The attraction of cryptocurrencies to the digitally savvy younger generation seems understandable. But who else can see the value in the use of digital tokens?
In the second of a two-part series, Jason Guthrie, Head of Digital Assets at WisdomTree, and Ha Duong, Crypto Specialist at BIT Capital, shared Citywire selector why developing countries are drawn to the asset class.
Security in emerging markets
One of the major criticisms of cryptocurrencies has been their volatility and the uncertainty of whether they will retain their value over time. But Guthrie said that in many parts of the world they are still preferred over the local currency.
“The real base use for bitcoin is about being a digital native store of value. It’s hard for many people living in Europe or the United States to get their heads around it, he said.
“But if you live in a place like Venezuela, Argentina or Zimbabwe, where your currency has just been completely devalued and it’s very difficult to trust the local institutions, the idea of having this universally accessible store of value is really strong,” Guthrie said .
“We’ve seen adoption in these parts of the world happen very quickly because they have no other options. Things like gold and dollars – which the talking heads in Europe and the US like to compare them to – are not universally available to people.
“But if you have a smartphone, you can get bitcoin. And it works much better for you, even with the volatility.’
Guthrie said another key use of cryptocurrencies — as a medium of exchange — offered benefits in developing countries.
“Cross-border money transfers are notoriously expensive for large parts of the world. It can be 10% plus to move from one country to another. We know that many people work in one country and send money home to another.
“The best example of this is El Salvador because they adopted bitcoin as legal tender. The reason is that 30% of El Salvador’s GDP comes from cross-border remittances due to people primarily working in the US sending money home.
“This is a country that lives on about $1,000 a year per household, while the Western Union bank earns $400 million from El Salvador transactions every year. It has caused some resentment.’
Value versus weak currencies
Duong (pictured) said individuals living in countries with high inflation would find the asset class attractive.
“If you think of bitcoin as a sovereign type of money, it’s probably relevant to countries with high inflation. We have seen high adoption rates in Turkey in the last two years, also in South America, and even on the African continent.
“But in those communities, it’s probably high-income people who want to get exposure to more alternative assets. We’re not yet at a stage where it’s reached mass adoption.’
He said greater stability could see crypto more widely adopted. “The less volatile something is, the more adoptable it will be. If one day in the future bitcoin is less volatile, it is more likely that it will be used as a form of money in certain places in the world.’
Guthrie said adoption in the developed world will ultimately be driven by crypto offering a technologically advanced financial system. “The very last people it will affect are the wealthy financial professionals in the developed economies.
“The use cases coming to Europe and the US are less focused on crypto as an asset class or store of value, but more on the technology side of things in a way where we can have a more efficient financial services system.”
No need for gold
Responding to criticism that crypto has no real value since it is not backed by assets like gold, Guthrie said that, as with fiat currencies, its value came through its use.
“The idea of backing a currency with gold was to give it confidence. But really, it’s just a medium of exchange that circulates through an economy, he said.
The utility of some of these things is based on people using them and people believing they have value. You don’t need to be supported by something that exists in the past to have value going forward.
“What is needed is for parts of the economy, individuals, countries or whatever, to find benefit in it and use it. That’s what makes things valuable.’
Help for the environment?
Another major criticism of crypto has been the energy-intensive nature of bitcoin mining and the resulting carbon emissions. However, Duong said, if deployed properly, bitcoin mining could help make renewable energy production more viable.
Riot Blockchain has a very large bitcoin facility in Winston, Texas, which has a heavy reliance on sustainable energy sources – wind and solar – where you have intraday supply curve irregularities.
“The difference with bitcoin mining and other types of large-scale industries is that you can turn off the machines at any time without any negative implications. If they turn off the machines in the late afternoon or early evening when energy prices are very high and turn on at night, it’s a load balancer.
“That kind of flexibility could allow new renewable energy projects to be capitalized in areas where it would otherwise be difficult to justify this production.”
