Is Bitcoin Just A Crisis Currency, Or Something More?

Updated on

Since Bitcoin’s (BTC) creation more than a decade ago, the decentralized ecosystem has seen a respectable rise in terms of value and supporters. Bitcoin’s market cap surpassed $1.2 trillion in late March 2022, while the cryptocurrency industry as a whole reached the $3 trillion mark.

Bitcoin Is Still Young

The original cryptocurrency is still young, having been created in 2009 by the pseudonymous Satoshi Nakamoto. The real-world identity of Nakamoto remains unknown. Despite notable growth—and popularity—since its inception, Bitcoin is very different from traditional securities in a number of ways.

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q4 2021 hedge fund letters, conferences and more

A common critique of Bitcoin, when compared to traditional securities, is its high degree of volatility. In the world of stock trading, markets are generally calm. Yet with Bitcoin, 30% price plunges are known to occur in periods of 24 hours—or less.

Another common issue with Bitcoin is the lack of familiarity, understanding, and trust in its working mechanism, which is partly new and pseudonymous. Bitcoin’s proof-of-work consensus mechanism and ‘tokenomic’ structure were essentially the first of their kind.

Echoing the same point of view, Angela Fontes, a financial researcher and a managing member at Fontes Research, believes that there is much less information available when it comes to trading digital assets. On the other hand, “there’s this whole world of information around the stock market,” Fontes told CNBC’s MakeIt.

Due to this lack of familiarity with an emerging asset, many investors tend to stay away from Bitcoin. Yet recent events have sparked a different trend.

Is BTC Just A Crisis Currency?

Cryptocurrencies have proven to be valuable assets during times of crisis. For instance, following Russia’s invasion of Ukraine, more than $60 million worth of crypto was donated to help humanitarian causes. Of this tally, 31.2% of the funds were in BTC. Furthermore, the use of digital currencies to help Ukraine fund its humanitarian and military sides led to several crypto-friendly laws in the country, allowing residents to legally use and trade cryptocurrencies.

In addition to direct crypto donations to Ukrainian NGOs and the government, Bitcoin’s transferability helped a refugee take 40% of his life savings to Poland. An anonymous individual told CNBC on March 23 that he put $2,000 worth of Bitcoin on a USB drive when he could not “withdraw cash at all.”

The refugee was leaving Ukraine, and was unable to access the local currency due to high demand. The situation exemplifies the ease of Bitcoin transactions, where there’s no need for a bank to confirm the transaction—nor is the transaction only feasible in a specific jurisdiction.

At the same time, Russia is also considering cryptocurrencies as international sanctions tighten the grip on the country’s economy. Next to its central bank digital currency (CBDC) pilot, the digital ruble, Russia is also considering Bitcoin as an option for the country’s gas and oil exports.

Pavel Zavalny, the head of State Duma of Russia, revealed that Russian “friendly countries” might soon be allowed to purchase natural gas and oil with Bitcoin or their local currencies. President Vladimir Putin, on the other hand, restricted “unfriendly” countries to Russia’s national currency, the ruble.

"We have been proposing to China for a long time to switch to settlements in national currencies for roubles and yuan," Zavalny said. "With Turkey, it will be lira and roubles."

Does this mean that Bitcoin’s best use involves the evasion of sanctions or as something akin to a crisis currency? Agreeing with such an idea would severely limit Bitcoin’s potential—and existing use cases.

One of the reasons Bitcoin was created was to give underdeveloped countries and communities the ability to participate in international business. Bitcoin’s Peer-to-Peer (P2P) protocol allows it to complete transactions without going through a third party intermediary.

An estimated 1.2 billion people are underbanked across the globe, meaning they lack access to basic bank accounts or traditional financial services. In much of the industrially ‘developed’ world, customers are frequently paid to use bank accounts. Yet there are many areas of the world that simply lack the infrastructure to offer banking services. With the internet and mobile cellular networks reaching such countries however, Bitcoin becomes a legitimate opportunity for the underprivileged.

BTC’s Use As A Treasury Reserve Asset

Despite its potential to help the underprivileged, Bitcoin has developed use-cases in other areas as well. Several companies have added BTC to their balance sheets, effectively making BTC a treasury reserve asset.

One of the largest companies to turn to Bitcoin is MicroStrategy. The reason was, according to Chief Executive Officer Michael Saylor, that the value of the U.S. dollar was a “rapidly melting ice cube” after the mid-pandemic cash supply rate was growing fast.

Saylor turned to Bitcoin as an alternative to cash for saving the company's funds. MicroStrategy now holds 125,051 BTC, worth more than $5.5 billion at the time of writing.

“Our strategy with bitcoin has been to buy and hold, so to the extent we have excess cash flows or we find other ways to raise money, we continue to put it into bitcoin,” said Phong Le, Microstrategy’s chief financial officer.

Other big names to have large Bitcoin portfolios are Tesla (42,902 BTC), Galaxy Digital Holdings (16,400 BTC), and Voyager Digital LTD (12,260 BTC). Moreover, a decentralized blockchain platform called Terra (LUNA) plans to have $10 billion in Bitcoin reserves, according to Do Kwon, Terraform Labs’ founder.

Currently, the Luna Foundation Guard, the company helping the Terra ecosystem grow, has over 24,900 BTC, worth more than $1.1 billion. The company uses the Bitcoin reserves to back its algorithmic stablecoin, Terra USD (UST).

Bitcoin As Legal Tender

Governments have started to use Bitcoin as well.

In September 2021, El Salvador took a big step into the cryptoverse by announcing Bitcoin as legal tender. The country was previously using the U.S. dollar and nearly 70% of El Salvadorans did not have access to modern financial services.

"We must break with the paradigms of the past," President Nayib Bukele said in a statement translated from Spanish. "El Salvador has the right to advance toward the first world."

The country’s move to Bitcoin brought more opportunities for the people while, according to a survey by the Central American University (UCA), 67.9% of the people surveyed were not happy with El Salvador’s economic move. Many of them didn’t know how to use Bitcoin with their government’s official wallet, Chivo.

On the other hand, a Salvadoran shared his first experience purchasing food with Bitcoin at McDonald’s, while “fully expecting to be told no.” Aaron van Wirdom tweeted, “But low and behold, they printed a ticket with QR that took me to a webpage with a Lightning invoice, and now I'm enjoying my desayuno traditional!”

It’s still too early to conclude if Bitcoin can become a global reserve currency in the future, but as more firms and governments dive into the industry, the likelihood is only increased.

With many recent developments around Bitcoin and other digital currencies and the communities backing them, we can see that they’re not created just for the sake of evading sanctions or saving the day in terms of global crises. Rather, there could be the sentiment for something much more significant in the long-term.

Want to stay up to date on the world of digital assets? Subscribe to Tokenist’s newsletter, Five Minute Finance. Receive one email, every Friday, with the week’s most important trends in the converging worlds of traditional and digital finance.

About the Author

Shane Neagle is editor-in-chief of The Tokenist. Shane has been an active supporter of the movement towards decentralized finance since 2015. He remains fascinated by the growing impact technology has on economics - and everyday life.