Cryptocurrencies are going mainstream. Since the creation of Bitcoin in 2008, the market capitalization of cryptocurrencies (cryptos) has reached $2 trillion. Bitcoin and other cryptos are also growing presence in the Middle East.

Cryptos are not just an alternative investment, but they may be used to relieve economic and financial turmoils.

The Middle East is not new to the use of decentralized payment systems. For years, people used the Hawala (Trust) system as an informal value transfer system to bypass traditional banks. But with cryptocurrencies, the trust based on the Hawala system has been replaced with algorithms, which are the fundamentals of the decentralized nature of the cryptocurrencies based on blockchain technology.

Cryptocurrencies have gained attention from users in the Middle East over the past few years. A growing presence of cryptocurrency-related service providers, exchanges, and trading platforms popped up rapidly in the region.

Although crypto is a highly volatile investment, the growth of Bitcoin (from $1 in 2011 to almost $43,000 in 2021) has shown the world its promising profits.

For people, buying cryptocurrency is not only an opportunity to invest but it is used as a shield of their savings against the devaluation of local currencies and financial crises.

For people, buying cryptocurrency is not only an opportunity to invest but it is used as a shield of their savings against the devaluation of local currencies and financial crises.

Scams and frauds are ordinary in the crypto world. The relative complexity and the lack of knowledge on cryptos may expose investments and savings to big risks.

However, such risks haven’t stopped Lebanese from investing in cryptos amid an unprecedented economic and financial crisis that hit Lebanon in late 2019. Lebanese Lira fell to 80% against the dollar. Banks severely limited access to accounts to millions of people, thus, many started to invest in cryptos to relieve from the devaluation of the local currency and secure their assets away from the Lebanese banks.

Crypto users in the Middle East conduct trades in many ways, depending on the regulations of their countries of residence. Many use several mobile apps. Some investors that have foreign bank accounts use well-established exchange platforms, including Coinbase. But some crypto exchanges don’t serve users in every Middle East country. So, buyers rely on local exchange platforms, such as OTC remittance outlets or private professionals that manage several portfolios by trading on WhatsApp, Telegram, Facebook, and Twitter.

Aside from Coinbase, Binance, and other popular platforms, users in the Middle East also use local exchange platforms.

Although new cryptos are getting popular, the most crypto traded in the Middle East is Bitcoin. As a second choice, buyers invest in Ether, the cryptocurrency based on the open-source blockchain developed by Vitalik Buterin in 2015. Recently, Dogecoin, a crypto formed as a joke, gained popularity due to the endorsement of Elon Musk, CEO of Tesla and other companies.

Due to the restrictions, lack of a regulatory framework, or unclarity over trading cryptos, not all countries in the Middle East may use the most popular exchange platforms. Aside from Coinbase, Binance, and other popular platforms, users in the Middle East also use local exchange platforms. For instance, BtcTurk is the biggest cryptocurrency exchange in Turkey, with around 3 million users, according to Bloomberg.

Rain, a cryptocurrency trading platform licensed by the Central Bank of Bahrain, serves crypto products and services in Bahrain, Saudi Arabia, United Arab Emirates, Kuwait, and Oman. Among other exchange platforms, BitOasis, Local bitcoins and Paxful are widely used in the Middle East. However, many people join Western platforms by using Virtual Private Network (VPN) tools. Charges and the security infrastructure are the key elements that lead to preferring an exchange platform rather than another one.

Trading aside, mining is an essential operation to buy and sell cryptos. Mining is the process by which new cryptos enter into the market circulation. Furthermore, mining is the process of verifying bitcoin transactions and recording them in the public blockchain ledger.

Miners use very sophisticated computers that solve complex calculations. Miners were paid 6.25 bitcoin for every block mined, but the reward was reduced by 50% in May 2020. One of the most expensive costs to mine cryptos is power energy. Elon Musk has recently highlighted the issue related to crypto mining related to the environment. Electricity cost is an essential factor for starting a mining activity.

Most mining farms work in China, where electricity price is widely cheaper than in Europe and the U.S. In the middle East, Iran is a very important player in the mining market. Its electricity price ($0.005 KWh in a household) makes Iran a suitable country for mining, along with China and Venezuela. There are some Chinese mining farms in Iran, according to several reports. Kuwait may be an interesting county for mining, but the lack of infrastructure prevents mining operations on a large scale.

Blockchain technology is not only limited to cryptocurrency. Like the rest of the world, Middle Eastern countries are developing Central Bank Digital Currencies (CBDCs). These are new financial instruments based on the blockchain that would allow central banks to issue digital currency. CBDCs are an effort to contain and fight back Bitcoin and other cryptos. CBDCs are the digital representation of countries’ fiat currencies (government-issued currency). They are important because they can be programmed and can reduce processing times and costs.

When bitcoin first emerged in 2009 in the aftermath of the greatest financial crisis in human history in 2008, its utility was questioned and scrutinised. Today, the price of bitcoin stands at $47,000 after it rallied from $5,000 when coronavirus lockdown hit the global economy back in March 2020. This is 10x value unfold in less than a year. The spectacular rise in value boggled the minds of many including investors, regulators, and bankers.

