Bitcoin and other cryptocurrencies are being used more during times of economic stress

This happens mostly in countries where inflation is high, it’s expensive to send money, or the government limits how much money can leave the country.

A new report by the Bank for International Settlements (BIS) has revealed that the use of Bitcoin and other cryptocurrencies tends to increase during periods of economic stress, particularly in countries with high inflation, expensive remittances, or capital controls.

As reported by Ben Armstrong on X, the report, titled "Bumpy Ride: A Tale of Two Hemispheres in a Small World," delves into the factors influencing the adoption and utilization of cryptocurrencies. It provides insights into the role of crypto in a globalized and interconnected economy, highlighting the role of Bitcoin in times of financial hardship.

The study found that when the financial system becomes dysfunctional or too costly to use, people turn to decentralized alternatives like Bitcoin and stablecoins such as USDT and USDC. This is especially true for small international payments, where crypto offers a viable third option when traditional money transfer systems become unreliable or limited.

Furthermore, the report shows that the use of crypto rises when inflation surges, making local currency hold less value, or when remittances become expensive, hindering the ability of migrants to support their families back home.

Additionally, the researchers observed an increase in crypto use when countries implement capital controls, limiting how much money people can move in or out of the country. This leads to a higher demand for cryptocurrencies like Bitcoin, which offer a means to bypass such restrictions.

The report utilized data from major crypto exchanges and the usage patterns of crypto-related mobile applications to track cross-border transactions of Bitcoin, Ethereum, USDT, and USDC from 2017 to mid-2024.

The cross-border crypto flows, which include both retail and institutional transactions, shot up from less than $7 billion in the first quarter of 2017 to over $800 billion in the fourth quarter of 2021. However, they decreased to around $400 billion in 2022 during a crypto market slump but rebounded to approximately $600 billion by the second quarter of 2024.

Initially, Bitcoin constituted about 80 percent of those payments, but that proportion has since fallen to less than 25 percent as more people opt for stablecoins for cross-border transactions. This shift indicates that different user groups prefer different tools for varying needs.

The report also noted that Bitcoin use doesn't seem to depend much on where people live or what language they speak, unlike regular bank activity. It's used more when and where people need it, and it becomes more visible when global financial stress increases.

The researchers measured global financial stress using the VIX, a widely recognized market fear index. They found that surges in the VIX tend to coincide with a rise in Bitcoin use, even among investors and businesses, who increase their use of crypto during uncertain economic times.