6 November 2017

Zimbabwe: Bitcoin Soars As Zimbabweans Brave Risks for Way Out of Currency Chaos

In 2008 at the height of the global economic crisis which followed the collapse of the United States based financial group, Lehman Brothers, a white paper challenging the traditional system of global payments was making rounds in the underground world of coders.

The publisher, an anonymous character going by the alias Satoshi Nakamoto, was proposing to revolutionize the way financial transactions are conducted. Money as we know it, is tangible and centrally regulated but Nakamoto's vision was that of a virtual currency, curiously named Bitcoin, that would operate outside the banking system, free from government meddling.

During this time the world was a mess, banks everywhere were collapsing, currencies were faltering, markets were crushing. The financial system as we know it was showing all its vulnerabilities and Nakamoto's idea of "a purely peer-to-peer version of electronic cash" was slowly gaining momentum and In January 2009 the world witnessed the first ever Bitcoin based transaction.

The Zimbabwe factor

In October of 2009, an exchange rate for the Bitcoin was established, which was US$1 = 1,309.03 BTC. This rate was decided after framing up an equation based on the cost of the electricity required to run a computer, generating bitcoins. Fast forward to 2018 one Bitcoin is now worth $7,325.

In Zimbabwe, where the financial system is in disarray, one bitcoin is trading at $13,500, as of Friday, on the local exchange, Golix. The southern African country, which abandoned its own hyperinflation-ravaged currency in 2009 in favour of the U.S. dollar, has run out of hard currency. Its local bond note currency pegged at par with the USD, is fast losing its value dampening confidence in the country's monetary system.

Additionally, the government has resorted to issuing Treasury Bills -- as well as manipulating the real-time gross settlement RTGS) system -- to finance its operations, increasing digital money balances and fueling inflationary pressures. As a result Zimbabweans are turning to the Bitcoin as a store of value rather than for functional transactional purposes. Bitcoin is free from control by monetary authorities

The digital currency normally trades at a premium in developing markets, where demand is high due to the instability of local currencies, although trading volumes are usually low. Golix is reported to be moving monthly volumes worth $1 million.

Analysts say the fact that bitcoin is trading at a premium in Zimbabwe against the global markets, coupled with the current local stock market bull run, reflects serious economic fundamental flaws, which if not addressed will see the economy getting into recession.

"When you look at how the bitcoin is being priced in Zimbabwe, the current ZSE bull run along with the significant arbitrage opportunities that are presented by dually listed stocks on the ZSE, its crystal clear that there is something wrong in this economy, especially from our monetary authorities," an analyst said.

"These huge premiums are caused by high demand induced by those who are in dire need to convert their excess cash sitting in banks (RTGS balances) to hedge themselves against currency risk and the upcoming inflationary environment. However, for some it is an easy way to send money outside the country for various reasons, including making foreign payments."

Investment alternative

Globally there are more than $100 billion worth of Bitcoins in circulation, an indication of how the currency has gained prominence and some degree of legitimacy. Some countries, including Thailand, Sweden, India, China, Vietnam, Russia, Iceland, Bolivia, Bangladesh and Ecuador have outlawed Bitcoin while other economies are embracing it as an investment alternative.

Year to date the cryptocurrency has gained over 600 percent in value and recent news that the Chicago Mercantile Exchange (CME) plans to establish a futures market for Bitcoin is expected to drive a rally for the currency.

"A bitcoin futures will enable investors to fix a price at which they would like to sell or buy a certain quantity of the cryptocurrency at a later date. This helps traders to hedge their positions against price fluctuations, a development which is most likely to attract more institutional investors to Bitcoin markets as they add the digital asset into mainstream institutional portfolios and theoretically push up prices".

Investing in bitcoins is highly speculative and the market is largely unregulated, as such those involved should be prepared to lose their entire investment. The inherent risks include price price volatility, low liquidity, shallow trading volumes, and oversized exposure to trading in countries with weak regulatory oversight.

Notwithstanding that the volatility of Bitcoin has lessened since its inception, the price swings have continued to worry regulators and institutional investors, deterring widespread use of the digital currency.

The inherent risks include price volatility, low liquidity, shallow trading volumes, and oversized exposure to trading in countries with weak regulatory oversight.

Notwithstanding that the volatility of Bitcoin has lessened since its inception, the price swings have continued to worry regulators and institutional investors, deterring widespread use of the digital currency.

Given that the bitcoin thrives in times of economic turmoil, the value of bitcoin in Zimbabwe is expected to remain far above the global average and provide arbitrage opportunities for risk-averse investors around the world.

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