Can bitcoin solve Argentina's inflation problem?

In terms of bitcoin adoption, when we talk about Latin America, we tend to immediately think of Salvator which was the first country in the world to accept bitcoin as legal tender. Then we think about Volcano Bond, and possibly to the Petrodollars of Venezuela.

Indeed, many citizens of the American continent buy bitcoin to counter the devastating effects of inflation. This is particularly true for Argentina, which is one of the countries with the highest inflation rate in the world.

A complex Argentine economic history

Let us remember that the economic recession which hit Argentina in the years 1998-2001 left (profound) after-effects which are still felt today.

The causes of this recession are certainly numerous and varied, but all economists agree that the fall of the Brazilian Real associated with a rising US dollar, as well as the decline in agricultural production are at the origin of the crisis. Argentine economy.

Twenty years later, this is still felt with periods of occasional crises... This is all the more true as the context of the world economy does not radiate its splendor. The most pessimistic among us will affirm that the subprime crisis is only a preamble before the advent of the greatest global financial crisis of the 21st century.

It was, moreover, the primary goal of Satoshi Nakamoto, who claimed to have created bitcoin to resolve and overcome banking crises…

You don't have to be a keen economist to see that the global recession is blatant and the ways used to “reboost” the economy belong to financial tinkering and nothing more. Manually injecting cash into central banks ultimately amounts to nothing more than putting a simple bandage on a gaping scar... Question of point of view? Only history will tell us.

Then, here, for this article, we will not take the side of the colapsologists, rest assured. What interests us is the role of bitcoin in this new crisis – which seems more pernicious than the previous ones – that Argentina is currently facing.

A loss of confidence for the Argentine Peso…

It is said that this crisis will be more difficult to overcome because the country's public debt risks reaching 100% of GDP. This is enough to suffocate any government in this situation.

According to the journalist Fabrice Nodé-Langlois, “The specter of the 2001 crisis, triggered by the biggest default in history, is on everyone's minds in Buenos Aires.”

It all started with a very strong depreciation of the Argentine Peso. In fact, Argentinians are relatively accustomed to occasional depreciations of their currencies. And often, these are brutal and are mostly unpredictable.

In 2020, overnight (and this is not just an expression), Argentinians saw their currencies depreciate against the American dollar. The only time we saw this in history was in Sri Lanka in 1989. This time, the fall of the peso stabilized at more than 25%. 25%? Yes, that's a quarter of its value that the Argentine peso lost in the space of 24 hours...It's simply enormous.

The crisis that the country is currently experiencing stems from the traumatic episode that took place in 2018. We remember that at that time, Argentinians were, to say the least, delighted to see that the country was just beginning to curb its inflation. Then, while the American dollar experienced an unprecedented surge, the Argentine Central Bank exhausted all its foreign exchange reserves. This explains why today we are reaching an inflation rate of around 60%.

However, this latest inflationary crisis has revealed something rather surprising...

Argentinians are taking refuge in dollars and bitcoin…

In general, every time the peso lost its value against the American dollar, the first instinct of Argentines was to look for dollars, by all means.

We don't know and we suspect that this is not how Argentina's currency problems will be resolved. What we do know is that this has become an understandable protective reflex.

And, even better than dollars, it appears that many Argentines are “taking refuge” in the “safe haven” value of bitcoin.

Some have started mining illegally in the country. Others have transformed into real hidden traders. And, the bitcoin ecosystem in Argentina has never been as dense as today.

Obviously, and this is also a situation that we observed in Mozambique: The more the currency fails, the more people are attracted to cryptocurrencies. This is called the phenomenon of hyperbitcoinization.

This is a relevant reaction for Peso holders, especially when they consider the exponential rises in bitcoin and the fall in the value of their local currencies…

Argentinians protect themselves with bitcoin and the American dollar

Finally, the behavior of the Argentines is reminiscent of that of the Venezuelans. In an attempt to protect themselves, residents of Argentina seek to accumulate dollars. They prefer to exchange their Argentine pesos for dollars or bitcoin to avoid the (potential) loss of value of their national currencies. This is all the more relevant as nMany people believe that bitcoin will continue to increase in value. This is then logical behavior.

The complete loss of faith in their government and economic system is one of the main reasons why some believe that Bitcoin can help these people maintain stability.

The monumental volatility of Bitcoin makes it a weak candidate, certainly, and this is also what explains why only a minority is interested in bitcoin.

That said, a cryptocurrency seems to have won over Argentinians: DAI. In fact, it is a better option for them because it is a stablecoin and it effectively offers the stability of the US dollar supported by a decentralized protocol.

Overall, the common thesis seems to be shifting from authoritative fiat currency, which rapidly loses value, to decentralized currency where the economic framework cannot be manipulated at will.

What result can we expect?

Ultimately, bitcoin cannot be considered a safe haven for economies with high inflation. However, other cryptocurrencies can really serve as a refuge, such as the dollar via stablecoins, particularly popular in Argentina.

This can certainly influence the perception of cryptocurrencies in this country and internationally. It can also push for mass adoption.

We will have to see the government's reaction, initially. And, to answer the initial question of this article namely “can cryptocurrency solve the current crisis in Argentina?”; We are forced not to comment (as quickly, at least).

This nevertheless remains a very good textbook case so to speak, because unfortunately it is not the only country prey to disruptions in the monetary system. Perhaps we will see in the way of using cryptocurrency in Argentina, solutions for other countries? In any case, this is the “gamble” taken by Nayib Bukele, the president of El Salvador, who legalized bitcoin in the country.

That said, in absolute terms, cryptocurrency can help Argentinians overcome this inflationary crisis, but it is up to the government to provide a national solution, including (or not) cryptocurrencies...

See also:

• How Bitcoin Could Improve the Situation in Latin America?
• Javier Milei: Argentina's far-right candidate is a supporter of bitcoin
• Javier Milei: Is he really pro-bitcoin?
• If you are interested in the subject, there is a very good documentary on cryptocurrencies which talks about the specific problem of Argentina. Here is one you might like: