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You may not want to hear another word about the pandemic caused by Covid, but it is impossible not to when it has impacted multiple areas of life. More than one country can show that the financial area is one that has been majorly affected, as political changes and constant uncertainty moved currency markets.
Latin America was one of the most affected regions at the end of 2021. Four of its currencies are in the top five of the most depreciated against the dollar worldwide: the first was the Turkish ira (-94.85%); followed by the Argentinean peso (-20.49%), Chilean (-18.68%), Colombian (-17.05%), and Peruvian sol (11.93%), according to Alianza Valores.
On the other hand, despite these drops in traditional currencies, the region also closed 2021 as one of the main adopters of cryptocurrencies, above China and the United States. Why this contrast?
More Crypto for Latin America
The region has a market with a growing adoption of cryptocurrencies, EBANX detailed. “They have become an instrument of financial inclusion in LatAm, as a way of transferring funds at a lower cost”.
Thus, the countries that have best received these digital currencies, according to Statista, are: Peru (16%), Colombia (15%), Argentina (14%), Brazil (13%), Chile (12%), Dominican Republic (10%) and Mexico (10%).
Notably, Argentina, Chile, Colombia, and Peru top both lists; this is not a coincidence at all. Argentina ended 2021 with a 52% inflation rate; Chile is facing the uncertainty of a new government; Colombia has experienced multiple violent protests; and Peru is also facing a new governmental mandate. To this must be added the economic instability and health crisis caused by the pandemic.
All these factors affect the foreign exchange market. In this regard, José Rodríguez, director of Blockchain Land, told Contxto that many people in these countries do not trust their currency, the government nor the central bank. He noted that one reason that they are adopting cryptocurrencies is because they are fleeing traditional currencies and economies. “People are looking for other investment options.”
Other reasons that Latin America have stood out here is that “people are looking for safer alternatives to keep their money in the face of economic instability”. José Luis González Birlain, cryptocurrency analyst at Bitso, told Contxto that the region made a huge leap with crypto adoption.
In other words, there was a generational leap. While other countries and regions were gradually adopting cryptocurrencies, Latin America had more tools that facilitated their use, and more players in the market. This has led the region to show a remarkable rise in a short period of time.
Cryptocurrencies vs Traditional Currencies
According to EBANX, individual consumers in Latin America represent the majority of cryptocurrency users (more than 80%). The rest are businesses and investment institutions.
The reason for this difference is that individuals are reaping multiple benefits. For example, in the region cryptocurrencies are largely being used by immigrant communities.
Both González Birlain and Rodríguez agree that other benefits of cryptocurrency that people in Latin America are finding are:
- Sending remittances: not as many intermediaries are required as in traditional banking, so commissions are much lower. This action has been booming in Mexico.
- Maintaining savings: this is achieved through the use of stable currencies linked to the dollar. This can’t happen with many local currencies since they often depreciate due to external factors. In Argentina this has greatly helped people maintain the value of their savings.
- Cross-border trade: it allows us to eliminate barriers and move money from one point to another easily.
- Investing with returns above inflation: cryptocurrency investment platforms are increasingly friendly. They allow investments from US$5 to obtain more capital with returns above those of a traditional bank, and are protected against inflation.
- Financial freedom: people have more control over their assets and how they use them.
- Loans: if you have cryptocurrency, you can put it as collateral (as if it were pawned) in a decentralized fund. In exchange, you will receive a stable currency that can represent dollars and thus obtain a source of funding (money) immediately. Once the loan is repaid, the user will get their cryptocurrencies back.
Here’s the Outlook between 2022 and 2025
While El Salvador was a pioneer in adopting Bitcoin as legal tender, the Bank of Mexico (Banxico) announced the creation of its own digital currency. These are clear signs of steadier crypto adoption in the region.
González Birlain expressed no doubt that the adoption of cryptocurrencies in countries where local currencies have depreciated will continue. They are being perceived as a refuge for economic stability in the face of inflation; and as some totem of trust due to the general disappointment in the traditional financial system.
He also noted that there will start to be real use cases well beyond just a storage of value. For example NFTs, concepts such as metaverse, video gaming and decentralized finance.
In addition, he said that financial inclusion will have to be measured in a different way. It will no longer just be about whether you have a bank account or not. Other indicators will have to be taken into consideration, such as if whether people have access to the cryptocurrency ecosystem.
Rodríguez sees that despite its short-term volatility, Bitcoin will have an upward trend in the medium to long term. He stressed that there is no way for other currencies to sustain their value. The past year had the highest amount of new money printed in a majority of countries in the world, which reduces a currency’s value.
Both experts agreed that central banks will start creating their own digital currencies. Rodríguez emphasized that this will give more transparency and people will be able to see the management of these assets. González Birlain pointed out that this could be complementary to evolve towards an inclusive digital economy.
“We are going to be interacting with cryptocurrencies without knowing it, just as we do today with the Internet,” says the Bitso analyst.
Thus, up to the close of last year, the cryptocurrency platforms that stood out in Latin America were: Mercado Bitcoin (Brazil), Bitso (Mexico), Ripio (Argentina), Coinbase (Brazil), Binance (Brazil), LocalBitcoins (Finland), Paxful (USA), Gemini (NYC) and Kraken (USA).
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