Bitcoin won’t save Argentina but a gold-backed stable coin could help citizens

After only 3 months in the job, this week the president of the Argentine Central Bank Luis Caputo resigned after raising the country’s interest rates to the highest in the world failed to stem the peso’s bleed. As the peso plummets the only option for the government is to print more money, and for holders of Argentine debt the only option is to sell out for other currencies or a store of value like gold.

Now in the eighth iteration of the past 200 years, with another currency on the brink, how can Argentina re-instill confidence in the future of the peso?

Bitcoin hype in Argentina

Amid the stories of Argentina turning to bitcoin as the deflationary counterweight against the country’s inflation – now over 30% – we’ve been told again how Local Bitcoins volumes have gone through the roof in Argentina this week. Despite Local Bitcoins volumes being an imperfect metric of demand it also fails to adjust for the peso’s weakness against the USD, in which case the volumes would actually be declining.

We should take metrics on Local Bitcoins with a grain of salt.

One could argue that stable coins are the “best-performing” cryptocurrencies of 2018 as dozens of new assets have appeared on the market and existing ones have grown in market cap. While banking on bitcoin long term has validity, it serves Argentinians no immediate solution to their loss of spending power over their own currency.

BTCUSD, in red, is down almost 56% YTD compared to ARSUSD down 50%

Inflation – the traditional demand for gold

Argentina has been in this position on three ocassions since 1977, only coming out of its most recent debt crisis in 2012 after defaulting on its debt in 2011. During all those periods as the currency suffered an inflation crisis, the demand and local price for gold surged as the economic depression hit.

*The periods bracketed between the lines are the "depression" phase of the debt cycles. *

There are over 20 gold-backed cryptos currently in circulation all in nascent stages with more to come to market this year. While the pegging mechanisms vary across the coins, one that stands as unique is USDVault, which is pegged to the USD but also backed and redeemable for gold. Vault is an ERC-20 token which acts as an “evidence of deposit” for the gold bullion kept in custody by Prime Trust. Vault claims to be backed by a consortium of precious metals-focused private equity groups, explorers and miners.

“Stablecoins will help provide a real service to markets where the local fiat currency isn’t viewed as reliable and has failed to act as a reasonable store of value or medium of exchange”, says Vault CEO Ranjeet Singh, while admitting that it would just be an interim solution for citizens as the country’s political and economic woes are resolved.

“We would expect that people from such locations would prefer to have the backing of gold bullion over anything else. Additionally being pegged to the US dollar, which is the preferred currency for international trade, allows these people to safeguard their networth and transfer it to jurisdictions they may not have access to directly.”

As most of the stable coin market is focused on attracting institutional grade investors and allaying custodial fears there is yet to emerge a stable coin with its own wallet aimed at real-world use cases.

Money not always the worth metal it’s printed on

A cryptocurrency backed and redeemable for gold – but not pegged to it – would leave citizens and investors confident in it as a store of value and a unit of money. Sometimes, the value of a coin hasn’t even been worth the raw material it’s printed on; for example for many years the production cost of US 5c and 1c coins has been above their face value.

The spot price of nickel in the US 1c and 5c coins was worth more than the money

According to Bloomberg, in 2011 and 2012 the nickel cost the US government 10c to make and the dime 2c which led to a rush of traders buying thousands of coins and melting them for a risk-free arbitrage trade.

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