Not all Bitcoin halving cycles are created equal. The return over a cycle can vary greatly depending upon the domestic currency being used. When we step out and analyze returns on a currency-by-currency basis, we get vastly different results. Globally speaking, relative stability of a country’s domestic currency is more the exception than the rule.
Often times discussions around bitcoin focus solely on its relationship with the US dollar since the dollar continues to maintain its position at the center of the financial universe. Many debates in the MSM or on Twitter are filtered through an American centric lens which tends to exclude the experience of many participants within the Bitcoin ecosystem who don’t use the dollar. When pundits make comments such as “the government can ban Bitcoin” what they really mean is the US government can ban bitcoin (a dubious claim in and of itself) while neglecting to mention anything about the rest of the world, which happens to be responsible for roughly 75% of global GDP.
Loss of purchasing power is felt far more acutely in many places outside of the US. It is far too often that many citizens of the world wake up to find their domestic currencies being identified as one of the worst performing in terms of purchasing power. If we want the bitcoin network to grow in a meaningful way then it is important to focus some attention on the plight of the world outside of the US. In today’s discussion we will do just that as we observe the return profiles of the bitcoin hodlers outside of the US who use domestic currencies that are not the dollar. In our analysis, we will use the dollar return only to serve as a benchmark for analyzing the loss of purchasing power and bitcoin return profiles of these others currencies.
Purchasing Power and Bitcoin Returns
One of the aspects that makes this analysis challenging is obtaining the data. Due to the absence of reliable price data for some of the larger global economies, our analysis will be somewhat lacking, however, we should be able to glean some valuable insights nonetheless. Our analysis will be very simple. We will observe the loss of purchasing power in a number of currencies while at the same time providing the bitcoin return for said currencies. In order to derive meaningful insights, we will use the period of time between the 2016 halving and the time of writing (2/26/21) for our analysis. The longer period of time will provide a clearer picture of the importance of possessing some bitcoin if domiciled outside of the US. The losses in purchasing power are also uneven but will show that some countries are in desperate need of a mechanism to secure value over time due to the failure of their domestic currencies ability to store long term wealth. Before we observe the returns of each country in the analysis, we will first turn our attention to the US dollar.
The US dollar functions as the world reserve currency and is therefore the most liquid currency by an enormous margin. In order for other countries to participate in international trade they must hold dollars. The need for foreign countries to settle accounts in dollars has created a synthetic demand for them. We have seen attempts in recent years to bypass the dollar, such as the establishment of bilateral trade agreements between Russia and China or Russia and the EU where accounts are settled in rubles, yuan, or euros, but this has not provided a meaningful challenge to dollar supremacy as of yet. Due to the importance of the dollar, we will use it as our benchmark in order to observe differences in returns among currencies. While the dollar has returned an enormous 6,834% since the 2016 halving, this pales in comparison to some of the returns we will see as we move through the article.
In Argentina, there are two prices for bitcoin, both an “official” price and a market (true) price. This price discrepancy does not represent a premium as some have indicated but instead it measures the difference between the value of the peso as set by the government versus the valuation set by the free market. As one might have already concluded, the free market values the peso much lower than the government does. Since the 2016 halving, bitcoin has returned a staggering 44,036% under the official standard while returning an even larger 74,642% under the free market standard. During this period of time the peso fell 84.10% against the dollar. Unfortunately, I am unable to ascertain whether that figure is the official price or the free-market price but I believe it represents the official price in this case.
Brazil is a large economy whose share of global GDP accounts for roughly 2%, a large figure. Due to its large population, vast resources, and preeminence within South America it is one of the most important countries among emerging market nations. Sadly, Brazil has also insisted in debasing its currency, falling 41.26% against the dollar since the 2016 halving. There is good news though, if you had held bitcoin since that point in time it would have earned you a lofty 11,554% return. In a nation with rapidly increasing prices, bitcoin has provided relief for those who have been bold enough to both acquire it and save in it.
