Emerging markets lead uptake of cryptocurrency despite bear market

– Emerging markets are leading the world in cryptocurrency adoption

– Cryptocurrencies are seen as a safe haven amid macroeconomic and inflationary pressures

– Many African nations are leveraging cryptocurrencies to increase financial inclusion

– NFTs and gaming are encouraging new adopters, even in countries with trading bans

Despite global financial headwinds and significant declines in the value of cryptocurrencies this year, emerging markets are adopting the technology at a rapid pace.

The global uptake of cryptocurrencies in the first two quarters of this year outpaced 2019 and 2020, according to the Global Crypto Adoption Index published by US blockchain analysis firm Chainanalysis.

Emerging markets dominated the Chainanalysis index, with Vietnam, the Philippines, Ukraine and India ranking as the top-four adopters, while Pakistan placed sixth, Brazil seventh and Thailand eighth. 

The data suggests that despite weaker public sentiment on cryptocurrencies in developed countries amid the current bear market, demand has remained resilient in emerging markets. 

Adoption drivers

With rising US interest rates and inflation weakening many fiat currencies around the world, cryptocurrencies and the decentralised exchanges on which they are traded allow users in emerging markets to limit exposure to macroeconomic pressures and ease transaction flows.

Long touted as a hedge against inflation, cryptocurrencies as an asset classes have seen one of the largest declines since the second half of 2021, when inflation ramped up globally, prompting many banks and financial institutions to question this premise.

The Covid-19 pandemic spurred the growth and adoption of new e-commerce solutions as many citizens sought innovative ways to gain access to financial services. 

The number of unbanked citizens – those without access to checking or savings accounts, credit cards, loans, mortgages or other traditional financial products – fell from 1.7bn in 2017 to 1.4bn in 2021, according to the World Bank.

In Morocco, Vietnam, Egypt and the Philippines, more than 65% of the population is unbanked, according to data from UK research platform Merchant Machine. Three of these countries were among the top 15 on the Chainanalysis index. 

Regionally, 50% of citizens in the Middle East and Africa are unbanked, while South and Central America average 38%, Eastern Europe 33% and Asia Pacific 24%. Meanwhile, 94% of citizens in Western and Central Europe are considered banked. 

Given these disparities in financial inclusion, it is unsurprising that citizens in emerging markets are driving the adoption of cryptocurrencies and decentralised exchanges, which Chainanalysis maintains is more important than the overall volume of holdings, trades or even price. 

Weighing risk and reward

Last year El Salvador became the first country to accept Bitcoin as legal tender; President Nayib Bukele pledged to build a “Bitcoin City” as a tax haven for crypto investors, including an airport and residential and commercial areas. 

However, Bitcoin’s subsequent price crash – it fell from $47,000 to less than $20,000 in the 12 months after El Salvador adopted it as legal tender – has raised questions about these plans and El Salvador’s ability to cover $1.6bn worth of sovereign bonds due in 2023 and 2025.

Nonetheless, several African nations are continuing to encourage the use of cryptocurrencies to drive financial inclusion. 

The Central African Republic adopted Bitcoin as legal tender in April, and the continent’s four largest economies – Egypt, Kenya, Nigeria and South Africa – also have the largest number of cryptocurrency holders in Africa.

Zimbabwe, for its part, has installed a Bitcoin ATM managed by Golix, the country’s first and largest cryptocurrency exchange, and the only place in the country where citizens can buy or sell US dollars for Bitcoin.

Citizens skirt government bans

One major risk to the long-term viability of cryptocurrencies is the potential for governments to curtail trading because of their use for illicit payments.

Last year China instituted a ban on cryptocurrency mining and trading. Eight other countries, including Egypt and Morocco, have similar bans in place, while 42 countries have implicit bans on these activities.

Even so, China was the 10th-largest adopter of crypto and Morocco the 14th, according to the Chainanalysis index. In the case of China, many citizens are skirting the ban, and the government reportedly is not enforcing it strictly.

The country has, however, encouraged the use of non-fungible tokens (NFTs) that leverage blockchain technologies, so long as they are traded on regulated exchanges.

Most NFTs are bought and sold with cryptocurrencies, driving adoption in Central and South Asia as well as Oceania. 

NFT marketplaces were cited as a major reason for India’s big jump in the Chainanalysis rankings, including FanCraze, a platform that sells cricket NFTs and has financial backing from US venture capital firm Sequoia Capital.

Blockchain-backed, play-to-earn (P2E) gaming is another major draw for new cryptocurrency adopters, most notably in top-ranked Vietnam.

Despite the high-profile hacking and subsequent collapse earlier this year of the NFT online video game Axie Infinity, which was created by the Vietnamese studio Sky Mavis, many in South-east Asia are turning to new, locally developed P2E options.

More sustainable mining

Another fundamental concern about cryptocurrencies − the energy cost of mining – has become more acute in light of recent energy shortages and supply chain disruptions due to Russia’s ongoing invasion of Ukraine.

The energy required to power the Bitcoin network varies according to the volume of mining and transactions, but at the time of writing its annualised electricity consumption was estimated at 92.7 TWh, according to the Cambridge Bitcoin Electricity Consumption Index, which is roughly equal to the annual electricity consumption of Pakistan.

There are, however, developments under way to make cryptocurrency mining more sustainable by using renewable energy. These have coalesced this year around the so-called regenerative finance movement, an effort to merge the growth of Web3 technologies like blockchain with measures addressing the climate crisis.

In September the White House Office of Science and Technology Policy released a report about the climate and energy implications of cryptocurrency in the US, which identifies Web3’s capacity to support technologies that monitor or mitigate climate impact.

Cryptocurrency miners themselves are also innovating to reduce the environmental impact of their activities. For instance, while Norway is already able to mine cryptocurrency using renewable energy due to its surplus of hydropower generation, Norwegian company Kryptovault is recycling excess heat from Bitcoin mining rigs to dry chopped timber.

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