QE and Capital Controls Create Worldwide Demand for Bitcoin
Bitcoin had an incredible run in 2016, finally breaking $1,000 USD on New Year’s Day 2017. Many people are curious to find out why significant amounts of money found its way into the bitcoin economy over the past year. Two of the biggest reasons that are spurring bitcoin demand worldwide are bitcoin’s censorship resistance and it’s store of value attributes.
The global economy is going through significant changes and tumultuous times. Because traditional markets are failing globally, people have been searching for a financial escape and economic safe haven. Bitcoin has filled the role of currency and store of value that is helping people worldwide. These needs have attributed to the exponential demand bitcoin has seen over the past year.
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Capital Controls Bolster Bitcoin Demand
One notable aspect of the troubled global economy is the use of capital controls by individual countries. Capital controls are residency-based policies concerning the in-and-outflows of legal tender from capital markets. Many of these rules are applied to currency exchanges that limit the amount of wealth that can leave the country. Lately, certain countries have increased capital controls to try and save the country’s failing economy and devalued currencies.
China, home to a large amount of participants within the bitcoin community, has tightened capital controls. On December 30, 2016, the People’s Bank of China (PBOC) imposed two new policies on capital outflow. The central bank now requires Chinese citizens and organizations to report all yuan transactions above 50,000 yuan (US$7,200). Furthermore, China’s State Administration of Foreign Exchange (SAFE) detailed that Chinese residents must also apply to SAFE’s committee before registering with a foreign currency exchange.
Capital controls limit people’s abilities to transfer wealth as they please. This has highlighted bitcoin’s censorship resistance. Over the past two years, the strictest capital control policies come from countries such as China, Mumbai, Cyprus, India, Russia, and Argentina. Curiously enough these countries’ citizens have been heavily involved in the bitcoin economy over the past two years. Localbitcoins’ volumes in such economies has seen all-time highs, showing significant bitcoin demand stemming from geopolitical monetary controls.
Devalued Sovereign Fiat Currencies Strengthen Bitcoin’s Store of Value
Globally, bitcoin is being discussed as a recognized store of value and hedge against turbulent markets. News reports and many headlines over the past year have defined the digital asset as an economic safe haven. The reason for this is because bitcoin has increased in value significantly in contrast to every fiat currency worldwide. The devaluation of legal tender in certain countries has also showcased bitcoin’s ability to be a digital store of wealth. The ongoing quantitative easing (“QE”) orchestrated by governments and central bankers in the US and the EU is another powerful driving force for the demand of bitcoin worldwide, as more and more people start to understand how QE devalues their own holdings.
Currency devaluation is slightly different than depreciation because it is an economic policy that officially lowers the value of the country’s fiat value across global exchange rates. A monetary authority imposes these fixed rates by referencing the value of a foreign currency. Currently the most devalued currencies across the globe are the Vietnamese Dong, the Chinese Renminbi, the Venezuelan Bolivar, and the British Pound. Of course as you may have guessed all of these countries have intensified bitcoin demand.
Devaluation makes people’s purchasing power less useful when using their country’s legal tender. It makes inflation grow and goods become more expensive. Because bitcoin has been a significant store of value nearly every year except for 2014 its popularity has increased quite a bit. Bitcoin has allowed global citizens to actually save money and see their purchasing power accrue remarkably.
Bitcoin: The 21st Century Safe Haven
Bitcoin has a lot of benefits to why it’s useful but most likely the biggest reason is because it helps people escape monetary losses imposed by central authorities. It’s safe to assume that these financial restrictions will grow throughout many countries worldwide. This means bitcoin’s censorship resistant uses and its potential to remain a store of value will continue to entice many people. Bitcoin was born as an alternative to the central edicts of those trying to control the world’s wealth. As countries tighten their grips on their citizens, more people will try to escape the clutches of totalitarian financial regimes.
If citizens catch wind of the benefits decentralized digital assets offer, the obvious choice will be bitcoin.
What do you think about capital controls and devaluation causing people to find a safe haven in the bitcoin economy? Let us know in the comments below.
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