Cyprus is a small Mediterranean island off the coast of Turkey. The Republic earned a reputation for being a tax haven for Eastern Europe and Russia. For example, Russian oligarch Dmitry Rybolovlev, owned 10% of the Bank of Cyprus.
On March 25, 2013, the island nation accepted a bailout from European Banking authorities and the IMF. In exchange for €10B, Cyprus imposed a one-time levy on uninsured bank accounts holding more than €100,000 and austerity measures. Economist Richard Wolf suggested:
This is basically the officials of the banks and the political leaders going to the mass of people and saying to them, “This awful deal that makes you, who have nothing to do with the crisis and didn’t get any bailout, pay the costs of the crisis and the bailout. You must do this, because if you don’t, we will do even more damage to you and your economy. So give us your deposits, give us your money, pay more taxes, suffer fewer social programs, because if you don’t, we will impose even worse on you.” It’s the basic idea of austerity across the board and in our country, too. And I think it’s the confrontation of a system that does not work with the mass of the people, saying, “We will go down and take you with us, unless you bail us out.
Bitcoin was trading around $60 prior to the announcement. It more than tripled in the weeks following:
The price action was an early indication of things to come. As currency crises plague economies, Bitcoin serves as a refuge. For example, according to Bitcoin brokerage Surbitcoin.com, the number of Venezuelan users skyrocketed, from 450 in August 2014 to more than 85,000 in November 2016. Argentinians, no strangers to collapsing currencies, have also been early adopters:
African economies are also turning to the cryptocurrency:
According to Yami Kazeem’s article in QZ, “With Nigeria’s foreign reserves and revenues shrinking amid an economic slump, the Central Bank of Nigeria (CBN) put up currency controls to restrict access to dollars.” The controls have driven a 1500% increase in peer-to-peer bitcoin trading. Nigerian Naira trading on LocalBitcoin has exploded:
Our current fiat monetary regime turns 47 years old this September. The US Dollar became the world’s reserve currency by default. The privilege permits sustained fiscal profligacy and imperialism. All fiat monetary regimes hide the true cost of welfare and warfare states. The larger cryptos get, the more viable they become as reserves. It’s a positive loop. I believe that’s one of the factors that drove Bitcoin’s price in 2017.
Individually the Venezuelan Bolivar or Zimbabwean Dollar would never threaten the US Dollar’s status as the world’s reserve currency. Together, and as other more developed economies like Russia get involved, a tipping point could be reached.
Since the beginning of 2018, Bitcoin has experienced about a 65% draw down and the combined crypto market cap has fallen by about $340B. I’m by no means an expert on cryptocurrencies. I understand there are some serious issues with transaction speeds and costs. I’m not arguing that Bitcoin or any other alt-coins are good investments. However, the fact that the technology has repeatedly provided a safe haven around the world, particularly in developing economies, can’t be ignored. I believe it’s a sign that cryptos will inevitably become the world’s ultimate reserve currency, and that the day might come much sooner than our gatekeepers expect.
Whether or not Bitcoin ultimately survives isn’t the point. It’s already shown a promise that a global, decentralized, autonomous movement can exist and thrive beyond the realm of legacy institutions. The significance of that and how that evolves will be the subject of a future post.