Written by Ethan Goldenberg
Financial expert @ Global Asset Finance Limited, 10+ years in the finance and cryptocurrency market
Why do the residents of many countries keep their money in cryptocurrency? How can it be useful in perspective?
Hypothetically, if a default occurs in any country, cryptocurrency may be one of the rescue tools. Bitcoin is an independent, decentralized system. Without the agreement of the majority, no one has the opportunity to issue more coins than is included in the program code, block or withdraw them, or turn off the entire system. Therefore, if a major crisis occurs in any region, digital money is likely to be less affected than fiat ones.
“In the event of a default, the work of the financial system may be paralyzed. Often, before the default and for some time after, regulators impose restrictions on capital markets to contain money outflows and stabilize the situation. This can be a wide range from restrictions on funds transfers and a ban on capital withdrawals to cutting deposits and a ban on the sale of assets in financial markets.”
Cryptocurrency can act as a defensive asset against the devaluation of the national currency. For these purposes, bitcoin and other coins are used, for example, in Argentina. There is a high demand for digital money in the country due to the gradual depreciation of the peso, and it became even more in demand when the local government imposed restrictions on the dollar purchase.
This is happening not only in Argentina. Residents of African and other Latin American countries also used bitcoin in order to protect capital from the depreciation of the national currency. In addition, it has been used to transfer funds bypassing regulatory authorities, although governments have tried to thwart these transactions. Therefore, the trend towards increased regulation of the cryptocurrency market is likely to continue.
Cryptocurrencies and diversified portfolios of stocks are quite suitable as a capital storage because they often outpace inflation and benefit from the depreciation of national currencies. However, it has its own ultimate strength. In cases of massive deleveraging in financial markets, only a few selected currencies are steadily adding to the value, while the rest are at risk of uncontrolled decline.
Cryptocurrency can be a tool to protect funds in the event of a crisis, as it happened in Venezuela. This is possible due to limited emissions.
“In fact, Argentina has already declared a default, and there are still risks of default in Turkey and South Africa. A default is usually accompanied by a serious currency devaluation (4-10 times), hyperinflation, and a loss of interest in the national currency. Cryptocurrency gained popularity in Venezuela in 2018-2020. The credibility of it is higher, since the issue is determined by the algorithm, and not by the Central Banks.”
It is difficult to use cryptocurrency during the crisis, as there will be huge problems with cashing out. It will be easier to exchange dollars, euros and gold for the national currency. Another aspect is that now bitcoin’s potential is fully realized only by young people, while the older generation prefer precious metals, as "you can touch them and protect against economic disasters with their help.
As we can see, having some bitcoins in your pocket is a good idea. It will not totally save you from the consequences of another financial crisis, but, at least, help to survive the difficult times.
Please note: purchasing or selling Cryptocurrency carry significant risk. Prices can fluctuate at any time.
Because of such fluctuations, Cryptocurrency may gain or lose value. This is your responsibility on how to handle your own assets.