How is Bitcoin market share affected positively by failed central monetary policy

Jonathan M. Hazell


On March 25th of 2013, the island nation, Cyprus, announced an unprecedented levy on bank accounts holding more than 100,000 worth of Euro. This levy, became known as a "bail-in".This decision was part of an agreement to receive a 10 billion Euro bailout by the EU, the IMF, and other international financing institutions. The world press covered the financial chaos over the next several weeks. Many of the depositors who were subjected to this "bail-in"  came from foreign countries, especially Russia. Cyprus had been considered a safe haven to store wealth. The days leading up to the announcement is was estimated that Russian depositors had moved 10 billion in assets out of the country. The exact amount of Russian capital that was ultimately affected is difficult to estimate, considering the lax citizenship laws of Cyprus, but the speculation is well above 20 billion Euros in deposits. Many have speculated that the EU "mandatory "bail-in" served several purposes; 1) It was a subversive sanction against Russia for the Ukraine issue and other perceived international offenses. 2) The move signaled EU intentions and consequences to other southern European nations, Spain, Greece, Italy, etc with their, "soft economies."  3) It tested the model of a bail-in where depositors pay for bad monetary policy as opposed to taxpayers.

In fact, an IMF study just a year before in April of 2012, had actually introduced and recommended the use of bail-ins during a financial crisis. Cyprus had often been considered the Russian equivalent of the Cayman islands for the U.S.  It was an offshore refuge to bank. It therefore was a good target for Western banking to use as a test case, and send a message to Russia in the process.

Cyprus has slowly re-emerged from the 2013 crisis since then. Central banks and investors have watched the developments of this country closely to see the long-term effects of the bail-in. Many natives of Cyprus are bitter towards the EU for this "experiment", and the havoc that it caused.  It took two years before capital controls were lifted and money transfers out of Cyprus were enabled.  Russia meanwhile has doubled down on its support of Cyprus. It has restructured loans to the small nation and signed new political agreements, including military use of ports. The IMF/EU/ NATO, etc, geopolitical chess move against Russia may not be judged in the long run a successful move. The strategy in Cyprus can be called a financial policy failure for Cyprus itself and against Russian penetration of European territory. The western financial institutions though were able  to test out bail-Ins....which may have been the most consideration of all.

Bail-Ins are today considered a viable monetary option. Canada, Germany, and other nations are considering bail-ins as an option. Here in the U.S. citizens are also not immune to these financial policies. A depositor in a bank has less legal standing that a speculator. This means that a hedge fund using derivatives has a better debt position than a depositor. "Under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured."

This financial picture is daunting for the individual. There was however an unforeseen consequence of Cyprus and the implementation of the bail-in strategy. The global rise of Bitcoin. This digital currency had been a relative niche Internet phenomenon with little real value before Cyprus. The price of Bitcoin nearly doubled in two weeks from $47.00 to $88.00. From there the price dramatically rose all the way past $1200.00 a Bitcoin by November of 2013. Many believe that the Cyprus event effectively launched Bitcoin. The Cyprus Central Bank, connected to the EU, as well as Russian interests, has tried to dissociate itself now with Bitcoin since then. The fact remained however that Bitcoin became a working alternative for currency in Cyprus during that particular crisis. Bitcoin then evolved into a store of value against financial systemic failure. It has gone through several fluctuations in pricing over the last three and half years. Events such as the failure of Bitcoin exchange, Mt. Gox, Chinese governmental policy against Bitcoin, U.S. tax rulings, etc, have dramatically affected Bitcoin's price.

Still Bitcoin stands as a viable alternative to the World's financial system and its financial policies. The recent Brexit vote was another testament to Bitcoin's role as a hedge against the established financial system. Bitcoin's price has gone up over $250.00 since April. The Brexit vote was not the sole reason for this surge, but played a substantial role.

What Cyprus acutely showed the world though, was that Bitcoin can function not just as a hedge, like gold, etc, against financial uncertainty in the marketplace. No, Cyprus proved that Bitcoin can function as a currency replacement, when the establishment's currency denomination fails or is unavailable. The challenge for the Bitcoin economy is that it is often judged by its success against the standard currencies. The question is always, "What is the price of Bitcoin versus the U.S. Dollar, The euro, The Yuan, etc.?"

The real test is when those standard currencies fail. This may come from war, environmental disaster, or an overwhelming failed monetary policy. Bitcoin's inherent technological platform and global reach then allows it to become the alternative, world-wide currency of the future.