The next financial crisis is coming. Never mind what it is though. You don’t really need to know. What you do need to know is that they happen with a certain regularity. And we’re well overdue.
We don’t look at the cause. We look at the solution. A potential solution, that is.
And if you’re looking for solutions to financial mayhem, there’s nowhere better than Venezuela to find them. News.com.au reported on how a certain cryptocurrency proved itself useful there in December 2017:
In the last month, John Villar has bought two plane tickets to Colombia, purchased his wife’s medication and paid the employees of his start-up business in Venezuela — all in bitcoin.
As Venezuela’s national currency loses value at a catastrophic rate, thousands have begun turning to the world of cryptocurrency to salvage what little value remains from their increasingly worthless bolivars.
“This is not a matter of politics,” Villar said. “This is a matter of survival.”
Both poor Venezuelan retirees and wealthy business leaders are converting local currency into bitcoins online and then using the digital currency to pay for everything from doctor appointments and honeymoons to motorcycles and artisan beer. The transactions are relatively swift for anyone with a smartphone — websites like LocalBitcoins and Colibit function as exchanges where Venezuelans can buy and sell bitcoins using a local bank account.
Honeymoons, flights to Colombia, artisan beer, motorcycles, doctor appointments and medication for the wife. You can see what happened…
But why use bitcoin at all? Because the Venezuelan currency is a total disaster. It’s so bad the government is issuing its own cryptocurrency.
Of course, Venezuela is not alone. In China, bitcoin was used to evade capital controls. In Zimbabwe it was inflation.
The point is that, when a country’s currency and banking system stops functioning, people turn elsewhere.
Where would you turn?
Here’s the key question. In a financial crisis that strikes a little closer to home, would Britons, Americans and EUians turn to cryptocurrencies? In other words, if bitcoin had been invented a few years earlier, what would’ve happened in 2008?
CNN had the answer in 2015: “With bank doors slammed shut, frantic Greeks are turning to online trading platforms to see if the digital money Bitcoin is a better bet than the euro.” That worked out well for anyone who held on…
If the reality in Venezuela, China and Greece aren’t enough to convince you, perhaps hearing it from the horse’s mouth is. Who better than the currency debasers and bankers themselves.
Two Federal Reserve economists recently wrote about whether bitcoin could compete with currencies and banking systems. They said it can’t “in a world of trust”.
“If we lived in a dystopian world without trust, bitcoin might dominate existing payment methods. But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that bitcoin could ever be as convenient as existing payment means.”
I don’t know about you, but I trust my bank about as far as I can throw it. And we’re not even in a financial crisis yet.
Deutsche Bank analysts agreed with the Fed economists, not to mention the Greeks, Chinese and Venezuelans:
However, if fundamental trust in monetary and political stability were lost, people would probably turn away from any form of the sovereign currency in favour of other alternative assets or private cryptocurrencies.
In case of a general lack of trust in the government, the legal system of a country or the currency, payers will seek third-party anonymity. They would not want authorities to be able to monitor their payments. In such an extreme case, digital cash issued by the central bank will surely not be the payment type of choice to avoid state surveillance or tight capital controls. Private cryptocurrencies, though, are well positioned to enable citizens to circumvent state-controlled payment systems, as is happening in China, Zimbabwe or Venezuela.
The point is that cryptocurrencies could surge to prominence precisely when you want them to – when the financial system shudders to a halt. That sounds like a pretty good crisis hedge to me.
Imagine if the European sovereign debt crisis makes a comeback because Italy elects a party which wants to restructure its debt. Or if a hard Brexit delivers a shock to the banking system. Would people rush into bitcoin? Or would they sell out to escape for cash?
I don’t know the answer. A lot of cryptocurrency wealth is purely speculative. And speculators tend to sell out of their positions when there’s trouble in financial markets.
But perhaps the next big crisis could bring a flood of cryptocurrency buyers into the tight market. They’ll want to escape the banking system – the Great Crypto Escape. Prices would spike.
It’s not like central bankers have earned our trust. The president of the European Central Bank led the division of Goldman Sachs which helped Greece hide its debts to get into the eurozone. His new deputy worked for Lehman Brothers.
Central banks in eastern Europe have been getting into trouble already. The Polish central bank has admitted it helped fund an anti-cryptocurrency YouTube video. The Latvian central bank governor was arrested by anti-corruption agency.
Trust? Anything is better than this lot.
Which currency for a crisis?
Where does this leave you, the investor?
The good news is that cryptocurrencies seem to have spurred the banks into action. After next to no improvement in the speed of transactions for decades, the banks have finally upgraded their services to consumers.
The US and Australia recently launched new payment systems. They’re much faster and use a variety of identifiers to make payments instead of just the long list of account information you used to need. An email or phone number will now suffice to send cash instantly.
It’ll speed up bank runs too…
But what about cryptocurrencies? Should you invest before the next crisis breaks out?
Even if cryptocurrencies do spike during a crisis, they could languish in the meantime.
And not all cryptocurrencies are created equal. A gold-backed crypto might be just what you need as a crisis hedge. But which ones actually have the gold?
Opting to keep some of your wealth outside the financial system is always a good idea. But most ways of doing so are a pain in the neck. And they tend to require you to trust a counterparty. Even gold is usually kept in some providers’ vaults.
Cryptocurrencies, used correctly, are an excellent way to add to your wealth outside the financial system. It’s a form of diversification.
They should outperform as an investment in coming years thanks to a long list of potential crises.
If you are interested but unsure, and want a guide from someone who understands which cryptos to buy and which to avoid, click here.
Until next time,
Nick Hubble
Capital & Conflict
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Category: Investing in Bitcoin