Bitcoin can grow in the wake of the crisis

“Nations in a failing economy with an inflation crisis can become more interested in cryptocurrencies. This has happened before and can happen again as a consequence of the Covid-19 crisis,” says Ed Saiedi , one of the researchers behind the study.

Since Bitcoin, the world’s biggest digital currency, gained its breakthrough in the wake of the 2008–2009 financial crisis, the value of and trade in cryptocurrencies has had sharp ups and downs.

There have long been strong suspicions that trading in Bitcoin, that is done anonymously and without any government oversight, often concerns criminal activities, not least money laundering in association with drugs trading. A recent survey showed that up to half of all trades using Bitcoin can be illegal.

In a study, the first of its kind, researchers within Industrial Economics at KTH have investigated which nations you can trade with Bitcoins in, and what the connection to criminality looks like.

“Support for Bitcoin is most widespread in states that have the strongest legal systems and the biggest problem with money laundering, but this can also be the case for states that satisfy criterias about economic recession. If crime prevention is tough enough to make it difficult to engage in selling narcotics on streets, this can drive criminals to move their operations to anonymous parts of the internet instead,” Saiedi says.

Mistrust of banks

As transactions are mostly done anonymously, it is not possible to find out who owns Bitcoin today, or even where in the world the currency is used. However, by mapping the countries in which computers are available to verify transactions and which merchants accept e-currency, the researchers have still been able to provide a picture of which parts of the world the Bitcoin network is active.

According to the study, there are several explanations for the prevalence of Bitcoin in different countries. The development of technology and the IT infrastructure in countries are crucial. For example, Sweden is the ninth largest nation in terms of computer resources available for lease to verify and validate Bitcoin transactions.

A propensity to take risks and mistrust of banks also favour the use of cryptocurrencies. The popularity of Bitcoin can also be connected to economies in crisis with weak national currencies and to countries with extensive money laundering activities.

Large fluctuations

The value of Bitcoin has always seen large fluctuations. At the end of 2017, the exchange rate was a roller-coaster ride, right now, the rate is at its highest level since the crash in early 2018.

Can economic downturns in the wake of Covid-19 persuade more people to adopt Bitcoin as an alternative to traditional currency systems?
“Our study shows that high levels of inflation, over 20 percent, in national currencies can increase the use of Bitcoin. Just as this has done previously in Venezuela and Iran. So an economic crisis as a consequence of the Covid-19 epidemic can very likely have similar consequences in certain countries,” says Saiedi.

On the other hand, he notes that there are major problems with cryptocurrencies that must be resolved before they can be a genuine alternative on a broad front. These include both technology challenges, legal restrictions, scandals concerning cryptocurrency exchange rates and that cryptocurrencies have a bad reputation due to their links with criminality.

Text: Christer Gummeson

How cryptocurrencies work:

There are hundreds of cryptocurrencies, but Bitcoin is the most common and most well-known. Cryptocurrencies use a technology called blockchain, that can be described as an extremely long data code where selected codes have been determined to have a financial value. This makes the actual transactions easy to trace. However, you only see which so-called virtual wallets have been traded with each other. The people behind these wallets are not shown, which means you can transfer large sums totally anonymously.

Mapping the Bitcoin network

To study the use of Bitcoin, Ed Saiedi has built up a database for two variables:

1) Bitnode activity, i.e. the presence of the nodes (computers) that enable Bitcoin as a network in a country or region. In other words, the private individuals, companies or organisations that make a computer available to verify transactions and save blockchains.

2) The number of merchants that accept Bitcoin as a means of payment. In Stockholm for example, you can buy computers at Webhallen using Bitcoin.

A number of variables were added to the above that describe the economic and social conditions around the world and that present a picture of the different aspects of Bitcoin’s popularity.

The countries that use and support the Bitcoin network the most:

• When it comes to using Bitcoin for purchases, the biggest users are in North America, Central and South Europe, the Baltic countries and Australia, plus a few neighbouring island regions. On the other hand, IT technical support for the Bitcoin network is strongest in Scandinavia, the Baltic countries, West Europe, Australia and its neighbouring areas.
• There are no statistics as to the extent to which Swedes pay by Bitcoin for purchases, very largely because much of this trade is done on the quiet. It is also unclear how many Swedish merchants accept Bitcoin, but a site that lists the stores and sales outlets that do, displays around 40 names.
• Saiedi also finds it noteworthy that many small countries are big users of Bitcoin. These include for example, Monaco, Luxembourg, Belize, Lithuania, San Marino, Slovenia and Malta.

The study, Global drivers of cryptocurrency infrastructure adoption . Saiedi, E., Broström, A., & Ruiz, F. (2020), has been published in Small Business Economics. doi.org/10.1007/s11187-019-00309-8