How Cryptocurrency Can Increase Economic Activity in the Developing World

If you follow the stock market, or simply follow or trade cryptocurrencies like Bitcoin, you would have noticed that there have been various dramatic leaps and falls in the value of Bitcoin. Bitcoin has shown us the new era of the digitalization of money. Cryptocurrencies are currencies that are entirely based on the web. Along with bitcoins there are numerous other cryptocurrencies, that are less valuable such as litecoin, or dogecoin. Currently 1 Bitcoin equates to 1,686.00 USD, and there are a finite number. The total number of Bitcoins has been capped at 21 million with 72% of them already in circulation. For those bitcoins that are not in circulation, they have to be mined using expensive programs that process algorithms.

While many are optimistic about Bitcoin’s role in the world economy, there are some who are wary. Bitcoin is a highly volatile currency that media outlets have deemed “nationless”. But one must ask if it is really nationless because the reason for its volatility can be linked to one country in particular, China. Chinese mining pools control between 70-80% of bitcoin’s collective hashrate. Among the top 5 mining pools in the world, 3 are Chinese. A mining pool is a collection of either individuals or major companies who share their processing power over a network. Once bitcoins are mined they then share their findings.

China is becoming the hub of bitcoin operations, especially after scandal, corruption and heist tainted the image of their Asian competitor in Japan, Mr. Gox. Mt. Gox was a bitcoin exchange that was launched in 2010. At one point in handled about 70% of all bitcoin transactions, until a heist revealed that many of the bitcoins had been stolen. Since then the exchange has shut down and legal actions have been brought. The limelight has now moved over to China. There are so many bitcoins in China that there is an indirect relationship with the yuan. Each time there is a devaluation in the yuan, the demand for bitcoins increases. Bitcoin becomes a store of value that can aid people in countries with very weak currencies. China is known for keeping its currency weak in order to promote exports, in response to a weak currency and a new cyber market, investors have taken to acquire bitcoins to serve as an intermediary with the US dollar.

Because the Chinese have been using bitcoin to trade against the yuan, the government has actually been cracking down on some bitcoin operations. Using bitcoins as a type of auxilary currency is a risky venture as bitcoin is known for its fluctuations. Nevertheless, bitcoin is gaining a reputation for being the currency of quick internet transfers and if one lives in a country with a low valued currency, bitcoin can serve as a means of increasing ones purchasing power and lead to more economic activity. Acquiring cryptocurrencies has particular advantages for those in the developing world as it also provides an easier means to send money across borders without acquiring fees through using western union or a traditional bank. This type of investment also creates an easier means to store currency, by having an encrypted digital wallet. Most of the world does not have access to a traditional banking service. without such an account, it is more difficult for people to receive wages, remittances, and government payments.

A chart form the International Monetary Fund Describing Worldwide Access to a Bank

Cryptocurrencies however are limited to one’s access to the web, and those in low income countries have little to no access to the internet. This fact however, is quickly changing. In many low income countries. Access to internet by continent is as follows: South America (39.3%), Central America (12.8%), the Caribbean (2.6%), Africa (9.4%), the Middle East (3.8%) – (Source by Internet World Stats).

The numbers are strikingly low, but the growth rates, as seen below, are some of the highest in the world.

Chart by Forbes Detailing the Growth in Internet users by Continent

In addition, the percentages of people who do have access to the internet are the young, and the educated. These are the future leaders, the privileged, and the ones with the most purchasing power. Cryptocurrencies enable these people to flex economic muscle without facing as many of the hinderances of their respective countries’ infrastructure.

Although cryptocurrencies are not available for most individuals in low income countries, they can become available to a number of microfinance institutions which have been proven to be quite effective in providing financial services, and small loans to people who do not have access to banks.

Two companies in Nigeria, Stellar and Oradian have developed a money transfer network that connects these small lending institutions throughout the country.  Previously microfinance companies have not been able to transfer money between themselves, but now with digital currency it is possible. As well, one can use cryptocurrencies to send money in one denomination and have it be received in a different denomination. Nigerian Naira can turn into American Dollars and Chinese Yuan with ease and minimal additional cost. According to the World Bank, the average fee for sending money into Africa through traditional banking systems is 12%, and the fee for sending money between African countries countires is even higher.

So while most of the developing world is limited to its individual access to the internet, that does not prevent them from being able to reap the benefits of cryptocurrencies through microfinance institutions, and benefitting from a more formal, and cheaper way of transferring money and investing in various ventures in their countries.