Emerging Markets and the Digital Currency Question
In 2014, the fear of another European sovereign debt crisis was brewing, and investment asset classes were on a decline. However, Bitcoin inched up; it was then speculated that Bitcoin may be both a risk-on and risk-off asset.
Bitcoin and digital assets represent just the tip of the iceberg in a completely new asset class. A key factor propelling the soaring Bitcoin prices is the approval of 11 Bitcoin ETFs by the Securities and Exchange Commission in early 2024, marking a historic milestone. This approval opens doors for institutional investors, wider family offices, and other regulated and risk-averse investment bodies to enter the crypto-asset space in a more structured manner.
The Bitcoin ETF, along with Bitcoin itself as a whole asset, is experiencing demand that outstrips its supply. However, several other macroeconomic factors also play significant roles. Questions regarding interest rates, inflation, and the possibility of an impending recession are influencing the evaluation of Bitcoin. To date, many are turning to the Bitcoin ETF and general Bitcoin over-the-counter (OTC) purchases as a hedge against potential financial downturns or recessions.
Nevertheless, the true driving force behind the Bitcoin and wider crypto-asset revolution lies in emerging markets. As the Federal Reserve moved to implement a 24-fold increase in interest rates over just a 12-month period, sending shockwaves through the US financial system with global ramifications, speculators are naturally focused on short-term lagging economic indicators. However, a shift in perspective outside the West reveals a different picture.
Nigeria, Egypt and Underserved Geopolitical Markets
For instance, take the Nigerian Naira, which has devalued by two-thirds since June 2023. At first glance, this might seem like a cause for concern. However, Nigeria, the country of origin for the Naira, is one of the wealthiest nations globally in terms of its resources, being rich in oil and minerals. Moreover, it currently boasts one of its most forward-thinking administrations, adopting a business-friendly approach to investment. Similar trends can be observed in Egypt and Argentina.
When considering emerging markets, there is a growing rationale for owning Bitcoin as a hedge. Looking back to the era of 2014, we find evidence of Bitcoin being considered a risk-on asset class. During times of turmoil, such as when Greece threatened to leave the European Union, Bitcoin prices tended to rise. This unique duality makes Bitcoin an intriguing asset class that appeals to both risk-on and risk-off sentiments.
Last year's Regional Bank crisis reaffirmed this position, with Bitcoin more than doubling in price while regional banks faced implosion. Price discovery plays a significant role in catering to both risk categories. In 2024, the average compound annual rate of forecast return for Bitcoin stands at 44%, compared to the 4.5% average return for leading traditional industry funds. As trading volatility decreases, returns are expected to follow suit, assuming demand remains relatively constant. However, economic theory suggests that this is unlikely, as asset legitimacy and maturity lead to wider acceptance and understanding, thereby increasing its user base over time.
Currently, the Bitcoin market remains relatively small at around $1.5 trillion. However, with a capped supply of only 21 million coins, continued growth in understanding, acceptance, and portfolio inclusion is anticipated.
In the 1990s, the emergence of the internet sparked a wave of excitement and fear. While many marveled at the possibilities of this new technology, others raised concerns about its environmental impact. Fast forward to the present day, and we find ourselves in a similar situation with the rise of crypto-mining and Bitcoin. Once again, critics are warning of dire environmental consequences due to increased energy consumption. However, history has shown us that such apprehensions often stem from a lack of understanding and are ultimately overcome as technology evolves.
The Early Days of the World Wide Web
In the early days of the internet, critics were quick to point out the energy consumption associated with data centres and server farms. They argued that the growing reliance on digital technologies would lead to a surge in electricity usage, exacerbating climate change. While these concerns were not entirely unfounded, they failed to account for the innovations and efficiencies that would arise in the years to come.
Similarly, the advent of crypto-mining, particularly the process of Bitcoin mining, has reignited debates about energy consumption. Critics argue that the energy-intensive computations required for mining Bitcoin are unsustainable and contribute to carbon emissions. Indeed, it's true that the energy consumption of the Bitcoin network is significant, but it's essential to consider the broader context.
