Digital gold rush: A high-stakes gamble in a fragile economy

Pakistanis are turning to cryptocurrencies as both a lifeline and a gamble, betting on digital fortunes amid soaring market highs and devastating lows.

Fatima S Attarwala 

Published August 27, 2024 

“I used to walk an hour to work every day because I couldn’t afford any form of transportation,” said Ashraf*, who earns around minimum income while trading in cryptocurrencies on the side. Showing photos of his brand new Kia Sportage worth Rs9 million ($32,000), Ashraf proudly talks about his new three-story home and the state-of-the-art solar system he has installed, all courtesy of his investments in cryptocurrency. He started investing when Bitcoin was a mere $700 with a wallet of just $1.

Ashraf’s story is just one example of how many Pakistanis, driven by the need for wealth preservation in a volatile economy, are turning to cryptocurrencies. Given that crypto trading is not legal in Pakistan, most of the activity takes place on peer-to-peer exchanges, such as Binance, with information being shared in groups on less-widely used apps such as Telegram. With the uncertainty surrounding the recent arrest of Telegram’s co-founder and CEO Pavel Durov, the app Signal is being touted as a strongly encrypted alternative.

In Pakistan, as austerity measures continue pinching the pockets of the masses, crypto is looking like a good bet for many trying to hold onto their money, explains Chainalysis’s 2023 Geography of Cryptocurrency Report.

A 2020-21 report from the Federation of Pakistan Chamber of Commerce and Industry estimated that Pakistan held around $20 billion of cryptocurrencies, a rise of 711 per cent. To put it in context, the State Bank of Pakistan held $14.7bn in liquid foreign reserves as of August 16. Estimates of crypto holdings indicate its appetite for investors in Pakistan.

And it is not just Pakistan. Global developments also reflect the growing influence of crypto, with significant investments in political campaigns, particularly in the US. In late 2021, as expectations of rising interest rates in the US grew, investors began shifting funds from riskier assets like stocks and cryptocurrencies towards interest-earning investments. The decline in cryptocurrencies continued until 2022 when Larry Fink, CEO of BlackRock —the world’s largest investment manager with around $10 trillion in assets under management — endorsed cryptocurrency.

Recently, Trump, who was previously dismissive of cryptocurrencies, has raised over $4 million in crypto assets. As the US elections approach, pro-crypto groups are lobbying intensively. According to Bloomberg, Coinbase, the largest US cryptocurrency exchange, has contributed another $25 million to the Fairshake SuperPAC, a political action committee focused on crypto. Meanwhile, another crypto firm Ripple has also donated $25 million to Fairshake. Lately, crypto has been see-sawing around the $60,000 mark, while gold surged to record highs and stocks stumbled amid global market turmoil before making a recovery.

The risk is real, too

Bitcoin’s recent plunge alongside the global equity market meltdown has made its correlation with stocks increasingly evident, challenging its reputation as a safe-haven asset. The volatility of cryptocurrencies has led to the destruction of wealth for many.

Take Ashraf, for example. “My four friends and I lost Rs10.5 million cumulatively when the market crashed,” he said. “But I have recovered over 80pc of it once the market started reviving; it was a wait-and-see game,” he added while surreptitiously checking his Binance account every minute.

Urging everyone to invest, he explained the secret to success, at least his so far: “Buy hundreds of thousands of crypto coins before they are launched when they are worth less than one-hundredth of a cent.” It’s a minuscule investment, and if the currency’s value rises close to a cent, it can deliver higher dividends than investing in the Pakistan Stock Exchange, which is trading at new highs, he asserted. Of course, it comes with risks attached.

The profile of an investor

Ashraf is among the many small traders in Pakistan, a country among the top 10 in Chainalysis’s Global Crypto Adoption Index in 2023.

“As Bitcoin recovers, cryptocurrency adoption in Pakistan is on the rise, driven by tech savvy youth and remittance inflows from overseas Pakistanis. Despite the Pakistan Stock Exchange reaching new heights, it hasn’t deterred crypto investment; instead, the positive market sentiment encourages diversified portfolios,” said Farrukh Kiani, Country Marketing Manager of KuCoin Exchange.

According to a KuCoin Pakistan report published in June 2023, 17pc of internet users aged 18-60 identified themselves as crypto investors. This group includes users who have owned or currently own crypto assets in the past six months.

