Exploring the Possibilities of Bitcoin in the Wake of Lebanon’s Financial Crisis
/The use of the cryptocurrency Bitcoin spread throughout Lebanon like wildfire in the wake of the country’s financial collapse in 2019.[1] Yet, many people, both Lebanese and in general, still do not know how digital currency works or whether or not they should use it.
Bitcoin first earned widespread attention in the United States and Europe a few years after the 2008 financial crisis generated intense skepticism of the global monetary system, but Lebanon took less notice because the crisis barely affected the country.[2] Distrust of the monetary system grew rapidly in Lebanon in 2019 after the Bank of Lebanon’s “financial engineering” strategy designed to maintain artificial parity between the Lebanese pound and the US dollar failed, resulting in one of the most severe economic and financial disasters in modern history.[3] Only one year after the financial collapse, Lebanon’s national currency lost more than 90 percent of its value against the dollar, while consumer price inflation rose by 290 percent.[4]
The financial crash pushed Lebanese central banks to seek survival by placing heavy restrictions on residents’ bank accounts to prevent them from withdrawing all their money.[5] This action made withdrawals and cross-border transactions extremely difficult and time-consuming for Lebanese residents and businesses, especially affecting those dependent on foreign business and remittances.[6] Lebanon’s rapid consumer price inflation and currency deflation, residents’ inability to access their own money because of bank restrictions, and the difficulties associated with transferring money across borders all caused the decentralized Bitcoin cryptocurrency to proliferate throughout the country.
Bitcoin is often misunderstood due to its novel and seemingly complicated system, which causes some people to discredit it and others to overlook its flaws. To understand why Bitcoin became so attractive in Lebanon’s devastating post-2019 financial environment and what it can offer to Lebanese residents, we will take a closer look at how Bitcoin operates, its various functions, and its advantages and disadvantages.
Satoshi Nakamoto, an anonymous person or group (still unknown to the public) created the Blockchain operating system in 2008 along with its most famous application, a cryptocurrency program known as “Bitcoin.” Blockchain technology can be understood as a peer-to-peer distributed ledger/operating system with many potential applications other than cryptocurrency. Nakamoto created Bitcoin as an application running on the Blockchain operating system as a currency that could not be controlled by any person or entity.[7] Bitcoin allows anyone with internet access to send or receive digital money using blockchain technology.[8]
The decentralized aspect of Bitcoin is the most enticing element for those who distrust government and bank involvement with money, as do many residents of Lebanon. Bitcoin’s decentralization ensures that all individuals using Bitcoin have sole control and access to their holdings.[9] Bitcoin’s decentralization is closely connected with its peer-to-peer technology because peer-to-peer transactions mean that Bitcoin can be sent and received by anyone with internet access, without involving intermediaries like governments, banks, or institutions.[10]
Decentralization and peer-to-peer technology also prevent any outside actors from altering or placing restrictions on people's assets as Lebanese central banks did after the country’s 2019 economic crash. Unlike fiat currencies such as the U.S. dollar, which can be adjusted without public consent by the Federal Reserve System, Bitcoin’s decentralization prevents modifications to the Bitcoin network without the consent of everyone using the network.[11]
Open-source technology adds an additional aspect to Bitcoin’s decentralization by transparently displaying the code and consensus rules the Bitcoin network utilizes, enabling access to anyone with internet connectivity.[12] The transparent aspect of the Bitcoin code means that anyone participating can understand how the network functions and verify it is performing correctly.[13]
Blockchain technology consolidates the huge volume of transactions constantly occurring on the Bitcoin network into uncluttered baskets of transactions—much like a bank ledger.[14] When peer-to-peer transactions take place on the Bitcoin network, they await confirmation to be added to the next block of verified transactions, which are created every 10 minutes on average. Once a “block” is created, it is connected by the identical hash code to the previous block in the “chain.” This digital architecture renders the transactions immutable, permanently recorded and irreversible.[15]
The process of “mining” bitcoin (i.e., the process of creating new Bitcoins) is less necessary to understand for the vast majority of people since digital mining can only be done by powerful computers that use an enormous amount of energy. Nevertheless, it is important to outline this process because the two most common issues people have with Bitcoin—especially those who are only familiar with hard currencies—is that it appears that Bitcoin currency randomly materializes out of nowhere and its value is backed by nothing. These are legitimate concerns because the process of mining Bitcoin is basically an arduous guessing game occurring on the internet; however, it is a guessing game with strict rules. Mining Bitcoin is executed by computers that continuously attempt to generate the exact 64-digit encrypted hexadecimal number that is randomly produced by the Bitcoin code every 10 minutes on average.[16] As of March 2020, whenever a mining computer creates the next block of confirmed transactions by correctly guessing the 64-digit encrypted hexadecimal number, it is rewarded with 6.25 Bitcoin.[17] The reward for mining one block of Bitcoin is halved every four years in order to increase demand for Bitcoin, increase its price, and increase the computing power dedicated to mining, all while making Bitcoin more scarce.[18] A block is mined every 10 minutes on average because there is a “difficulty adjustment” mechanism in the Bitcoin code that ensures a block is mined at this fixed rate, regardless of the amount of computing power currently dedicated to mining Bitcoin.[19] The difficulty adjustment mechanism means that anyone with a PC computer could have mined Bitcoin when it first emerged because fewer people were trying, but now, only massive computers specifically designed to mine Bitcoin are successful due to the huge volume of computing power constantly attempting to guess the 64-digit hexadecimal number.
