Why the liquidity of digital assets is beneficial for countries with unstable local currencies

Ever since Nixon administration has decoupled the dollar from gold in 1971, fiat currencies have become inherently prone to inflation risks, especially in developing countries, not possessing the economic might of the first-world countries. To combat these risks, over the course of the past decades Central Banks have developed and deployed multiple sophisticated policies and tools, yet the result has been such that the risks were just offset, not eliminated. Consequently, modern economic defaults and constant stagnation of national currencies are not an uncommon appearance.

A bright and most recent example is that of Argentinian Peso (ARS). Argentina, a LatAm country has recently suffered immensely from the plunge of its national currency. In one day, on Monday, August 12th, 2019 ARS has lost 25% of its value in a single spike. The local stock market skyrocketed against the peso and continued gapping higher as investors are fleeing the Argentinian capital markets. The degree of the bond market crash was not seen in 18 years since the last major recession which took place in 2001. This begs a question - is the fiat currency system, based entirely on government debt and instruments of artificial demand stimulus and supply control, fundamentally sound?

To answer that, we’ll need to take a look at several other factors.

To answer that, we’ll need to take a look at several other factors.

First, take into consideration that there are about 180 fiat currencies emitted by governments. Note that all of them, by their nature, are competing with each other - either directly or indirectly. The most prominent example of a fiat currency being manipulated by a central authority is the Chinese Yuan (CNY). People’s Bank of China (PBOC) is the ultimate authority when it comes to influencing its national currency - it frequently exercises the right to devalue the Yuan at will, in situations it sees fit. This, in turn, makes the currency more competitive and is considered to be a manipulation on a state level.

Devaluation is just one of the grey-area means to affect your national currency at the cost of people using it. Another tools which is all over the news headlines these days, is interest rate - an instrument so powerful that one mishap could lead to a recession. Every time the Fed changes it, media blows up with the news that we’re now at risk of global crisis.

All of the above leaves one wondering - do we need a different fundamental structure for cash? Detractors often say that digital assets are too unstable with volatility numbered in thousands of percent and could be manipulated by some malevolent groups. However, as we see, fiat currencies are being manipulated on a much larger scale and can be as unstable. Perhaps we are not (yet) at the point where a whole new economic system is needed, but at least a back-up plan needs to be in place. That’s where digital assets come into play. An uncorrelated asset class with no central authority to influence its course. Nothing but the market gets to decide, and, as we know, no single player or a cartel is stronger than the market forces.

In light of that, it is vital to develop a robust, global infrastructure that would provide the liquidity and access needed for the new asset class to reach its full potential. Without such infrastructure that can provide mass access and mass use for digital money on par with fiat and following build-up of the mass of goods and services, supporting their value, this backup plan is unrealistic.

With that infrastructure and liquidity in place, crypto will be able to provide a sound alternative to the often manipulated, defaulting, increasingly volatile and in many cases very unstable fiat currencies. That is exactly what Cyclebit is actively working on - providing liquidity to digital assets in an increasing number of countries.