in bitcoin have associated with financial disasters before. When Cyprus was in the center of its banking crisis in April 2013, prices of the digital currency struck record highs. Bitcoin prices mounted to even new heights in 2017.
Other countries inflicting capital controls have also seen residents bolt to bitcoin.
Argentina is an excellent example of bitcoin effect on economy. The country’s government restricted its population from purchasing US dollars after undergoing its own financial crunch. Reports now have it that Argentina has turned into a hotspot for bitcoin-related ventures, as banks deteriorate. Prices of cryptocurrencies there were higher than in other nations.
Argentina has even become a forerunner in the BMPI Bitcoin Market Potential Index, a report created by analysts at the London School of Economics, which reveals economies in which Bitcoin could get the greatest traction.
People might fancy the notion of escaping a sinking currency in support of a digital, decentralized one, but there are likely disadvantages. For one thing, the value of bitcoin is highly volatile, and people who are pouring huge sums of money into it could find their net worth going up and down like a ship on an ocean storm.
If people in economic turmoils start using bitcoin as some sort of haven, they could find themselves in even more chaos than they were initially. As with any type of extremely speculative financial tool, people should not invest money they cannot afford to lose in Bitcoin or any other digital asset. The problem is that if they are scared of squandering everything anyway, people might conclude that any haven is better, in an economic turmoil.