The recent escalation of the U.S.-China trade war has brought currency manipulation back on the table. Many crypto-analysts are attributing Bitcoin’s price spike as a consequence of geopolitical instability. With the dollar and yuan embroiled in controversy, could troubled nations look to Bitcoin as an alternative to peg their currencies?
When most people think of Bitcoin as a hedge against hyperinflation, Venezuela comes to mind. After all, for much of 2017 and 2018, the country has been turning to cryptocurrencies as a solution to its monetary nightmare. It’s caused many analysts to ask whether Bitcoin could gain its first ‘test’ as a reserve currency through adoption in troubled countries.
Venezuela As a Test for Bitcoin
The situation is not as easy as it seems. This year, despite still experiencing hyperinflation, Venezuelan interest in Bitcoin has plummeted. Today’s trading volumes are some 50% less than what they were in February in the country. Weekly, around 2,487 BTC was traded then on LocalBitcoins, for example; Now, that number is sitting around 433 BTC or so weekly. Has Bitcoin failed the so-called ‘Venezeula test’ as a reserve currency?
There are multiple reasons for Bitcoin’s now-declining success in Venezuela. One is likely Bitcon’s increasing fees, which have sharply increased since February. Another possible reason could be LocalBitcoin’s new enforced KYC measures, which have pushed many retail users off of the platform. Still, Bitcoin has not proven itself reliable in Venezuela, as its citizens flock to other cryptocurrencies like DASH or Litecoin. Frankly, transaction fees matter when your sovereign currency is worth a fraction of a penny.
The Real Obstacle to Bitcoin
A hardcore skeptic might say that Bitcoin failed Venezuela. However, a geopolitical analyst might also ask: why would a nation suffering from hyperinflation want Bitcoin competing with its sovereign currency? This was partly the idea behind the Petro, intended to be Venezeula’s own native cryptocurrency but it failed.
The real test for Bitcoin is not whether or not it has staying power in countries suffering from hyperinflation. The truth is, Bitcoin cannot prove itself as a store of value until a country recognizes that pegging its inflationary currencies to Bitcoin is the best course of action. It’s then that we’ll know for sure that Bitcoin has proven itself. After all, Bitcoin is an apolitical entity—there’s plenty of reason to think that a struggling nation would prefer pegging its currency to Bitcoin as opposed to dollar or yuan, which always comes with strings attached.
The CEO of investment website ADVFN, Clem Chambers, writes in Forbes that “without doubt, the fear of Chinese yuan devaluation has driven Bitcoin prices up and this driver is on the ascendant.” Yet, he seems to misunderstand the geopolitical realities. Investments will not flock to Bitcoin from Americans or Chinese folks disgruntled with their fluctuating currencies. Instead, it will come from the peripheral nations who, having their currencies pegged to the dollar (for example), will begin to search for alternatives to this instability.
That solution may, in fact, be Bitcoin someday—if the leading cryptocurrency can convince a struggling government it is worth betting on, that is.
Do you believe that Bitcoin could someday be a reserve currency for trouble nations suffering from inflation? Let us know your thoughts below in the comments.