Bitcoin is Digital Gold for Emerging Markets

The price of the bitcoin blockchain currency has more than doubled since the beginning of the year and has appreciated by 450% since the bottom of the most recent financial meltdown in March. The financial crisis and Covid epidemic have been brutal for many emerging market currencies and financial assets and, not surprisingly have provoked a wave of capital flight from EM.  For the first time, bitcoin appears to have had a significant role in this movement of capital, a testament to growing trust in its value for both cross-border transactions and the preservation of wealth.  What initially had been mainly of interest to financial and tech geeks and criminals seeking anonymity, now appears to have gained mainstream status with EM elites seeking paths to preserve wealth in a world of growing financial instability and currency debasement.

Not surprisingly, Bitcoin is finding more early adopters in countries which have a combination of financial instability and governments with weak deterrence ability. Therefore,  as expected,  Bitcoin adoption is more prevalent  in a country like Nigeria  than it is in China. The following chart from CoinDesk Research, a media outlet that focuses on blockchain and bitcoin news, confirms this. In the case of Nigeria, bitcoin “cryptowallet” payment systems, which bypass banks and regulators, have become prevalent for conducting all sorts of international transactions, ranging from receiving  remittances to paying for imports to facilitating capital flight. Though not appearing in CoinDesk’s survey, Russia, Argentina and Brazil have also become big bitcoin adopters. These three countries all have precarious financial systems and poor prospects of economic growth and highly sophisticated elites with a penchant for seeking offshore havens to preserve financial wealth. A network of specialized broker dealers/asset managers/fintech platforms has been set up mainly in London and Zurich to service the needs of this clientele.

The rising prominence of bitcoin is a response to the high costs and increased monitoring of more traditional channels, especially private banks. Governments have become more effective at monitoring  cross-border financial flows through regulated financial institutions.

With currency debasement and unorthodox monetary policies reaching ever higher levels, EM investors are being proactive in anticipating the probable consequence of these policies (capital controls and confiscatory tax policies) sometime  in the near future. In this context, bitcoin’s attractiveness is enhanced by its “digital-gold” status in a world of inflated fiat currencies.

At the same time, bitcoin is slowly but surely gaining status with institutional investors in developed markets as a legitimate asset with valuable diversification benefits.  This year, for the first time, prominent investors in the investment world have touted bitcoin, and some large conservative institutional funds have started to  nibble. So what started as a currency for geeks and criminals is now moving into the mainstream led by emerging market flight capital.