In the midst of economic turbulence and hyperinflation, Bitcoin has emerged as a beacon of hope in Argentina’s financial landscape. In recent times, the cryptocurrency has shattered previous records, reaching unprecedented highs. This meteoric rise is not only a testament to the global resurgence of interest in digital currencies but also a stark reminder of the unique economic challenges that Argentina has faced for years.
As the country grapples with soaring inflation rates and a volatile peso, Bitcoin’s newfound prominence is captivating the attention of both investors and the general populace.
Bitcoin becomes a safe haven for Argentinians
Argentina has been dealing with hyperinflation for several decades as a result of failing policies that have resulted in budget deficits. As time passes, the possibility of Argentina, home to 47 million people, experiencing a full-fledged currency collapse grows. But, given Bitcoin’s great track record when priced in Argentine pesos, what are the chances for increased adoption?
Throughout its history, the Argentine government has repeatedly used bank deposits or government bonds to inflate the money supply. Notably, Argentina’s aggregate money supply M1 — which includes currency, demand deposits, and other checkable deposits — has increased 277% in three years, from 2.81 trillion pesos in July 2019 to a whopping 10.66 trillion pesos.
Bitcoin’s price on domestic exchanges has risen to 19.6 million Argentine pesos, up from 14.2 million in November 2021, when BTC attained its all-time high in US dollars. This indicates that despite a 61.5% decline from $69,000, investors in Argentina have still managed to accrue 38% in local currency gains.
However, when checking Google or CoinMarketCap for Bitcoin’s price in pesos, one may find a distinct result. The Argentine peso’s official exchange rate, which is more complex than most investors are acclimated to, explains this discrepancy.
First, there is the official rate, known as the “dollar BNA,” which is used for all government transactions and imports and exports. This rate is determined by Argentina’s central bank.
Observe how the Bitcoin price in Argentine pesos, as transacted on cryptocurrency exchanges, is almost double the theoretical price of Google.
This price is derived by multiplying the BTC price on North American exchanges in U.S. dollars by the official Argentine peso exchange rate provided by the local government. This phenomenon affects other extremely liquid international assets, such as stocks, gold, and oil futures, in addition to cryptocurrencies.
The future of BTC in Argentina
BTC regained $27,500 for the first time in September after the Fed announced a halt in interest rate hikes on Tuesday. According to on-chain data, BTC miners have profited from the recent price increase.
When Bitcoin surpassed $27,000 on September 19, Bitcoin Miners held 1,844,854 BTC in their reserves. However, less than 72 hours later, they sold 3,495 BTC, reducing their total balances to 1,841,350 million BTC.
By artificially strengthening the official rate in favor of the Argentine peso, the government hopes to stabilize the economy, reduce capital flight, and curtail speculative trading by increasing the cost of purchasing foreign currency and storing wealth in U.S. dollars. In an effort to improve the trade balance, this measure may also increase import prices while bolstering exports.
As seen in Argentina, manipulating the official foreign exchange rate ultimately contributes to inflation and hinders economic growth. First, it creates incentives for the existence of an unofficial and unregistered market, also known as “dollar blue,” which promotes illicit activities, undermines financial transparency, and discourages foreign investment.
This results in varying exchange rates depending on the market where the transaction takes place and whether or not the government and official institutions are involved.
Bitcoin’s value in Argentine pesos has increased by 150% in the two years ending on September 21, rising from 7.84 million pesos to 16.6 million pesos. However, the cumulative official inflation rate during this time period has exceeded 300 percent, rendering the claim that Bitcoin has been a reliable store of value incorrect.
Notably, the holdings of those who opted for U.S. dollars, whether in their traditional form or as stablecoins, increased by 297% during the same period, effectively matching the inflation rate. This comparison is limited to the two-year span between September 2021 and September 2023.