So why bitcoin is rising? Since the financial crash of 2008, questions were raised about the future of the US dollar as the global reserve currency. The quantitative easing policy adopted by the Federal Reserve Bank was described by many economists and financiers as the recipe to the destruction of the US dollar exorbitant privilege and its status as the global reserve currency.

Simply put, no one wants to save and invest their wealth in a currency that constantly loses its value to inflation. Loss of wealth that happened to many countries and investors that save in dollars is significant. The dollar had an average inflation rate of 1.64% per year between 2007 and today, producing a cumulative price increase of 25.63%.

Investors who have to deliver profits to their clients needed to hedge against dollar inflation. Thus, an influx of institutional investors lined up to buy bitcoin as they saw it become the gold standard for the digital era. The limited supply of bitcoin at 21 million coins means it is inflation-proof.

Scarcity of bitcoin operates as the catalyst for the increased demand on bitcoin and thus its price increases against the dollar. Therefore, institutional investors such as MicroStrategy and Guggenheim Partners fund managers increased their portfolio holdings of bitcoin and offered related financial services to their clients.

Not only institutions are lining up to buy bitcoin, but also retail investors have increasingly shown greater interest in the coin and used it to hedge against losses to their savings in dollars due to inflation and to trade it. Companies such as PayPal, Square, and Visa have allowed or about to allow their customers to deal in bitcoin and used that to boost their payment solution for their customers which increased the number of retail investors who got into bitcoin.

The ongoing changes in the global economy are also part of the reasons for bitcoin rise. The Bretton Woods system of a gold-pegged dollar made the US (which owned 80% of world’s gold reserve at the time) the world leading economy. Eventually, to maintain the financial privilege, the US economy deindustrialised and became a service and finance-based economy.

With China’s rise, and due to security concerns around the safety of its supply chains, the US is interested in getting industry back onshore. Devaluing the dollar helps achieve such strategic objective as the US seeks to reclaim its domestic manufacturing capabilities.

The economic dynamic of bitcoin is simple. As USD value decreases, conversely, the price of bitcoin increases.

Overall, the economic dynamic of bitcoin is simple. As USD value decreases, conversely, the price of bitcoin increases. The increased demand helps institutional investors save their treasury, increase their profits, and adapt to technological changes in digital payment systems using blockchain-enabled technologies such as bitcoin.

Thus, China tried to exercise regulatory control over Chinese holding bitcoin by banning cryptocurrencies. However, the Chinese crackdown on bitcoin led to more Chinese investments in the coin as it proved the need for non-government-controlled assets.

Today, China is a dominant actor in bitcoin mining. This is due to the cheap cost of electricity, mining equipment, and land. Furthermore, the strong capital controls exercised by China lured many Chinese who cannot move money abroad to bitcoin. Since China could not beat bitcoin, it decided to play its own blockchain game.

Globally, by deploying the digital yuan, China aims to offer foreign governments an opportunity to save and invest in a currency other than the dollar.

Hence, in April 2020, China announced its commitment to launching the digital yuan which would use blockchain technology. The aim of such move was to maintain the power of the Chinese state over the wealth of the nation, to reap the benefits of the new technology to reduce transactions cost and time, and to preserve the domestic power of the Chinese Communist Party.

Globally, by deploying the digital yuan, China aims to offer foreign governments an opportunity to save and invest in a currency other than the dollar. This shall help, according to the government view, boost the status of the yuan as a global reserve currency. Over the past few years, the yuan value has been appreciating, and China continues to implement policies that encourage its internationalisation.

Bottom line, China is happy the USD is losing its status as the global reserve currency which was used by the US to exercise power globally over the past seven decades. Furthermore, China’s mind is open to technological changes and is trying to harness the blockchain technology to boost the global financial status of the yuan, which is expected to help China materialize its goal of becoming the world’s top economy by 2050 and contribute to the success of its Belt and Road Initiative.

From the US point of view, the Federal Reserve Bank continues to signal a quantitative easy policy via trillions of dollars of stimulation packages. In 2020 alone, $10 trillion were injected in the US economy to offset COVID19 depression.

The Biden administration promised more stimulus packages and an increase in the minimum wage to $15, which is expected to inflate prices. Therefore, American and international investors and retailers alike have a low level of confidence in the Fed’s willingness to protect the value of the dollar.

Is all bitcoin story gloomy? Of course not. Despite the rosy picture bitcoin enthusiasts show, mass adoption of the coin lags due to several concerns about the high volatility of bitcoin prices and the impact of bitcoin mining on the environment. However, on the long run, as more institutional and retail investors adopt bitcoin, the price will stabilise. Furthermore, mining bitcoin using green energy will become viable.

Taxing bitcoin holding is another issue due to the anonymity enjoyed by the holders. However, many governments have figured out ways to tax bitcoin holders and mechanisms continue to be developed to achieve such objective.