Just as advancements in internet technology have led to more energy-efficient data centres and improved infrastructure, innovations in cryptocurrency mining are already underway. Developers are exploring alternative consensus mechanisms, such as proof-of-stake, which require significantly less energy than the proof-of-work system used by Bitcoin. Additionally, efforts are being made to utilise renewable energy sources for mining operations, further mitigating environmental impact.
What's often overlooked in these discussions is the potential of these technologies to drive positive change. The internet changed communication, commerce, and access to information on a global scale. Similarly, cryptocurrencies have the potential to democratise finance, empower individuals in underserved communities, and shake up industries like banking and supply chain management.
It's crucial to approach emerging technologies with a balanced perspective, acknowledging both their benefits and challenges. While concerns about environmental impact should not be dismissed outright, it's essential to recognise that technological progress is not a zero-sum game. As we continue to innovate and adapt, we have the opportunity to address these concerns while harnessing the transformative potential of new technologies.
Furthermore, history has repeatedly shown us that the initial fears surrounding new technologies often give way to unforeseen opportunities and benefits. The automobile was once derided as a noisy, polluting menace to society, yet it revolutionised transportation and spurred economic growth. Similarly, early critics of the internet failed to foresee its transformative impact on nearly every aspect of modern life.
Emerging Market Influences
Bitcoin and crypto assets are no longer confined to the realms of speculation and niche markets. In recent years, these digital currencies have been making significant inroads into emerging markets, reshaping economies and challenging traditional power structures. As these markets mature, solidify, and embrace digital crypto assets and infrastructure, they risk outstripping the West and the European Union (EU) in technological advancements, potentially pressuring established world superpower zones to adopt crypto acceptance and adoption.
Emerging markets have long been the engines of global manufacturing and service provision, supplying the West and the EU with essential goods and services. However, their reliance on traditional financial systems has often hindered their full potential. Enter Bitcoin and crypto assets, offering an alternative financial ecosystem that transcends borders and bureaucratic hurdles.
One of the primary drivers behind the increasing adoption of crypto assets in emerging markets is the inherent instability of local currencies. Many countries in Africa, Asia, and Latin America grapple with hyperinflation, currency devaluation, and inadequate banking infrastructure. In such environments, crypto assets provide a lifeline, offering a more stable store of value and a means of conducting cross-border transactions with greater efficiency and transparency.
Moreover, the proliferation of mobile technology has democratized access to financial services in these regions. Mobile wallets and digital payment platforms have become ubiquitous, laying the groundwork for the widespread adoption of cryptocurrencies. In countries like Nigeria, Kenya, and Venezuela, where smartphone penetration is high, crypto assets have gained traction as a viable alternative to traditional banking.
As emerging markets embrace digital currencies and blockchain technology, they are not only leveling the playing field but also positioning themselves as leaders in innovation. The agility and adaptability of these economies allow them to quickly adopt new technologies and integrate them into existing infrastructure. This rapid pace of innovation poses a significant challenge to the West and the EU, which may find themselves lagging behind in the race for technological supremacy.
Furthermore, as emerging markets strengthen their digital infrastructure and foster a thriving crypto ecosystem, they are likely to exert pressure on established world powers to embrace crypto acceptance and adoption. Already, countries like El Salvador and Ukraine have made bold moves to legalize and integrate Bitcoin into their economies, signaling a shift in the global financial landscape.
The potential ramifications of this trend are profound. As emerging markets continue to assert their influence and drive innovation in the crypto space, they may compel the West and the EU to reevaluate their stance on digital currencies. Failure to adapt to this new reality could result in these regions falling behind in the global economy and losing their status as dominant players on the world stage.
The parallels between the criticisms levelled against the internet in the 1990s and those facing crypto-mining today are striking. In both cases, concerns about energy consumption and environmental impact have been raised, reflecting a broader pattern of skepticism towards new technologies. However, just as the internet has become an indispensable part of our lives, cryptocurrencies have the potential to reshape our world in ways we have yet to imagine. By embracing innovation and addressing legitimate concerns through collaborative efforts, we can ensure that these technologies contribute to a sustainable and prosperous future for all.
