Effects of widespread bitcoin investment in emerging markets

27 February, 2014

Bitcoin may be sweeping the world by storm, but the digital currency has proven to be particularly popular in countries with emerging economies, including Argentina. Currently, individuals living in Argentina pay more for the digital currency than their counterparts in the United States. According to some estimates, Argentinians may face an annual inflation rate of up to 25%. Official figures released by the Argentinian government place the annual rate of inflation at about only 10%. Private economists have estimated that the rate of inflation could be double this amount. In early 2011; however, the Argentinian government began to implement stiff fines amounting to more than $123,000 for any consulting firm or economist that refuted government figures.

Although the Argentinian government may be determined to deny that inflation exists as a problem, the citizens of Argentina seem to have other ideas. The current inflation problems are not the first for the troubled country. In the late 1980s, prices in Argentina increased almost daily with inflation rising to more than 96% at one point. Subsequent unrest led to a series of riots. Following severe looting, the government was forced to declare a state of emergency. Since then, the situation has barely improved. Authorities in Argentina have implemented capital controls that prevent average citizens from transferring their funds to gold or US dollars. Furthermore, citizens are prevented from using credit cards for making international purchases. Given such controls, it comes as little surprise that bitcoin has become popular in Argentina, as well as other developing economies, where strict government controls are in place.

Interest in the digital currency has also increased in several other Latin American countries, including Brazil, Mexico, Chile, and Ecuador. In addition, bitcoin has become increasingly popular in Iran. A country known for its strict governmental controls, Iran has also been associated with widespread inflation. Severe currency devaluation has hit the country hard in just the last couple of years. As a result, some foreign airlines even ceased service to Tehran due to the instability of the Iranian rial. Despite those problems, many Iranians have been quick to embrace bitcoin has a method for making purchases abroad. With the ability to keep the currency outside Iran and the fact that regulators are not able to track transactions easily, it is easy to see why Iranians have been so quick to adopt the virtual currency. Citizens in India as well as Venezuela have also been quick to pick up on the fact that bitcoins provide tremendous value.

Although it is frequently pointed out that bitcoin lacks the central bank or government authority of most currencies, it remains impossible to completely separate the currency from politics. As bitcoins become increasingly popular in emerging economies, the resulting political and social ramifications cannot be ignored.

Critics of the currency have been quick to dismiss it as a bubble or a fad. At first glance, this can certainly be easy to do considering the regulatory threats the currency has faced, along with recent price volatility and even hacking attacks. Even so, the currency's rapid ascent in value combined with increased interest in emerging markets means that the virtual currency can no longer be ignored. According to a study conducted by Jana, the mobile payments firm, nearly 60% of people in emerging markets have confirmed they would feel comfortable with the idea of investing in a digital currency. Furthermore, almost 20% of people responding to the survey felt that virtual currency investments were a safer option compared to investing in real estate and stocks.

Historically, low value transactions have taken place in the form of physical currency. With bitcoin; however, it is possible for both low value as well as high value transactions to take place with only nominal fees. In the event that the virtual currency does take off in emerging economies, a potential threat to bank payments systems, credit card companies, and wire transfer companies does exist.

The threat posed by virtual currencies has already served to increase competition throughout the global payments market. Widespread adoption of the currency in emerging markets could also pose a threat to attempts by central banks to exercise control over the supply of domestic currency in economies that are already otherwise volatile. The prospect of such a situation has led to the question of whether it would be possible for reserve managers in emerging economies to acquire bitcoin and other virtual currencies as an alternative to the dollar.

While Bitcoin has taken investors on a rollercoaster ride in recent months due to price volatility, the fact remains that the digital currency frequently offers a better store of value for individuals in emerging markets than their own national currency. If adopted in a widespread manner in such countries, bitcoin could prove to be an important game changer when it comes to cross-border payments.