Bitcoin and Hyperinflation: Unpacking Crypto Adoption Amid Argentina's Economic Turmoil
Summary:
Argentina is witnessing an increase in Bitcoin adoption due to persistent hyperinflation from populist policies leading to budget deficits. Despite a 61.5% fall from its peak price, Bitcoin has offered a return of 38% to Argentine investors when measured in local currency. However, the manipulation of the official foreign exchange rate has fostered economic irregularities and impedes growth, causing concern. While Bitcoin has gained 150% in Argentine Pesos over two years, the official inflation rate has exceeded 300%, questioning Bitcoin's dependability as a store of value. As a result, the use of stablecoins might increase in the region, provided the U.S. dollar retains its purchasing power in line with local inflation.
For several decades, Argentina has struggled with hyperinflation caused by populist approaches that resulted in budget deficits. With each passing day, the country's potential for a complete currency crash grows larger. Yet, would the usage of Bitcoin (BTC) increase given its remarkable performance when valued in the Argentine Peso (ARS)?
Historically, the Argentine government has consistently increased the money supply through methods like bank deposits or government bonds. Of particular note is the sharp rise in Argentina's total money supply M1, which consists of currency, demand deposits, and other checkable deposits, which escalated from 2.81 trillion ARS in July 2019 to a staggering 10.66 trillion ARS, marking a considerable 277% increase over three years.
So, what has happened to the value of Bitcoin in Argentine Peso (ARS)?
The value of Bitcoin at domestic exchanges has rocketed to 19.6 million Argentine Pesos (ARS), up from 14.2 million ARS when BTC reached its peak in U.S. dollars in November 2021. This demonstrates that, despite a 61.5% fall from $69,000, investors in Argentina have still seen a 38% return when measured in the local currency.
However, a different outcome may be found when checking Google or CoinmarketCap for the price of Bitcoin in ARS. This difference can be traced back to the official currency rate for the Argentine Peso, which is more complex than many investors are used to. First and foremost, there is the official rate, the "dollar BNA," which is established by the Central Bank of Argentina and used for governmental transactions, imports, and exports.
Notice that the Bitcoin price in Argentine Peso, as traded on cryptocurrency exchanges, is almost double Google's theoretical price. This theoretical price is obtained by multiplying the USD price of BTC on North American exchanges by the official Argentine Peso (ARS) rate provided by the local government. This occurrence isn't exclusive to cryptocurrencies; it similarly affects other liquid international assets like stocks, gold, and oil futures.
By artificially bolstering the official rate in the Argentine Peso's favor, the government seeks to stabilize the economy, decrease capital flight, and curb speculative trading by making foreign currency acquisition and wealth storage in U.S. dollars more costly. This plan could also escalate import costs while bolstering exports, benefiting the trade balance.
However, the manipulation of the official exchange rate, as demonstrated in Argentina's situation, exacerbates inflation and hinders economic growth. Firstly, it incentivizes the existence of an unofficial and unregistered market, the "dollar blue," promoting illegal activities, impeding financial transparency, and deterring foreign investment.
This results in various exchange rates, determined by the transaction's market and the participation of the government and official banks.
Could Bitcoin serve as a reliable store of value for investors in Argentina?
According to Bitso exchange rates in Argentine Pesos, Bitcoin's value has risen by 150% over the two-year time frame ending on September 21, increasing from 7.84 million ARS to 16.6 milion ARS. However, the cumulative official inflation rate during this span has surpassed 300%, making it incorrect to say Bitcoin has acted as a dependable store of value.
Interestingly, those who chose dollars, whether in typical form or stablecoins, have watched their investments grow by 297% during the same time, essentially matching the inflation rate. This analysis solely compares the two-year span between September 2021 and September 2023.
Despite this disappointing result for BTC supporters, it is likely to boost stablecoin adoption in the area. On a brighter note, investors have been able to explore the benefits of self-custody and scarcity, given the local currency's continuous inflation.
In conclusion, for Argentinians, as long as the U.S. dollar retains its buying power by aligning with local inflation, Bitcoin will likely not become the preferred store of value. The information provided in this article is for general knowledge purposes only and should not be regarded as legal or investment advice. The views expressed herein are solely those of the author and do not necessarily represent or reflect the views of Cointelegraph.
Published At
9/22/2023 8:20:00 AM
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