European Central Bank Report Reveals Significant Impact of Bitcoin in Emerging Economies
According to a recent publication by the European Central Bank (ECB), Bitcoin and other cryptocurrencies are gaining popularity across Emerging and Developing Economies (EMDEs) and the reasons behind it are fascinating. A recently released working paper outlines the findings of an analysis of Bitcoin transactions against 44 fiat currencies in the largest peer-to-peer crypto exchanges.
Potential Drivers of Crypto Adoption in EMDEs
Crypto assets are seen as a speculative investment and a store of value, especially in countries with limited investment options and high inflation. In addition, cryptocurrencies present more affordable ways to engage in cross-border transactions, including circumventing capital controls or reducing remittance costs in EMDEs.
Global Crypto Cycle and Speculative Motives
The paper reveals a global crypto cycle where trading volumes and users follow fluctuating Bitcoin prices. Momentum in the crypto market, past volatility, and global market instability all influence Bitcoin trading against fiat currencies.
Transactional Benefits in EMDEs
Bitcoin offers transactional benefits in EMDE countries, particularly following currency depreciation due to the COVID-19 pandemic. Macroeconomic instability may contribute to increased cryptoasset usage, suggesting that Bitcoin is seen as a better store of value or medium of exchange in countries experiencing currency devaluation.
Differing Fundamental Values in AEs and EMDEs
Bitcoin has a higher transactional value in Emerging Economiesdespite speculation, and this should impact the pricing theory of cryptoassets.
Alternative to Traditional Finance
Less developed economies are moving toward crypto-assets as traditional finance options become less available, thus creating potential for speculation to become an alternative to regular finance.
Financial Stability Risks in EMDEs
Financial instability risks in countries with low financial development and unstable fiat currencies are significant, and these economies offer an untapped market for stablecoin and other crypto asset growth.
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