Bitcoin isn’t a global currency ready to replace national currencies, including the mighty dollar. That’s a myth. At least, that’s the message from the recent emerging market currency crisis. The digital currency is crashing in tandem with emerging market currencies rather than rallying, as Bitcoin investors would have expected.
The emerging market crisis is a currency crisis. Investors are losing faith in currencies of countries heavily indebted in US dollars, and in the reluctance of central bankers to fight inflation. Like Turkey and Argentina, which have seen their currencies plummeted in recent weeks. Both countries have big dollar denominated debt burden. And their central banks have been losing their independence to fight inflation.
That’s why emerging market investors have been looking for alternative vehicles to park their money. Like US Treasuries, which have been a traditional safe haven in times of global crisis. The trouble is that this time around US Treasury yields have been rising, as the Federal Reserve is unwinding Quantitative Easing (QE). That’s why investors have to look at other vehicles to preserve their wealth.
Turkish investors, for instance, have been buying gold, as evidenced by the rising gold imports by Turkey — though that buying haven’t been enough to halt losses in the yellow metal. Then there’s Bitcoin, which could be a better choice. At least for younger tech savvy investors who have faith in the future of the digital currency. But that hasn’t been the case thus far. After a big spike last week, Bitcoin has come back down, moving in tandem with emerging markets rather than against them.
Will this change in the near future, as the emerging market crisis (as expected) gets worse before it gets better?
Clement Thibault, Senior Analyst at Investing.com, doesn’t think so. “I don’t see it happening to be honest,” says Thibault. “Aren’t we already deep into crisis mode in Turkey, Argentina, and Venezuela? You’d expect that most people with the technical ability to buy into Bitcoin would have done so by now. I do believe this is the best-case scenario for Bitcoin, but I’m not convinced emerging countries are capable of moving the needle enough, especially after significant devaluations in their local currencies.”