Are stablecoins a way out for weak currencies?
Global demand for stablecoins pegged to local currencies
We have customers from all over the world, and some of those live in countries that have weaker national currencies. Because we have a wide range of local currency stablecoins available for trading from the mobile app and DEX, a lot of customers use our services specifically to use stablecoins as a way to decrease the risks of dealing in steadily declining local currencies. Let’s look at some of the reasons why.
The basics of weak and strong currencies
Weak currencies are weak when their value decreases over time in relation to other currencies. Some common traits include inflation, current account deficits, and often much higher import levels compared to export levels.
Of course, what makes a currency weak can be attributed to country-specific variables such as bad governance, but it’s also determined by the performance of other currencies and commodities against which it’s traded.
The three most important factors to consider when determining the strength of a currency are interest rates, economic policies, and stability.
- High interest rates are attractive to investors and add to a currency’s strength.
- Economic policies that promote fiscal discipline and work to curb inflation strengthen a currency.
- Stability, which requires a strong commitment to the rule of law and a track-record of constructive policies, likewise attracts investment.
Stability is arguably more important than the overall strength of a currency.
A strong currency makes exports more expensive, while a weak currency makes imports more expensive. Low volatility, or stability, is ideal.
While it’s true that the value of currencies tends to decrease if a country performs badly, the opposite is not always the case. Rather, a strong currency usually indicates that a country has inflation processes under control.
Ranking strong and weak currencies
It may surprise you but, contrary to popular belief, the USD is not the strongest currency out there. Actually, it's the ninth on this list updated in January 2019, preceded by the Kuwait Dinar, Bahraini Dinar, Oman Rial, Jordan Dinar, Great British Pound, Cayman Islands Dollar, Euro, and Swiss Franc, respectively.
The five weakest currencies, are the Iranian Rial, Vietnamese Dong, Indonesian Rupiah, Guinean Franc, and Laotian Kip.
Some currencies, like the Venezuelan Sovereign Bolivar, are no longer among the weakest ten, due to their re-denomination - a measure often taken to deal with hyper-inflation.
Taking a closer look at vulnerable currencies
Naturally, currency rankings are not static. So it’s worth asking what currencies are vulnerable.
Late last year, the French bank developed a scorecard of gross and net vulnerabilities to assess which currencies are most at risk over the coming period.
Considering deficits, short-term capital flows, short-term external debt, FX-denominated debt, foreign bond ownership, and reserve adequacy, it identified the following currencies to be the most vulnerable:
- Turkish Lira
- South African Rand
- Malaysian Ringgit
- Indian Rupee
- Indonesian Rupiah
When it comes to the power - or vulnerability - of currencies, it’s good to know that this is not always due to natural processes in the market.
In some cases, governments intervene and purposefully weaken their currency to lower the price of their exports to gain a competitive advantage, and raise the price of imports, to spur on domestic entrepreneurship.
This is exactly what happened in China, in August 2015, when Chinese policymakers lowered the RMB-USD reference rate by 1.9%.
It’s interesting to note that as a result of this intervention, which led to a five-month selloff of global risk assets, in favour of wealth preservation assets, the JPY rose by 6.6%. Other major currencies and markets tumbled: EUR -1.2%, CHF -2%, GBP -9%, RUB -22.6%, ARS -31.3%.
Remarkably, the best performing currency during this five-month period was Bitcoin, which rose by a staggering 33% from $284 in August 2015 to $378 in January 2016.
It begs the question as to what role cryptocurrencies play in relation to vulnerable currencies and what benefits they offer.
Cryptocurrencies as a hedge
One way Bitcoin and other cryptocurrencies like stablecoins link into wider financial markets is as possible candidates for portfolio diversification.
The argument goes that since crypto is an uncorrelated asset, including it in your investment portfolio can serve as a hedge against economic downturn.
The fact that Fidelity recently announced it will offer cryptocurrencies as an investment option attests to the growing popularity of this perspective.
But there is another type of cryptocurrency that can be used to mitigate the negative effects of exposure to weakening currencies, namely, stablecoins.
Stablecoins as a way out
Using stablecoins as a way to reduce the risks of holding vulnerable currencies is an option that has not received much attention in the mainstream media yet.
One way to use this form of crypto for that purpose is to buy stablecoins with cash through our network of cash points and then trade into other local currency stablecoins and cryptocurrencies such as Bitcoin as a store-of-value.
So, for example, if you hold Philippine Peso, simply exchange your cash for stable.PHP, and then trade into BitUSD.
One of the great advantages of leveraging stablecoins for this strategy is that you’re not subject to conventional currency exchange rates. And it doesn’t stop there: if for some reason, you’re not fully confident that BitUSD will hold its price, Bitspark’s vast assortment of fiat pegged stablecoins makes it easy to trade into other currencies, such as BitJPY, sparkdex.HKD, BitEUR, or even BitGold.
If at any point you would want to put a portion of your assets into Bitcoin or Ethereum, during an upward trend, this is equally simple with just a few taps in the mobile app.
In a way, we’re creating a fully functioning FX market - which includes the major cryptocurrencies - where people can easily escape vulnerable currencies, without ever having to pay conventional FX rates or worry about capital controls.
This is one of the great ways in which stablecoins can be used to cope with weak currencies.