In the previous post, Bitcoin and Speculation, we have discussed the relationship between Bitcoin and speculation by reviewing the volatility of Bitcoin with that of more liquid assets. We have seen that since its inception in 2009, Bitcoin’s overall volatility was trending downwards as important network development are taking place, such as the development of supporting markets, the growth in the network participation and the slowing supply growth of coins in time.
Because of its relatively short life of barely 10 years, it is still unfair to try to compare Bitcoin against well established and liquid assets such as the US Dollar, the British Pound, the Euro or gold. However, Bitcoin most certainly can compete with other monetary units in emerging markets, as we shall see in this post.
The Economist published in November an article pertaining to the performance of emerging market currencies in 2018:
Most of the countries of the BRICS group are represented in the above figure, except for China, which pegs its currency, the Yuan, against the US Dollar. The disappointing performance of these currencies relative to the US Dollar is mostly explained by fiscal and monetary policies which have fallen victims to populism.
The way to read this graph should be the following: if you were a citizen of Argentina, and your wealth was denominated in Argentine Pesos, then since the beginning of 2018 your wealth was destroyed by 48.7% relative to the US dollar. In 2001, before Argentina imposed banking restrictions on its citizens and defaulted on its debt, leading to a devaluation of the Peso, the exchange rate between the Peso and the US Dollar was 1:1. Early on December 2018, that exchange rate was at 37.5:1. In 20 years, your 2001 holdings in Pesos would have been almost totally destroyed against the US Dollar.
Let’s revert to the volatility exercise from the previous post, Bitcoin and Speculation, and let’s instead compare the volatility of Bitcoin with that of some of the currencies displayed in the previous figure, (all units denominated in terms of USD):
The graphs above show what I find to be an extraordinary trend. Since 2016, Bitcoin started being competitive with intermediary monetary units which are affected by populism. This means that weaker currencies in developing countries in Africa, Asia and Latin America are seriously challenged by Bitcoin. The reason I find this extraordinary is because these countries represent a substantial proportion of the world’s population, and adherence to Bitcoin in these countries would increase the overall participation on the network significantly.
I also want to illustrate the volatility of Bitcoin relative to that of a currency of a highly populist and failed state, namely Venezuela. Venezuela has the biggest crude oil reserves in the world, and like Norway and Gulf states, there is no reason to think it couldn’t have benefited from its oil wealth. Unfortunately, Venezuela has fallen victim to populism, especially since the disastrous Nicolas Maduro has taken power, and has seen its currency crash under hyperinflationary pressure, the result of the state gross incompetence and the interdependence of politics and monetary policy under populism. The following figure, from The Economist in January 2018, illustrates the dire economic situation exacerbated by incompetence and a failed monetary policy:
The resulting volatility of the national currency in Venezuela is depicted in the following alarming graph:
Note here that the volatility curve of Bitcoin for 120 days moving average is a little bit different than that of the preceding graph because a lot of data points were missing from official exchange rates in Venezuela from late 2016 to today.
The resulting consequence of this mess is that ordinary Venezuelans have seen their wealth completely wiped out during the rise of populism. Worst, living standards have declined significantly and about a tenth of the population has fled the country in despair (The Economist), with many more considering emigrating:
It is very difficult for anybody living in a stable and rich country to even begin to comprehend how a situation can slip into populism and escalate to the events which occurred in Venezuela or Zimbabwe, to name a few. The most tragic aspect of these unfortunate events is that the people who suffers the most from these situations is actually the 50-90% of the population supporting the populist agenda in the first place. That dear price translates into increased criminality, poverty, and therefore, inequality.
I have been exposed directly or indirectly to the difficult reality of friends and acquaintances living in countries like Argentina, Venezuela and Zimbabwe who have suffered a depreciation and destruction of their personal wealth because of the grip of populism on monetary policy. Those people are the ones who would have gained from hedging their exposure to politics by investing in gold, or even better since 2013, in Bitcoin. Emerging countries are the ones which represent the biggest adoption opportunity for Bitcoin in the medium term. Citizens of these countries, which constitute a substantial proportion of the world population, would then be allowed to store their wealth away from increasingly politicized institutions and increase participation over the Bitcoin network, while more effectively holding their politicians accountable.
As I have mentioned before, each person must accomplish his personal mandate in society, which is to provide for his family and to provide for his older age. Mitigating risks is extremely important, and Bitcoin provides an opportunity to further mitigate risks related to politics since Bitcoin is decentralized, not controllable by any government and can’t be used for debasement of money, and thus, for the destruction of wealth (see Bitcoin, Gold and Fiat).
Even rich countries are not shielded from populism and from the risk it represents to personal wealth. In the next post, I will investigate the impact of the departure from the concept of sound money following the end of the gold standard in 1973 and see how it has impacted socio-economic prosperity in the US.