The last element of Bitcoin that makes it so appealing in Lebanon’s financial environment of hyperinflation is its fixed supply. There will only ever be 21 million Bitcoin in existence. Currently, there are around 19 million in circulation and the 21 million limit will not be reached until 2140.[20] Bitcoin’s fixed supply theoretically promises its value will appreciate over time as it becomes scarcer, similar to gold.
Understanding how Bitcoin works is critical for recognizing what Bitcoin can and cannot offer in Lebanon’s calamitous financial state. Bitcoin offers a secure and trustworthy network for people to send and receive money when used correctly, but that does not make it an adequate immediate replacement for hard currency. While Bitcoin allows people to make transactions without involving any institutions or corporations, it is not yet universally accepted which makes it highly volatile, which can cause users to lose money in the short term and interact with risky partners.[21]
Bitcoin’s short-term volatility makes it more applicable as an asset, rather than a currency, in Lebanon’s current market.[22] Converting money into Bitcoin could be risky for people living from paycheck to paycheck because Bitcoin could easily lose 30 percent of its value overnight; however, Bitcoin might be a secure investment over a longer period of time for those looking for an alternative to banks or stocks to hold and grow their money. Bitcoin experienced a compound average annual growth rate of over 170 percent since its emergence, and in theory, it should continue to appreciate as a consequence of its fixed supply.[23]
Bitcoin’s major advantage for Lebanese citizens is its insulation from the devaluation of local currency, mitigating the risks and damages of local inflationary trends and currency devaluation.[24] Other cryptocurrencies like Tether are pegged to the US dollar, which makes them more stable and useful than Bitcoin as an alternative to hard currency. However, by pegging a cryptocurrency to the dollar or to gold, Bitcoin’s benefits of security, decentralization, and asset appreciation are lost.[25]
Bitcoin’s drawbacks were made apparent in 2020 when there was a Lebanese Bitcoin surge mainly due to short-term speculation from people hoping to quickly make up their losses from the 2019 financial crisis.[26] Cryptocurrency can be dangerous if people believe they can use it to recover their losses since it can expose them to shady schemes that try to take advantage of unsuspecting first-time crypto users.[27] The Lebanese central bank banned the purchase of cryptocurrency using local payment cards on trading platforms back in 2013, but that has not prevented most people from trading cryptocurrency.[28] The cryptocurrency ban caused users to switch from engaging with people on regulated platforms to unverified and unprotected messaging apps like WhatsApp or Telegram. Partners on these unverified platforms can be unsafe for new crypto users as they entail a higher risk of scams and high commission rates.
At the same time, the ability to find partners on WhatsApp or Telegram to trade Bitcoin is the other central advantage of using the cryptocurrency in Lebanon. The peer-to-peer technology prevents Lebanese central banks from restricting people’s access to Bitcoin or blocking the cross-border transfer of funds. Bitcoin can accordingly bolster Lebanese businesses by allowing them to protect the value of their assets and investments during this hyperinflationary period by purchasing Bitcoin.[29]
Currently, there is a widespread issue for Lebanese businesses that operate outside the country, because the Lebanese central banks’ restriction on cross-border monetary flows prevents them from accessing critical funds. Bitcoin would address this by allowing the businesses to digitally transfer and access their funds across borders in seconds.[30] Bitcoin’s ability to easily bypass restrictions made by central banks could also help the significant Lebanese population that is reliant on foreign remittances. Bitcoin offers a much better alternative to intermediaries like Western Union for foreign remittances because these intermediaries often take anywhere from 5 to 50 percent of the transaction in the form of fees.
