Bitcoin and Financial Crises

Bitcoin as a Safe Haven in an Economic Storm

Bitcoin
••• Science Picture Co / Getty Images

Bitcoin might be a plaything for many, a fun way to experiment with digital cash or perhaps to buy things online that you’d rather people didn’t know about. But others are seeing it as a serious haven in a financial storm.

Countries that are in the midst of an economic crisis often tighten their financial thumbscrews. They impose capital controls on their populations that prevent them from doing even basic things like taking cash out of the bank. Could bitcoin be an alternative for people in those economies?

An Example From History

Greece joined the European Union in 1981 and adopted the euro in 2001 but it has remained one of the poorest regions in Europe. When the global financial crisis plunged countries into recession in 2008, Greece suffered heavily. It racked up huge debts and spent the next several years being bailed out by the European Central Bank, among others.

Greece’s government became increasingly irritable about the austere conditions imposed upon it by its creditors and negotiations on the latest round of bailouts finally collapsed in June 2015.

The country entered a referendum to determine whether it would stay in the euro or simply exit altogether. In the meantime, the government tried to avoid a run on the banks by simply closing them for a week. Panicky consumers were unable to take out all their money.

Leaving a Sinking Ship

When people lose faith in a currency, the typical reaction is to start using another currency. Traditionally, money has simply flung to the most stable currency and this has typically been the U.S. dollar. But bitcoin has a couple of advantages over old-fashioned cash.

First, it isn't controlled by a central authority. In countries where people are increasingly distrustful of how central banks and governments manage the economy, bitcoin might seem like a more sensible alternative.

The second advantage is that bitcoin can be easier to obtain than other fiat currencies. It can be bought and sold via bitcoin exchanges online, but also through indirect transactions via sites like LocalBitcoins.com.

Evidence suggests that people are increasingly looking to bitcoin as a viable alternative to their own beleaguered currencies during times of crisis. As the Greek crisis unfolded, bitcoin exchanges reported a healthy bump in volume as people traded the cryptocurrency around the world. The lion's share of the increase came from customers in Greece.

The price of bitcoin also rose significantly as the Greece crisis deepened, lending further credence to the idea of bitcoin as a "panic" currency.

More History of Panic Buying

Price spikes in bitcoin have correlated with financial crises all over the globe. When Cyprus was in the thick of its banking crisis in April 2013, prices of the cryptocurrency reached record highs. Bitcoin prices surged to even new heights in 2017.

Other places imposing capital controls have also seen populations flee to bitcoin. Argentina is a case in point. The country’s government stopped its population from buying U.S. dollars after suffering its own financial crisis. Reports suggest that Argentina has become a hotspot for bitcoin activity as banks there stagnate. Prices there are higher than in other countries.

Argentina even became a leader in the Bitcoin Market Potential Index (BMPI), a report produced by experts at the London School of Economics that showed the economies in which bitcoin could gain the most traction.

The Drawbacks

People might like the idea of fleeing a sinking currency in favor of a digital one with no central control, but there are potential drawbacks. The price of bitcoin has historically been extremely volatile although regulatory concerns in 2018 have tempered its volatility somewhat.

Those who sink large amounts of money into it could find their net worth rising and falling like a ship on an ocean squall all the same. People in troubled economies could find themselves in even more trouble than they were in originally if they begin using bitcoin as some kind of safe haven.

As with any form of highly speculative financial instrument, people shouldn’t invest more in bitcoin than they can afford to lose. The problem is that if they are afraid of losing everything anyway, people might decide that any port is better in an economic storm.