Rigid and sometimes insane currency policies in some countries might explain the big increase in bitcoin prices. The cost of one unit of the cryptocurrency has increased by $350.69 over the past year, according to Coinbase.
A bitcoin cost $229.91 on June 11, 2015 and $583.12 on June 8, 2016, according to the popular digital wallet. The big media has not noticed this surge yet, but it could be the start of a major change in the world's currency market.
Some observers, such as Zero Hedge's Tyler Durden, attribute the bull market to increased demand for bitcoin in China. Durden's thesis is that the People's Republic's efforts to enforce strict limits on the amount of money that can be transferred out of the country is fueling the increased demand for bitcoin.
China might be just the tip of the iceberg, because the same scenario is playing out elsewhere. The best example is Egypt, where the government is planning to punish black market money changers with a 10-year prison sentence. Bloomberg reported that the governor of the nation's central bank has also asked the cabinet for the power to fine and suspend the licenses of currency brokers that ignore official exchange rates.
The action is being taken to shore up the Egyptian pound, which is being weakened by speculators. On June 9, 2016, an Egyptian pound was worth 11¢ in US currency, according to Google. That provided for an exchange rate of roughly 10 Egyptian pounds to one US dollar. The official exchange rate was 8.88 pounds to a dollar, according to Bloomberg.
The government is trying to stop the leakage of its currency into a thriving black market of US dollars. This helps bitcoin, because the cryptocurrency makes it easy for Egypt's 44 million people to get around the new restrictions.
Interestingly, the government might further weaken the pound by making it easier for Egyptians to deposit dollars in bank accounts. That might make it easier for them to purchase bitcoin.
It sounds as if Egypt's central bank is worried about hyperinflation. Yet, the policies it is implementing might make the situation worse by convincing people they need to dump their pounds fast. Egypt's currency is weakening because of low oil prices and a tourism-dependent economy. Fears of terror attacks, and the lousy economy in Europe and Russia are undermining Egyptian tourism.
Insanity in Zimbabwe
The madness in Egypt is nothing compared to the sheer insanity taking place in Zimbabwe. The money in that nation is so worthless that the government lets citizens use other currencies, including the South African Rand, the US dollar, the British pound sterling, the Chinese yuan, and the euro.
Now, Zimbabwe's central bank is planning to introduce a new currency it calls a bond note, which is pegged to the US dollar, Bloomberg reported. Basically, the nation is admitting its money is worthless, so it is going on the dollar. Since 95% of Zimbabwe's trade is in dollars, that is not much of a stretch.
The bond note scheme will probably not work, because companies in South Africa refuse to take any kind of paper issued by Zimbabwe's government. Instead, they only take hard currency when dealing with Zimbabweans.
To pay its bills, the Central Bank now imports around $40 million a month in US dollars. That is only a stopgap measure, because the government is still unable to pay its bills or government workers' salaries.
Faith in the national currency is so low in Zimbabwe that the president of the nation's bankers association recommended that the government scrap its currency, the Zimbabwe dollar, and adopt the rand instead. Bloomberg reported that Charity Jinya even suggested such a policy to the country's parliament.
Wave of Currency Collapses Coming
The situations in Zimbabwe and Egypt might be the beginning of major changes to the international monetary system that could lead to an explosion in bitcoin value. Here are a few important takeaways from the currency crises in those countries that currency traders and investors need to grasp:
- National currencies may no longer be viable and sustainable in many smaller and weaker countries.
- We could be on the verge of a wave of currency collapses in a number of countries, fueled by the collapse of commodity prices. Like Venezuela, which is suffering from hyperinflation, Zimbabwe is heavily dependent on commodities - mostly minerals.
- Currency devaluation, one of the major tools central bankers use to kick-start a nation's economy, no longer works. The reason for this is that many people are now in a position to simply ignore the government currency.
- Official exchange rates are now meaningless in most countries. The only way the Egyptian government can get people to pay attention to them is to threaten to put people who ignore them in jail. Once the average person realizes that the government cannot throw everybody in prison, the exchange rate itself will probably quietly disappear in order to help the government save face.
- Most governments or central banks no longer have control of their currencies. Instead, the market sets the value, which undermines the whole idea of modern economic policy.
- Many countries will soon scrap their national currencies and adopt somebody else's. This will either be done officially by decree, or unofficially by simply allowing citizens to use dollars, euros or bitcoin in lieu of the government's toilet paper.
Under these circumstances, the value of currency alternatives, especially easily transferable currency alternatives such as bitcoin, will skyrocket. Traders take notice - if this continues, we could see bitcoin at $1,000 or higher by next year.