Although Lebanese banks may continue banning Bitcoin, that will only encourage residents to turn to peer-to-peer trading platforms as many actually trust the banks even less than strangers on messaging apps. Lebanese distrust in their banks is likely to endure for quite some time, given the trauma that thousands of residents faced when they were blocked from accessing their own savings. Lebanese banks failed to serve their customers, which made people eager to withdraw their money to take control of their own funds.
The government in Beirut is attempting to gain control and rebuild trust in banks through regulations like the previously mentioned capital controls that set withdrawal and transfer limits, but citizens will not forget about the banks’ mismanagement of their money so quickly. It is therefore recommended that the administration in Beirut instead provide easier access to crypto-platforms so that Lebanese businesses can operate normally and residents can preserve the worth of their savings that have not already been lost. It is also recommended they strengthen peoples’ understanding of Bitcoin by launching public awareness campaigns to make sure people are engaging with safe partners and making sound financial decisions.
The Lebanese people will continue to use Bitcoin because of its insulation from the devaluation of local currencies and its mobility. Therefore, it is in the best interest of the government to provide information and safe and secure platforms for Bitcoin trading.
The views expressed in this post do not necessarily represent the views of CMED or UCLA. Bitcoin is extremely volatile and highly risky. Do NOT invest in Bitcoin without first seeking expert financial advice.
[1] Lautissier, Hugo, “In Lebanon, Bitcoin Is Proving to Be a Safe Bet.” Middle East Eye. November 14, 2021. http://www.middleeasteye.net/news/lebanon-economic-crisis-bitcoin-currency.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Russell, Jacob, “In Lebanon’s Collapsed Economy, Cryptocurrency Offers Relative Security for Some.” September 22, 2021. https://www.voanews.com/a/in-lebanon-s-collapsed-economy-cryptocurrency-offers-relative-security-for-some-/6241568.html.
[6] Ibid.
[7] Frankenfield, Jake, “Bitcoin BTC Guide.” Investopedia. November 30, 2021. https://www.investopedia.com/terms/b/bitcoin.asp.
[8] Ibid.
[9] Young, Zachary (President of UCLA Bitcoin Bruins), interviewed by author, Los Angeles, May 2, 2022.
[10] Vays, Tone, “What is Crypto Decentralization and Why Bitcoin Stands Alone.” Tone Vays Blog. September 17, 2020. https://tonevays.com/blog/what-is-crypto-decentralization-and-why-bitcoin-stands-alone.
[11] Young, interviewed by author.
[12] Frankenfield, “Bitcoin BTC Guide.”
[13] Young, interviewed by author.
[14] Frankenfield, “Bitcoin BTC Guide.”
[15] Young, interviewed by author.
[16] Finn Kellow-Webb, “Tucker Carlson Interviews Michael Saylor: The Greatest Interview You Will Ever Watch!” Interview, 2021. https://www.youtube.com/watch?v=6sPR0O7issU.
[17] Frankenfield, “Bitcoin BTC Guide.”
[18] Ibid.
[19] Young, interviewed by author.
[20] Young, interviewed by author.
[21] Azhari, Timour, “FEATURE-Young Lebanese Driving Crypto ‘revolution’ after Banks Go Bust.” Reuters, September 21, 2021, sec. Healthcare. https://www.reuters.com/article/lebanon-crypto-currency-youth-idUSL8N2QH1MW.
[22] Finn Kellow-Webb, “Tucker Carlson Interviews Michael Saylor.” 2021.
[23] Young, interviewed by author.
[24] Bergman, Mickey, email message to author, February 14, 2022.
[25] Bergman, Mickey, email message to author, April 21, 2022.
[26] Azhari, “FEATURE-Young Lebanese Driving Crypto ‘revolution’ after Banks Go Bust.” September 21, 2021.
[27] Ibid.
[28] Ibid.
[29] Bergman, email message to author, April 21, 2022.
[30] Ibid.
