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Observation: As Rigid Rules To Prop National Currencies Fail, Bitcoin Gains Favor

Last Updated March 4, 2021 4:49 PM
Lester Coleman
Last Updated March 4, 2021 4:49 PM

Daniel Jennings, a contributor to Seeking Alpha , claims that rigid currency rules in some countries, such as China, Egypt and Zimbabwe, are pushing demand for bitcoin, boosting its price. He says national currencies may no longer be viable in some countries.

Daniel Jennings
Daniel Jennings

Many financial observers (Jennings cited Zero Hedge’s Tyler Durden, a financial blogger) have attributed bitcoin’s recent price rise to actions in China, where the government limits the amount of money people can transfer out of the country.

China: The ‘Tip Of The Iceberg’

China, however, may only be the “tip of the iceberg,” according to Jennings. A similar scenario is playing out in Egypt, where the government plans to punish black market money changers to 10-year prison terms. The central bank has asked the country’s cabinet to grant it the authority to suspend currency brokers’ licenses for ignoring official exchange rates.

The Egyptian central bank is taking this action to shore up its currency, Jennings noted, which speculators are weakening. The Egyptian pound on June 9 was worth 11 U.S. cents, yielding an exchange rate of about 10 pounds to $1. The official exchange rate, according to Bloomberg, was 8.88 pounds to $1.

Egypt wants to stop its currency from becoming overwhelmed by a thriving black market for U.S. currency. Bitcoin makes it easy for people to evade the restrictions designed to support the nation’s currency.

Egypt might weaken the pound further by making it easier to deposit dollars in bank accounts, Jennings noted, which would make it even easier for citizens to buy bitcoin.

Policies Undermine Currency

While the country’s central bank is concerned about inflation, its policies are further worsening the situation by convincing citizens to get rid of their pounds fast. Low oil prices and a dependency on tourism are also weakening the currency. Terrorism fears and a weak European and Russian economy are hurting tourism.

Even Worse: Zimbabwe

The situation is even worse in Zimbabwe, where the currency is so weak that the government allows people to use other currencies, including the U.S. dollar, the euro, the South African Rand, the Chinese yuan and the British pound sterling. The central bank plans to introduce a bond note pegged to the U.S. dollar, according to Bloomberg. Hence, the country is admitting its currency is worthless.

The bond note scheme is not likely to work since South African companies refuse to accept the paper money the Zimbabwe government issues. They only accept hard currency from Zimbabweans.

The Zimbabwe central bank currently imports nearly $40 million a month in U.S. dollars to pay its bills. The measure is only a stopgap since the government cannot pay its bills.

Confidence in the Zimbabwe currency is so bad that the president of the nation’s bankers association suggested the government scrap the Zimbabwe dollar and adopt the rand. Charity Jinya even suggested the policy to the country’s parliament, according to Bloomberg.

Also read: Digital fiat currency technology nabs investment, makes inroads with central bankers

Bitcoin Set To Explode

Such scenarios could set the stage for an explosion in bitcoin’s value. Key takeaways for investors and traders are as follows:

  • National currencies may no longer be sustainable in many small, weak countries.
  • A wave of currency collapses may be pending in several countries, fueled by commodity price collapses and inflation. Zimbabwe is heavily dependent on commodities, similar to Venezuela.
  • A tool central bankers use to jumpstart an economy, currency devaluation, no longer works as many people are currently able to ignore government currency.
  • Official exchange rates have become meaningless in many countries. The only way Egypt’s government persuades people to pay attention to it is to threaten to jail them. When the average person realizes the government can’t put everyone in jail, the exchange rate will likely disappear to help the government save face.
  • Most central banks and governments control their currencies. The market sets the value, which undermines the entire idea of modern economic policy.
  • Many nations will soon eliminate their national currencies and adopt someone else’s currency. It will be done by decree or unofficially by enabling citizens to use euros, dollars or bitcoin instead of the government currency.

Under such circumstances, the value of currency alternatives will skyrocket. Especially currencies that are easily transferable like bitcoin.

Bitcoin’s price could reach $1,000 or more next year.

Images from Shutterstock and LinkedIn.