Bitcoin (BTC) and stablecoins are increasingly seen as a threat to the stability of fragile emerging market currencies, according to a recent report from CoinShares. The report highlights several key factors driving this trend, including the growing adoption of Bitcoin and stablecoins in regions where local fiat currencies are struggling.
Bitcoin Adoption Increases
CoinShares’ 2023 Global Bitcoin Ownership Overview shows that approximately 270 million people worldwide own Bitcoin. These figures highlight Bitcoin’s significant user base, which is comparable to the population size of the world’s fifth most populous country. The report also noted that Bitcoin ownership is primarily an emerging market phenomenon and that the majority of Bitcoin owners reside in these regions.
From 2016 to 2022, the compound annual growth rate (CAGR) of Bitcoin owners was an impressive 146%. Although this high growth rate is unlikely to continue indefinitely, this trend signals a significant shift towards Bitcoin as the preferred financial asset in many parts of the world.
Decrease in value of fiat currency
The CoinShares report also examined the monetary health of local fiat currencies in countries with high Bitcoin holdings. This uncovers a consistent pattern where the currency is either currently deteriorating or has a history of underperforming. This trend suggests that people in the region are turning to Bitcoin as a more stable alternative to local fiat currencies.
Moreover, historical data shows that weak fiat currencies often fail when competing with stronger currencies. The availability of Bitcoin and stablecoins, considered ‘hard’ currencies, accelerates this process by providing alternatives that local governments cannot easily control or manipulate.
Stablecoins as gateways
Interestingly, the report highlighted the role of stablecoins in this paradigm shift. Stablecoins, often referred to as ‘cryptocurrencies’, are becoming increasingly popular for everyday transactions in emerging markets. Unlike Bitcoin, which is too volatile for everyday use, stablecoins provide the stability of traditional fiat currency while leveraging blockchain technology.
Stablecoins are also serving as a gateway for Bitcoin adoption. Initially, Bitcoin introduced users to the concept of stablecoins. However, this trend has reversed and stablecoins are now acting as an entry point for new users into the broader cryptocurrency ecosystem.
The ease of access to stablecoins is particularly noteworthy. You can buy and sell using just your smartphone, making it accessible to billions of people around the world. This ease of access significantly lowers the barrier to entry for new users, fostering widespread adoption of Bitcoin and other cryptocurrencies.
Implications for Emerging Markets
A CoinShares report suggests that the combination of Bitcoin and stablecoins poses a serious threat to the stability of emerging market currencies. The widespread availability of these hard currencies makes it increasingly difficult for governments to implement monetary policies that rely on the depreciation of the local currency.
Historically, people in emerging markets have actually had to import foreign banknotes to protect their wealth from local currency devaluation. With the advent of Bitcoin and stablecoins, this process has become much simpler and more difficult for governments to control. As a result, mismanagement of the local currency is likely to have a more immediate and pronounced impact on currency stability.
CoinShares concluded that, given the history of high inflation and currency instability, this trend will primarily affect emerging markets initially. However, the report also warns that developed market currencies are not immune from these impacts. As Bitcoin and stablecoins continue to gain popularity globally over time, even well-managed fiat currencies may face challenges.
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