In 2020, before the COVID-19 pandemic wreaked havoc on global economies, one narrative drove up the price of bitcoin: its ability to store value. Global inflation was about to accelerate at the time and assets like btc emerged as a hedge against this phenomenon.
A new paper published by the European Central Bank hints at a possible resurgence of this powerful narrative, which supported bitcoin prices as the asset entered uncharted territory.
ECB document sheds light on bitcoin's role in emerging markets
A recent document from the European Central Bank (ECB) has shocked the cryptocurrency community by offering a new perspective on bitcoin's role in the global economy, particularly in countries with high inflation. Patrick Hansen, Director of EU Policy and Strategy at Circle, highlighted this change in the ECB's stance towards bitcoin, a notable departure from its previous skepticism.
About a year ago, the ECB blog published an article titled “bitcoin's Last Resistance” when the price of bitcoin was around $20,000. The post suggested that bitcoin's price rise from its low of $17,000 in June 2022 was not a sign of stabilization, but possibly an “artificially induced last gasp.”
Since then, bitcoin's value has more than doubled, prompting a reassessment of its role and potential. The ECB worksheet titled “Global and Local Drivers of bitcoin vs. Fiat Currency Trading” sheds light on the dynamics of bitcoin transactions.
Analyzes the drivers of bitcoin trading against 44 fiat currencies on the largest peer-to-peer cryptocurrency exchanges. The findings suggest that speculative motives drive bitcoin transactions globally and offer transactional advantages in emerging markets and developing economies (EMDE).
The paper notes that in the EMDEs, bitcoin trading increases when the national currency is unstable, indicating that bitcoin is valued as a store of value or a medium of exchange in these regions. This is particularly evident post-COVID-19, as economic instabilities have spurred more significant use of cryptoassets. The paper's results highlight a stark contrast in the perception of bitcoin's value between advanced and emerging economies.
From Speculation to Store of Value: How bitcoin is Perceived Differently in Different Economies
Another significant finding is the negative correlation between banking depth and digitalization indicators and the degree to which each currency influences the global common factor in bitcoin trading volumes. This suggests that in MEEDs, where traditional financial services are less available and the population is younger and more risk-hungry, cryptoassets like bitcoin serve as a speculative alternative to traditional finance.
While the intrinsic volatility of bitcoin's price could discourage its use as a stable store of value or means of payment, the paper suggests that in the future, other cryptoassets, particularly stablecoins, could be used more widely in MEEDs to make up for the lack of financial alternatives.
However, these assets are less risky and cannot offer returns in high inflation environments, which could make them less attractive to younger populations.
As Hansen stated, it is important to note that neither the working paper nor the blog post represent the official position of the ECB. However, the evolution of language and the recognition of bitcoin's various functions in different economic contexts in ECB publications point to a growing recognition of the cryptocurrency's multifaceted impact on global finance.
Cover image from Unsplash, chart from Tradingview
