In 2020, before the COVID-19 pandemic wreaked havoc across global economies, one narrative pushed the Bitcoin price higher: its capacity to store value. Global inflation was about to accelerate then, and assets such as BTC emerged as a hedge against this phenomenon.

A new paper published by the European Central Bank hints at a possible resurfacing of this powerful narrative, which supported Bitcoin’s prices as the asset entered uncharted territory.

ECB Paper Sheds Light on Bitcoin’s Role in Emerging Markets

A recent European Central Bank (ECB) paper has stirred the cryptocurrency community by offering a new perspective on Bitcoin’s role in the global economy, particularly in high-inflationary countries. Patrick Hansen, Circle’s Director of EU Policy and Strategy, highlighted this shift in ECB’s stance towards Bitcoin, a notable deviation from its previous skepticism.

About a year ago, the ECB blog posted an article titled “Bitcoin’s last stand” when Bitcoin’s price was hovering around $20,000. The post suggested Bitcoin’s price increase from its $17,000 low in June 2022 was not a sign of stabilization but possibly an “artificially induced last gasp.”

Since then, Bitcoin’s value has more than doubled, prompting a reevaluation of its role and potential. The ECB’s working paper titled “Global and local drivers of Bitcoin trading vis-à-vis fiat currencies” sheds light on the dynamics of Bitcoin transactions.

It analyzes the drivers of Bitcoin transactions against 44 fiat currencies on the largest peer-to-peer cryptocurrency exchanges. The findings suggest speculative motives drive Bitcoin transactions globally and offer transactional advantages in emerging markets and developing economies (EMDEs).

The paper notes that in EMDEs, Bitcoin trading increases when the domestic currency is unstable, indicating that Bitcoin is valued as a store of value or a medium of exchange in these regions. This is particularly evident post-COVID-19, as economic instabilities have spurred more significant crypto asset usage. The paper’s results underscore a stark contrast in Bitcoin’s value perception between advanced and emerging economies.

From Speculation To Store Of Value: How Bitcoin Is Perceived Differently Across Economies

Another significant finding is the negative correlation between proxies of banking depth and digitalization and the extent to which each currency loads on the global common factor in Bitcoin trading volumes. This suggests that in EMDEs, where traditional financial services are less available and the population is younger and more risk-hungry, crypto-assets like Bitcoin serve as a speculative alternative to traditional finance.

While the intrinsic price volatility of Bitcoin might discourage its use as a stable store of value or means of payment, the paper suggests that in the future, other crypto assets, particularly stablecoins, might become more widely used in EMDEs to compensate for the lack of financial alternatives.

However, these assets are less risky and unable to provide yield in high inflationary environments, which could make them less attractive to the younger population.

As Hansen stated, it’s important to note that neither the working paper nor the blog post represent the official ECB position. However, the evolving language and acknowledgment of Bitcoin’s varied roles in different economic contexts in ECB publications point to a growing recognition of cryptocurrency’s multifaceted impact on global finance.

Cover image from Unsplash, chart from Tradingview