Bitcoin: Implications for the Developing World

Abstract

Bitcoin has become notorious as the first cryptocurrency to gain widespread media attention, however, despite its many benefits over the existing financial system it remains a volatile fringe currency. This thesis examines the validity of bitcoin as a currency and whether it can play a role in circumventing extractive economic and political institutions in developing countries. The analysis compares bitcoin usage to the level of financial openness, the inflation rate, and the percentage of the population with a bank account in 21 different countries. The correlation is found to be both statistically and economically significant for all of these variables, which suggests that bitcoin is being used in countries with underdeveloped financial systems and detrimental monetary policies. A regression run on these variables indicates that a one-percentage-point increase in inflation leads to a 44.48% increase in bitcoin usage, a one-percentage-point increase in the percentage of people in a country that have a bank account leads to an 8.65% decrease in bitcoin usage and a one unit increase in financial openness leads to a 216% decrease in bitcoin usage. Throughout this analysis the positive and negative implications of widespread bitcoin adoption are discussed with respect to economies in the developing world.