A global study illustrates how Bitcoin and other cryptos confirm their role of alternative investment and money in both developed and developing countries.

Let’s face it: the world appears to be rushing headlong into a global economic crisis.

Central banks’ reckless money printing in the US led to massive inflation, a banking crisis, and a looming debt crisis. russia’s war in Ukraine mixed up the market for essential commodities, such as wheat or gas. China’s enormous real estate bubble inches closer to a burst and threatens to drag down its whole economy. The Middle East is ablaze with intensifying hostilities and the increasing risks of a big war…

There is no shortage of things to worry about, and investors from developed countries are bracing for a major turbulence period, looking for a safe haven asset capable of withstanding it. People in developing countries have it worse: oftentimes, they must find ways to secure not only their savings but also the proceeds from their day-to-day activities.

In both cases, more and more people are turning to cryptocurrencies, which operate outside the banking system and provide a much-needed alternative.

In this Newsletter, we will look at the trends in crypto use pointed out by the newly published Chainalysis’ Geography of Cryptocurrency 2023 report and put them in the context of the economic and political situation.

The cost of free money

Opening a trillion-dollar money tap may have temporarily scored popularity points for politicians and central bankers, but it has also unleashed a wave of inflation in the US.

Even worse, the Fed’s predictable reaction to this inflation – raising interest rates – has shaken the already unstable foundations of the country’s huge financial system. Government bonds that traditional financial institutions have been hoarding so intensely (bonds equal stability, right?😏) depreciated almost overnight, bringing several banks to bankruptcy, and obliging the government to intervene to save others. One could guess that such an intervention implies creating more money.

What’s more, the surging rates put the whole country at risk. As borrowing becomes increasingly expensive, how will the US manage to service, let alone repay, its staggering $33 trillion debt? To put it in perspective, the federal government collected only $5 trillion in revenue in fiscal year 2022.

Servicing a debt of this magnitude requires an ever-increasing amount of money. According to the Congressional Budget Office, the USA will have to spend a total of $10.6 trillion on paying interest in the next decade. How will it generate so much money? You know the answer: printing more dollars and diluting their value so that $10 trillion in several years will be much cheaper than now.

So here’s our vicious circle and no one can provide a credible solution for breaking free from it. Unless, of course, we look beyond the traditional fiat system.

Crypto as investment

On-chain analytic company Chainalysis measures the crypto use by indexing the value of several on-chain metrics, such as value received by centralized/decentralized/P2P exchanges, and weighing them by population size and purchasing power.

The global crypto use fluctuates together with the crypto market cap, which is entirely normal. However, within this trend, several interesting particularities emerge.

North America (mostly represented by the US, of course) stands as the largest crypto market, with an estimated $1.2 trillion in value received on-chain between July 2022 and July 2023. That’s over 24% of global transactions and the 4th place in the Chainalysis crypto adoption ranking.

This year (and particularly banking failures in March) saw this region’s stablecoin use decline from 70% to 48%, while the share of Bitcoin and Ethereum grew. This can be attributed to a noticeable decline in DeFi use (which relies heavily on stablecoins), and also regulatory uncertainty. To us, this shift also suggests a growing preference for the investment aspect of crypto over speculation.

Rare European countries have made it to the Chainalysis top-15 throughout the years (in 2023 edition, only UK on the 14^th place). However, a recent trend in crypto funds flow shows that the last 5 weeks saw continuous inflows for the first time in months ($484 million), of which almost 90% came from Switzerland and Germany. This means that at least some institutional European investors are starting to consider crypto.

Crypto as money

While many American citizens are at grappling with the rapidly rising cost of living, millions of people in developing countries have been dealing with this challenge for quite some time. Argentina is an excellent case in point.

Consistently high inflation (40-60% through 2019-2022, and then an enormous spike leading to today’s 140%) and central bank’s attempts to prohibit citizens from buying foreign currency have made life in this formerly prosperous Latin American country very difficult. So, the Argentines turned to crypto.

Argentina is now leading the Latin American region in crypto transactions, exceeding $85.4 billion in value received. The most popular « escape crypto » are stablecoins, which combine the (relative) stability of the dollar and the borderless nature of the blockchain. Bitcoin and Ethereum come 2nd and 3rd, respectively.

As the Argentinian peso continues to lose value, crypto purchasing trends up. 

Furthermore, the crypto issue has now firmly entered the country’s political discourse.

Argentina’s upcoming 3^rd round of presidential election will see two candidates with radically different opinions: Sergi Massa, who wants the country to launch a CBDC to “solve” the inflation crisis (how? 🤷) and keep the USD away, and Javier Milei, who wants to abolish the central bank and adopt the USD. Milei has also shown support for Bitcoin, saying that it represents “the return of money to its original creator, the private sector”.

The final run-off vote will take place on November 19^th.  In the meantime, Bitcoin price hit an all-time high in Argentinian peso.

Bitcoin’s recent spike has also marked an all-time high in several other highly inflated currencies, such as Turkish lira, Nigerian naira, Laotian kip and the Egyptian pound.

Overall, Chainalysis rankings show a sustained dominance of developing countries, which use crypto not only as an investment but also as a means of payment. As the world crisis approaches and the American monetary experiments aggravate the already existing economic problems in these countries, they are likely to increase their crypto exposure.

Together with the nascent crypto growth cycle, that might be not a bad idea after all.