India is a growing power and accounts for over 3% of global GDP. Numerous articles have been written in recent years which expect its share of GDP to continue to increase. Despite PM Modi’s demonetization of the 500 rupee note in 2016, the rupee has still performed better than many emerging market currencies losing just 9.52% of its value against the dollar since the 2016 halving. Likewise, gains in bitcoin were not as large in India as they were in other places, rising by “only” 7,651%.
Nigeria has been in the news as of late after its’ central bank forbid financial institutions from transactions in cryptocurrency. This ban led to an enormous spike in the bitcoin price, with premiums reaching as high as 60% above spot. With the naira losing 25.49% against the dollar since the 2016 bitcoin halving, bitcoin has provided a much-needed release valve for the average Nigerian. The 9,857% return over the same span provides evidence for this.
South Africa had already slipped into recession prior to the onset of Covid-19 and unresolved tensions regarding land reform had caused a series of ongoing problems which go back years. To add insult to injury, South Africa also boasts one of the highest, if not the highest, unemployment rates for any country in the world. Nonetheless, the rand has held quite steady against the dollar, losing less than 3% against the dollar since the 2016 halving and the corresponding price of Bitcoin has increased by 7,606% during that period as well.
Unfortunately for Turkey, the respite from it’s 2018 currency and debt crisis had been short lived before the onset of Covid-19 which once again exposed the underlying weakness of the lira. In order to stabilize the lira, the government pursued a policy whereby FX reserves were sold to buy back lira in hopes of impeding its descent. The government even went so far as to borrow dollars from countries such as Qatar in an effort to defend the domestic currency. The current currency crisis had abated since its peak in November of last year but now appears to be rearing its ugly head once again. Since 2016, the lira has depreciated by 59.45% against the dollar while, during the same period of time, bitcoin holders saw gains of 16,896%.
Bitcoin is Global
So why the need to focus attention on emerging markets and their currencies? In a word: opportunity. Emerging markets, where purchasing power is being vacuumed away by rapacious governments at regular intervals, provide high growth opportunities for entrepreneurs from within the bitcoin industry. Many of these places are underserved and lack the same number of bitcoin infrastructure that we take for granted in places like the US, Europe, and Japan. Despite the absence of said infrastructure, many of these emerging market countries account for a decent share of the world’s GDP and would likely be able to contribute the resources to build out exchanges, bitcoin services, and so forth. With the power and influence of the US declining, there exists an opportunity among emerging market economies to increase their global market share. When you are dealing with countries that have difficulty acquiring bitcoin, but need it the most, there exists a problem that innovators and entrepreneurs have the ability to solve. If we want bitcoin to grow then we need to identity and target countries where bitcoin is most needed.
While reading this some people may be asking themselves “why don’t citizens in these emerging market countries just acquire dollars?” My answer would be “how will they acquire them?” The World Bank estimates that 1.7 billion people in the world still remain unbanked and, even if they have a bank, getting dollars is not always easy. The acquisition of dollars usually requires a hefty haircut by the government via exchange rate theft and this is under the assumption that the government allows their citizens to hold dollars at all. Furthermore, as the recurring dollar droughts in the Eurodollar market illustrate, it’s not only individuals struggling to acquire dollars outside of the US but also international banks and sovereigns, among others. We can thus conclude that competition for dollars outside of the US is fierce. The large bitcoin returns we witnessed above are an absolute necessity for the majority of countries outside of the US as a measure to offset their lost purchasing power. Besides, who would want dollars anyway when bitcoin is available? Certainly not me.
In closing, I think participants in the bitcoin space within the US need to make more of an effort to connect with the global community and to work in concert with people in different countries in a combined effort to defeat the dual forces of central banks and governments. Anytime you send or receive bitcoin, assuming you don’t run a node, there is a high likelihood that the node validating your transaction lives outside of the US. By participating in the bitcoin ecosystem you are, by extension, a global citizen. Time to start acting accordingly.
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