Analysis |

We’ve Seen Bitcoin’s Future and It’s Lebanon

FTX’s collapse isn’t just a bump on the road to a brilliant future for cryptocurrencies. Crypto has its uses, mainly as a last resort in failed states.

David Rosenberg
David Rosenberg
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ביטקוין פרסומת הונג קונג
פרסומת לביטקוין בהונג קונג, 2022Credit: Kin Cheung/AP
David Rosenberg
David Rosenberg

Even the spectacular implosion of the cryptocurrency trading platform FTX last week doesn’t seem to have done much to persuade true believers that virtual currencies are not the future.

Neither has the 75 percent drop in bitcoin’s SHARE price, the collapse of the crypto-lenders Celsius and Voyager Digital and of the stablecoin issuer Terraform Labs. Nor has the constant stream of stories of bitcoin thefts and scams, including reports that hackers lifted close to $500 million from virtual wallets kept by FTX customers.

The crypto-crowd insists that it’s nothing more than a “crypto winter” that will inevitably be followed by a crypto-spring and a brilliant future for bitcoin and all the other virtual currencies.

The problem is that cryptocurrencies have been around for more than a decade, which in the world of high-tech is plenty of time for a new and compelling technology to win widespread acceptance. Most Americans were using the internet within five years after it became widely available and the takeup for electric vehicles seems to be following a similar trajectory.

In other words, after 10 years, crypto’s future has already arrived, and one place we can see it is in the Middle East. According to a study by Chainanalysis, a blockchain research house, the Middle East and North Africa was the world’s fastest growing market for crypto in the year to June 2022, with year-on-year growth in transaction volume amounting to 48 percent.

Why the Middle East or North Africa? One reason is that the wealthy countries of the Gulf are investing heavily in building a cryptocurrency industry.

But the other, biggest reason is because the region numbers so many economies that range from the troubled to the dysfunctional. Egypt and Turkey are coping with inflation running at 16.3 percent and 85.5 percent, respectively. In Iraq, inflation is lower but its economy barely functions, corruption is rife and the government struggles to control the country. Then there are the failed states of Syria, Yemen and Libya.

But Lebanon may be the example par excellence, containing all the ingredients for a crypto-friendly environment. On the plus side, the country has a relatively well-educated and (before the economy imploded) well-off population that’s internet savvy. On the minus side, the Lebanese pound has lost 95 percent of its value, even more than bitcoin. Depositors’ money has been trapped in bank savings accounts for years, leading some to hold up banks in order to get their own money.

There are no statistics on cryptocurrency use in Lebanon (in fact, it’s not even clear whether the government bans it or not), but there is a lot of anecdotal evidence. “Bitcoin has really given us hope,” Gebrael Abou Gebrael, an architect who bills his clients in bitcoin, told CNBC last week. “I was born in my village, I’ve lived here my whole life, and bitcoin has helped me to stay here.”

In the Bekaa Valley, where unlike the rest of Lebanon have a constant supply of cheap electricity thanks to a nearby hydropower plant, residents have even taken to bitcoin mining.

Meanwhile, in America

America is another case of a country where crypto has enjoyed unusual popularity, according to Chainanalysis.

The United States, of course, isn’t Lebanon, but the sudden re-emergence of inflation after so many years has created no shortage of anxiety among American consumers. The U.S. Federal Reserve was slow to react by raising interest rates and now (many economists say) it has overreacted. Wall Street plunged, notwithstanding its recent mini-rebound.

The bottom line is that trust in the dollar and the ability of policymakers to ensure stable prices has been weakened. According to the conventional wisdom of Bitcoin believers, this should have been crypto’s golden opportunity.

Yet, just as the inflation problem was emerging in the U.S., the price of bitcoin began moving steadily lower. Indeed, as much as Americans are struggling with a near 8 percent decline in their dollars’ purchasing power, bitcoin holders have seen their savings plummet by nearly 10 times that figure.

In desperate places like Lebanon, the obvious drawbacks to crypto are outweighed by the lack of other options for making payments and savings. For the vast majority of countries coping with the ordinary sort of economic challenges of recessions, inflation and the like, crypto offers no serious alternative. It’s a speculative game, just like daytrading was during the peak of the COVID pandemic and tulips were in 17th-century Holland.

A study released a few days ago by the Bank for International Settlements covering 95 countries confirms that, by looking into what motivated people to buy during the years 2015-2022, a period covering bitcoin’s boom and bust.

Needless to say, people weren’t buying virtual currencies because there was anything useful to do with it, like buy a pizza or a car or even invest in other assets. Nor were they buying it because they distrusted banks or the government, as the bitcoin believers is the key to crypto’s wide acceptance.

Rather, they were speculating that prices would keep going higher.

“The typical crypto buyer was disproportionately younger and male, commonly identified as the most ‘risk-seeking’ segment of the population,” the BIS study pointed out. The BIS estimates the 80 percent of those who bought bitcoin at $20,000 or above have lost their money.

In short, in its current iteration as an unregulated free-for-all, it’s not the future of money. Crypto’s future is about being a place of refuge where economies fail, and a high-stakes casino for the rest.

This is not to say that blockchain (the technology behind bitcoin) won’t be employed in a host of applications, or that money won’t eventually go digital, but it will go digital as fiat money, issued by central banks. They may not always do the best job at managing currencies, but their track record is better than the “trustless” market bitcoin free of government control that bitcoin believers are waiting for.

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