Right now, more than 80% of Bitcoin volume is in the USD market. And many of the pundits commenting on Bitcoin, both positively and negatively, are in the US. So it is natural to assume that Bitcoin adoption will start first in the US. I think that that is a reasonable assumption, but it is one worth questioning.
The US is a relatively stable and strong economy, with good rule of law, good financial technology, low inflation and financial institutions that most people have faith in (although many Bitcoin enthusiasts would beg to differ). But these happy circumstances do not hold in every country in the world. And when these circumstances do not hold, the appeal for Bitcoin is stronger.
Some attributed one of the recent rises in Bitcoin price to worries in Cyprus and Spain about the fragility of their banking systems. There is a good documentary about Bitcoin in Argentina that highlights similar concerns, in that case driven by the economy and inflation.
Inflation, and hyperinflation, is one possible driver of Bitcoin adoption in a country. When holding the local fiat currency entails losing value by the day, citizens will seek alternatives. In Zimbabwe, hyperinflation drove the US Dollar became the de facto local currency even while foreign currency trading was illegal. So there is existence proof that high inflation can drive a whole country to adopt another currency, one that is completely disassociated from the central government. Despite Bitcoin’s volatility, it may serve as a better store of value than a rapidly inflating local currency.
High transaction costs are another possible driver of Bitcoin adoption. This can be especially severe when most transactions are small. Africa presents another example of adoption of a digital currency, or at least a digital form of payments. M-PESA, a payments system enabled on mobile phones, now constitutes 31% of Kenya’s GDP.
As the developing world leapfrogs to mobile, I think that it is likely that we will find some developing countries with the right combination of high inflation, high mobile phone penetration, high transaction costs and weak financial institutions to foster fast Bitcoin adoption. What do you think?