According to a recent working paper published by the European Central Bank (ECB), the popularity of Bitcoin and other cryptocurrencies has transcended economic borders, reaching even those with diverse levels of development and financial literacy. In particular, it notes that Emerging and Developing Economies (EMDEs) are leading the charge in terms of crypto adoption. This article summarizes the main findings of the authors’ analysis of “the drivers of Bitcoin transactions against 44 fiat currencies in the largest peer-to-peer crypto exchanges.”

Potential Drivers of Crypto Adoption in EMDEs

  • Speculative Investment: Cryptocurrencies, particularly in countries with restricted investment options, may offer an attractive alternative asset class for speculation.
  • Store of Value: Despite volatility, Bitcoin might be seen as a better store of value than domestic currencies in countries experiencing high inflation and currency depreciation.
  • Cross-Border Transactions: Residents of EMDEs may use cryptocurrencies to circumvent capital controls or reduce remittance costs.

Global Crypto Cycle and Speculative Motives

The paper’s findings support the prevailing hypothesis that Bitcoin trading is driven by speculation. Analysis reveals a global crypto cycle, where trading volumes across different currencies and users follow fluctuations in the Bitcoin price. Similar to other risk assets, momentum in the crypto market, past price volatility, and global financial market volatility all influence Bitcoin trading against fiat currencies.

Transactional Benefits in EMDEs

Beyond speculation, Bitcoin appears to offer specific transactional benefits, particularly in EMDEs. The depreciation of EMDE currencies, unlike AE currencies, leads to increased Bitcoin trading, particularly after the COVID-19 pandemic. This suggests Bitcoin may be seen as a store of value or medium of exchange in countries experiencing currency devaluation. Interestingly, this implies that macroeconomic instability may contribute to greater cryptoasset usage.

Differing Fundamental Values in AEs and EMDEs

The research suggests that Bitcoin’s fundamental value might differ significantly between AEs and EMDEs due to its increased transactional value in less developed economies. This finding holds implications for the asset pricing theory of cryptoassets.

Alternative to Traditional Finance

Proxies for banking depth and digitalization are negatively correlated with the extent to which each currency loads on the global common factor in Bitcoin trading volumes. This indicates that crypto-assets may offer a speculative alternative to traditional finance when unavailable, particularly in EMDEs with a higher share of young, risk-prone populations.

Financial Stability Risks in EMDEs

The findings point to potential financial stability risks in EMDEs with low levels of financial development and unstable fiat currencies. While Bitcoin’s volatility may discourage its use as a store of value or means of payment, other crypto assets, such as stablecoins pegged to US dollars or other reserve currencies, might gain traction in the future, filling the gap for individuals and firms lacking traditional financial alternatives.

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