However, crypto investors are not a homogenous bunch, said Zeeshan Ahmed, former country general manager at Rain Financial, a Gulf-based cryptocurrency trading platform. He explained that there are subsets of crypto investors. Those investing in the PSX, as well as crypto, are generally wealthy to begin with.

“The ones with excess wealth/cash are dividing it in a portfolio of investments to make more money or protect it from eroding in value. A large base in this subset has a substantial amount saved in USDT,” he said. Tether, commonly known as USDT, is a stablecoin used as a medium of exchange when purchasing cryptocurrencies. “They are not investors or traders but are saving in USDT,” he explained, given the dollar shortage in Pakistan.

Opportunities with caution

Crypto adoption can benefit the economy by attracting foreign investments and enhancing financial inclusion, especially in remittances. Establishing robust regulations and infrastructure development is crucial to ensure safe and sustainable growth of this sector while also protecting investors and the broader economy, said Kiani.

However, influencers and crypto experts like Waqar Zaka temper enthusiasm with caution. Sharing a screenshot of a partner transaction query of cryptocurrency exchange Bitget, Zaka showed the balance of $1.5bn in June that has been invested in cryptocurrencies through Bitget by his followers alone, most of whom hail from Pakistan. This does not include investments made by people on other popular exchanges such as Binance, he said, explaining the scale of investment in cryptocurrencies in Pakistan.

An average Pakistani crypto investor tends to engage in future leveraged trading rather than simply buying and holding assets, said Zaka. In the crypto world, leveraged trading involves using borrowed funds to increase potential profits, but it also carries high risks, as even small price movements can lead to significant losses against the borrowed amount. In India, on the other hand, more people are involved in decentralised finance, with a growing trend of holding Bitcoin and other cryptocurrencies for the long term.

Crypto exchanges typically do not have a regulatory license to offer leverage services. In a hypothetical example, let’s imagine Ali is a crypto investor with $100. A crypto platform offers him 100x leverage, which means that it allows him to invest up to $10,000 using borrowed funds. If the market moves significantly against the position, Ali could lose more than his initial investment due to the borrowed funds. An unlicensed crypto exchange may not have mechanisms such as auto-liquidation to close positions before losses exceed the investor’s account balance to prevent negative balances. In the best-case scenario, he earns $10,000.

“About 90pc of the people lose money through leveraged trading because they don’t research enough. When meme coins crash, there is little chance that they will rise back up,” he said.

The need for research

Ahmed was wary about the inspirational value of success stories like Ashraf’s. “It’s a superhero story. Stories like these inspire 50,000 other guys, but will they be successful? Maybe, maybe not. It can’t be used as a benchmark. For every guy who has bought a Kia Sportage, 10,000 others have lost all their wealth.”

He advises a cautious approach to crypto investment: “The amount you spend on eating out in a month is how much you should spend on crypto in a month and keep it in a cold wallet somewhere safe. In 10 or 15 years, it might help pay for your kid’s college, or it might mean nothing; such is its volatility.”

Emphasising the need to do research, Zaka strongly discourages investment in meme coins, comparing it to traditional gambling. Demand for meme coins is driven by social media hype and speculation, and they witness extreme price volatility.

Explaining his method of investment, Zaka said to follow America’s consumer price index data (CPI). The best way to grasp the investment mechanics and volatility of the crypto market is by understanding the workings of global markets, including the effects of CPI and jobs report data. These indicators influence inflation and interest rates, which, in turn, have a significant impact on cryptocurrencies. “Ultimately, crypto profits need to be realised through tangible assets or consumption,” he advised.

The dark side

In Pakistan, much of the USDT being traded comes from the black market. If USDT purchased by a legitimate crypto investor was ever involved in terror financing, it could lead to serious trouble with the Federal Investigation Agency. Zaka strongly advises USDT buyers to always request the wallet address and verify it online to ensure it hasn’t been blacklisted, and to practice strict digital hygiene. In particular, USDT bought below market price is prone to suspicion.

Many Pakistanis turn to Telegram for information, but it’s a hotbed for scammers promising sky-high returns. “The Double Shah that once existed is now available everywhere online,” he said, referring to the con artist who achieved notoriety through Ponzi schemes.

As cryptocurrency continues gaining traction in Pakistan, it’s evident that the promise of wealth comes hand in hand with significant risks. For those looking to ride the crypto wave, informed decisions and a healthy dose of caution are your best allies.

*Name changed for anonymity

Header image: This image is taken from Shutterstock.