Ever since I went to college at both Pasadena City College and the University of Denver, I have followed the Argentinian economy; I wrote several papers for my economic classes. Argentina’s economy seems to continuously swing from boom to bust and back again. Once more, as back in the 1990s and so many other occasions, the Argentinian economy is in a financial crisis. The current malaise stems from either the country’s own doing or just plain bad luck. The economy is currently reeling from both a severe drought that wreaked havoc on the country’s highly-dependent agriculture and interest rates increasing in the United States. The current administration in the federal government is making moves to try to stabilize and reprioritize the federal system. This has added to economic instability. Because of this, the Argentinian peso is dropping precipitously.
Unlike other previous financial problems in Argentina, there are alternatives to the financial calamity that is increasingly taking hold. The biggest solution is Bitcoin, or and, according to the data, Argentinians are buying large amounts. At the same time, the Argentinian Central Bank is considering diversifying their currency reserves into BTC. This is an interesting move and pundits are saying this will push the price of BTC-USD higher. I do not believe the central bank’s actions in itself is going to be a catalyst for BTC moving higher. Instead, I see the push for bitcoin higher being the people of Argentina purchasing and price supporters of BTC. I think this is going to be big. Very big.
The Argentinian Drought and Higher U.S. Interest Rates
Argentina’s economy has rapidly deteriorated. At the end of 2017, the economy was quite robust with GDP Growth coming in at 3.5%. But, part of the reason for their growth boom was ultra-loose interest rates in the United States. In the United States, the Federal Reserve lowered interest rates to an effective rate of 0% because of the financial crisis of 2008. Money abhors a vacuum; if you ever have an opportunity in life to make a loan for 0%, including to the US Government, I say don’t.
And, that is pretty much what happened around the world. As the United States worked to get out of the financial crisis, money that could only earn 0% in America left America and went to emerging economies, such as Argentina. But, now the United States Federal Reserve is reversing its interest rate policies as inflation continues to show its head, a concern I have brought up multiple times here on Seeking Alpha. And, with interest rates increasing, money is starting to flow out of the emerging markets and back into the United States. This is causing calamities in multiple parts of the world and Argentina may be the early warning sign of future problems. So far, the GDP has dropped -4.5% for this quarter.
Also, there was the drought in Argentina that hit the heavily dependent agriculture portion of the economy. Argentina’s agriculture accounts for almost 10% of total GDP. The drought has hit agriculture very hard costing the country about 40% in grain losses alone and then an ensuing decline of 1 million head of cattle.
The economic toll of this has done two things: It has exposed the weaknesses of the previous administration’s policies as well as created severe inflation and a currency decline. From this, investors lost patients in the reforms and hit the exits.
Government Reshuffle, Inflation, and Currency Crisis
History does not repeat itself. Argentina repeats history. Over and over again. Much like the United States and other parts of world, the extreme beliefs in the country has polarized the government. The solution of the current administration is to completely reverse the previous administration’s work. Depending upon where you lie on the political spectrum would be a determinant of whether or not you believe the efforts are going to work, or not; I am not addressing your inner Friedman or Keynes or where you are in between the two.
The previous president had turned on the printing press of the central bank printing up new money to pay the bills the government could not afford. The effect of turning on the printing press has deflated the purchasing power of the Argentinian peso. The countries inflation has hit 40% two years ago but is now sitting at 25%. The government of Argentina has announced an increase in their interest rates to an astounding 60%, the highest in the world.
This has led to a mass exodus out of the Argentinian peso:
Because of this, Argentinians are moving in large numbers out of their peso and into a more stable currency, BTC. The numbers being witnessed by the markets in BTC are surging from Argentina. To put that into perspective, here is a chart of the weekly volumes seen in Argentina for BTC purchases:
And, for comparison sake, here is a chart of the United States weekly Bitcoin volume purchases as well as neighboring country of Chile, respectively, during the same time period:
The whole world saw brisk purchases in Bitcoin going into the end of the year last year as Bitcoin became listed on exchanges. However, that euphoria wore off and there was a selloff of the digital currency. You can see the spike in the volumes that appear in the charts above. Now, despite there being a moderation in the world demand, Argentinians are making a sharp go at Bitcoin and pushing their own volume purchases higher. In fact, there is about a 3% premium for Bitcoin in Argentina over other nations. The stability being offered by the digital currency is far greater than the peso and Argentinians are moving in quickly.
Despite the selling that ensued in Bitcoin at the end of last year, Bitcoin has become relatively stable over the past several months versus the large drop in value of the peso.
Even more, Argentina may be the first real sign of what is likely to happen around the world as the United States raises interest rates. The increase in interest rates is felt in emerging markets around the world as several other nations have raised interest rates in response to their currencies falling in light of the Federal Reserve’s moves.
What if the Argentinian Central Bank diversified into BTC?
I have been mulling this over for some time, ever since I read a few articles about this subject. What would happen? The Argentinian Central Bank is considering buying BTC as a hedge and diversification of its currency reserves. This makes a lot of sense. First, no one in the world can print more Bitcoin. And, as more individuals and countries around the world move into BTC, this supports the price of BTC. But, my take on this specific move for BTC: Meh.
