New academic research has found that the price of bitcoin is higher in countries with lower degrees of economic freedom.
In his paper, Robert Viglione, a PhD student at Darla Moore School of Business in South Carolina, notes that investors in repressed countries have bigger incentives to invest in the digital currency.
Bitcoin, he says, is a low-cost option which allows citizens of these nations to bypass their domestic financial system.
He told CoinDesk:
“Countries with less freedom (eg capital controls and foreign exchange controls, like Argentina) have significantly higher bitcoin prices. It goes to the whole story about bitcoin having its highest values in repressive parts of the world. I think we’re seeing a similar argument for Venezuelans’ interest in bitcoin, as well.”
Viglione pointed out that Argentina’s high bitcoin price was likely due to the data picking up the differences between the official peso exchange rate – set by the government – and the effective exchange rate used by traders buying and selling the digital currency “on the street”.
A disaster asset
Bitcoin’s decentralised and open-source nature, Viglione says, affords it the ability to trade and transmit funds across borders with few barriers or transaction costs, hence allowing the digital currency to behave as a disaster asset for people in politically unstable environments.
Countries with capital controls, unstable prices, trade barriers or little financial freedom, he says, would be prime candidates for bitcoin as investors undergo a higher degree of asset confiscation and are less likely to move funds outside of the government controlled currency and their political jurisdiction.
Viglione asserts that there is also a connection between high corporate tax rates, total tax burden and the premiums that investors are willing to pay for bitcoin.
Although he notes hat bitcoin markets are probably too small for agents to consider the digital currency a viable channel of tax avoidance, he points out that there is a negative relationship between economic freedom and tax burden.
“Taken together, this could suggest that investors are using bitcoin as a mechanism of escaping broader repression, of which excessive taxation is a component,” he concludes.
Bitcoin in Argentina
The findings come after the Bitcoin Potential Market Index (BMPI), an index that seeks to rank bitcoin’s potential utility across 177 countries, asserted that bitcoin was most likely to succeed in Argentina.
Bitcoin’s potential in the South American country made the headlines earlier this year, following the publication of an article which highlighted Argentina’s volatile currency and dysfunctional banking structure and explored the digital currency’s performance.
CoinDesk’s research has found that bitcoin’s prominence in Argentina was comparable to that of New York or San Francisco, with one interviewee saying that Argentina has between 8,000 to 20,000 bitcoin owners, amounting to approximately $70,000-$80,000 worth of over-the-counter daily trades.
Research paper image via Shutterstock.