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Navigating the Declining Economy: Can Crypto Be the Solution?

Bitcoin, introduced in 2008, is a digital currency designed to be secure and decentralised. It has the potential to revolutionise the way we handle money and payments. It is based on blockchain technology, which enables secure and transparent transactions without intermediaries. Blockchain is the perfect technology to offer financial inclusion to individuals in Africa who lack access to traditional banks or financial services. It allows people to transfer money, pay bills, or save without relying on banks, which can bring financial empowerment to millions of people in Africa. Since its inception, Bitcoin has grown to become a global phenomenon, with a market capitalization of over $1 trillion and millions of users worldwide and the field of Decentralised Finance (DeFi) which represents financial type services on the blockchain to approximately $50 Billion. 

While cryptocurrencies like Bitcoin and Ethereum have been known for their high-risk reputation due to their volatile nature, recent market trends suggest otherwise. Despite both experiencing significant drops of over 70% between November 2021 and last year, they have since bounced back with sharp recoveries since the beginning of 2023.

According to a Kucoin study conducted in 2022, approximately 7.6 million South African adults between the ages of 18 and 60, representing about 22% of the adult population, have invested in cryptocurrency. This is significant and maybe not surprising given the current economic challenges facing South Africa, including inflation, interest rates, load shedding, and greylisting, all of which contribute to the devaluation of the Rand and people’s savings. 

How these factors affect the Rand

Inflation is a major concern in South Africa, as it remains stubbornly high for prolonged periods, making it difficult to grow international wealth. Interest rates are also rising globally to tackle inflation, with South Africa’s rates reaching 7.75%. This trend is likely to continue, making funding for companies more expensive, resulting in reduced company profits and discounting of future cash flows. These factors will undoubtedly hit current stock prices for South African companies.

Furthermore, load shedding disrupts economic activity, reduces company profits, and undermines tax collection. As a result, the value of the South African Rand is falling, making it difficult for ordinary investors to protect their wealth. South Africa’s recent greylisting by the Financial Action Task Force is also likely to increase the cost of foreign investment, further reducing demand for the Rand. These factors all suggest a future of persistent inflation, declining stock prices, and ongoing Rand devaluation. In this context, cryptocurrencies may provide a viable solution to help investors protect their wealth.

Crypto has proven to be one of the most high-performing asset classes

Cryptocurrencies have proven to be one of the most high-performing asset classes. For the past decade, Bitcoin has outperformed all other asset classes by a factor of at least ten. Roberto Talamas, a researcher at Messari, emphasised that Bitcoin has generated an average annualised return of 230%, over ten times greater than the second-ranked asset class – the Nasdaq 100 Index with an annualised return of 20%.

This demonstrates that while there may be significant fluctuations and volatility in the crypto market, it can still be considered a relatively stable investment for investors if taken over a longer period of time. In addition, among crypto currencies, USD stablecoins (crypto currencies pegged to the USD) are a good way for South Africa to access USD and the comfort of its value outside of the traditional banking system. Ultimately, South Africans need to get into an asset class that is a Rand hedge and consider an investment with low inflation and the potential for growth. Crypto meets all the criteria.

In conclusion, cryptocurrencies can be a valuable tool for South Africans looking to protect their wealth in a weakening economy. As inflation, interest rates and load shedding continue to impact the value of the Rand, investors can turn to cryptocurrencies as a potential solution.