I caught this from a well-written article off of Coin Desk:
Santiago Siri, a San Francisco-based blockchain technology enthusiast who’s best known for his work developing the voting platform Democracy Earth. Siri’s heading back to his native Argentina later this month with a proposal for Luis Caputo, the President of Argentina’s Central Bank.
His idea, announced in a tweet (in Spanish) last month, is that the central bank place up to one percent of its national reserves in bitcoin.
Current total reserves of the Banco Central totaled $51.3 billion. The total daily volume of Bitcoin trades is about $500 million, on average. I would expect that the central bank would do two things: First, diversify slowly. And, second, I would expect them to put in no more than 1%. That would be a total of about $500 million in diversification over the course of many days. This would be negligible to the overall market.
The odd thing about bitcoin is that once you own it you never want to spend it, otherwise, you are subjected to the age-old economic problem of opportunity cost. This is a situation that is being witnessed around the world; people only buy and hold their bitcoin, they do not use it for its intended use as a medium of exchange. The reason is simple: If you spend your bitcoin today, you forgo the future, increased value of your bitcoin.
That thinking is the complete opposite of how money works in the normal sense. With inflation, the money in your pocket will devalue providing you incentive to spend it. This is one of the ways governments keep the economy moving along by ‘incentivizing’ its citizens to spend their hard-earned money.
Given that, there has been a large push of Argentinians moving out of their currency and into Bitcoin. As inflation erodes the purchasing power of the peso, Argentinians are compelled to find alternatives to park their savings and ensure that there is growth potential with their investment. And, if the government were to do the same, this could push Bitcoin higher. But, I believe that to be a small part of the push higher in bitcoin.
Over the past several years, Argentinians have seen some 8,000 convenience stores installed where bitcoin can be purchased and used to buy goods and services in Argentina. This may be a very large turning point for bitcoin along with other events such as the government of Japan legalizing bitcoin.
There are some that are suggesting that Argentina is the first of many emerging market issues that will pop up over the course of the next several years. Argentina is just one of the more fragile economies and that is why their issues are showing up now. Egypt, Turkey, Hong Kong are also countries to watch. As well, Venezuela has seen large spikes higher in purchases of Bitcoin. In total, there is going to be long-term price support for the cryptocurrency as well as increased usage of the currency.
I see the problems of Argentina being the start of a very long list of problems that will start to show up in the coming years, and, I am a buyer of the cryptocurrency in larger numbers because of it.
How BTC can get pressured Higher
With the United States pushing interest rates higher, the USD is moving higher along with it. As inflationary pressures mount in the United States (Inflation is pushing the upper 2.7% threshold of the Fed), the Federal Reserve will likely raise interest rates more and more. The effect of this is for the dollar to increase and value relative to other nation’s currency. This is inflationary in these respective nations. As the purchasing power of these nations erodes, individuals will push into alternatives to their own currency. Enter: BTC.
I see Argentina being the most fragile economy in the emerging market world. First, they have prior convictions; they carry stigma from so many previous financial calamities throughout the past 30 years. Because of that, Argentina is getting hit relatively hard. The citizenry is pushing into BTC in large amounts and creating a 3% premium in BTC relative the cost in the rest of the world. I do not see Argentina’s woes getting better any time soon; I see it getting worse over the next several months, if not years.
At the same time, Argentina being who they are, other nations are already starting to move because of the pressures of the US interest rate increases. I see Argentina being the first major headline in a far bigger story. I also see this taking shape over a prolonged period of time. These problems may go on for a good 2 years, if not more.
My continued trade on BTC-USD
I trade Bitcoin options. This is my favored way of placing any trade in the market due to the uncertainty of every single market out there. With regards to BTC, I go long the underlying, or, buy BTC-USD, and simultaneously I buy put options on BTC-USD from one of my brokerages. This acts like an insurance policy for my trade with the benefit that I can potentially increase my position size while I actually decrease my risk.
Let me explain…
I always buy my option size based on my delta of the trade. An at-the-money option has a delta of about .50 or 50% of my position size. So, if I buy 100 coins of spot, BTC-USD I am also, simultaneously, purchasing 200 put options.
I have been putting this trade on almost every week for the past several months. I was a bit taken aback, as was the entire market with the massive surge in price nine months ago, but I really did not suffer any losses because of the type of position I had on. I think now the market is settled down and a lot of hyper-speculative movements have been taken out of the market. I view BTC-USD as a long-term buy. But, I have been able to augment my trading over the past several months earnings increased profits despite the fact that there was a significant sell off after the peak.
I am a firm believer in BTC-USD. I do not believe that the massive surge last year was warranted. I am only looking towards the long-term with Bitcoin. This trade has served me well over the past many months and I will continue to use this trade looking for smaller moves within the very big, long-term picture. The news that has been hitting the wires, such as the potential for the government of Argentina to buy into BTC is positive but, not a panacea. It adds to all of the other reasons why I believe in this cryptocurrency.
Disclosure:I am/we are long COIN, COINB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.