In a recent report released by the European Central Bank (ECB), research highlights the increasing role of cryptocurrencies, particularly Bitcoin, as speculative alternatives in emerging market countries where traditional finance is limited. The study emphasizes that these digital assets, including stablecoins, could become more widely adopted by individuals and companies in the future, offering alternatives in the face of financial constraints.
Drivers Of Crypto Adoption In EMDEs
The report notes that the popularity of cryptocurrencies, especially Bitcoin, has evolved into a global phenomenon, transcending economies with varying levels of economic development and financial literacy. Emerging and Developing Economies (EMDEs) are notably at the forefront of crypto adoption, with several potential drivers identified by the researchers.
Firstly, cryptocurrencies serve as speculative assets, attracting investors from countries with restricted investment options due to regulatory or institutional factors. Secondly, in countries experiencing high inflation and currency depreciation, digital currencies may present a more stable value store than domestic currencies. Additionally, residents in EMDEs might utilize cryptocurrencies for cross-border transactions to bypass capital controls or reduce remittance costs.
The research overcomes data constraints by analyzing fiat currency transactions against Bitcoin, assuming that traders using non-major international currencies are residents of the issuing countries. The study focuses on peer-to-peer (P2P) exchanges, particularly LocalBitcoins and Paxful, which primarily cater to small retail users, ensuring more reliable analysis due to larger bid-ask spreads and reduced susceptibility to market manipulation.
Examining trading volumes from January 2018 to April 2022, the report identifies a global crypto cycle in Bitcoin trading against fiat currencies. The crypto-asset market’s momentum, volatility, and international financial market conditions influence Bitcoin trading. Notably, Bitcoin offers transactional benefits in EMDEs, where the depreciation of domestic currencies, especially post-COVID-19, increases Bitcoin trading.
The study implies that despite its price volatility, Bitcoin may be appreciated as a store of value or medium of exchange in countries facing macroeconomic instability. This finding underscores potential differences in the fundamental value of Bitcoin between Advanced Economies (AEs) and EMDEs.
Furthermore, the report highlights the negative correlation between proxies of banking depth and digitalization with the extent of each currency’s involvement in global Bitcoin trading volumes. It suggests that digital currencies could serve as a speculative alternative to traditional finance, particularly in EMDEs with a higher proportion of young, risk-prone populations.
Nevertheless, the complex relationship between financial development, macroeconomic instability, and the risk of cryptoization calls for further investigation, marking a significant step in understanding these dynamics.
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