Pakistanis are using cryptocurrencies as both a lifeline and a gamble, betting on digital assets amid market highs and devastating lows.
“I used to walk an hour to work every day because I couldn’t afford the transport fare,” says Ashraf*, who earns a minimal income from a side job trading cryptocurrency. Showing off photos of a new Kia Sportage worth 9 million rupees ($32,000), Ashraf boasts about his new three-storey house and state-of-the-art solar power system, all thanks to his crypto investments. He started investing when he had just $700 in Bitcoin and $1 in his wallet.
Ashraf’s story is just one example of how many Pakistanis are turning to cryptocurrencies, driven by the need to preserve their assets in a shaky economy. Cryptocurrency trading is not legal in Pakistan, so most transactions are done on peer-to-peer exchanges like Binance, with information shared in groups on less widely used apps like Telegram. Amid uncertainty following the recent arrest of Telegram co-founder and CEO Pavel Durov, an app called Signal has been touted as an alternative with strong encryption.
In Pakistan, cryptocurrencies are poised to become a good investment destination for many people looking to preserve their money as austerity measures continue to strain people’s wallets, Chainalysis’ 2023 Cryptocurrency Regional Report explains.
According to the Federation of Pakistan Chambers of Commerce and Industry’s 2020-21 report, Pakistan holds approximately $20 billion worth of cryptocurrencies, an increase of 711%. For reference, the State Bank of Pakistan held liquid foreign exchange reserves of $14.7 billion as of August 16. The estimate of cryptocurrency holdings indicates the country’s high interest in Pakistani investors.
This is not just a Pakistani issue. Global trends also reflect the growing influence of cryptocurrencies, especially in the United States, where we see heavy investment in political campaigns. In the second half of 2021, as expectations of rising interest rates in the United States grew, investors began shifting funds from riskier assets such as stocks and cryptocurrencies to interest-earning investments. The decline in cryptocurrencies continued into 2022, when Larry Fink, CEO of BlackRock, the world’s largest investment management company with approximately $10 trillion in assets under management, endorsed cryptocurrencies.
Trump, who has previously rejected cryptocurrencies, recently raised more than $4 million in crypto. As the US election draws closer, pro-crypto groups are stepping up their lobbying efforts. According to Bloomberg, Coinbase, the largest cryptocurrency exchange in the US, donated another $25 million to FairShake Super PAC, a crypto-focused political action committee. Meanwhile, another cryptocurrency company, Ripple, also donated $25 million to FairShake. Recently, cryptocurrencies have fluctuated around $60,000, while gold has surged to an all-time high and stocks have recovered after dropping amid turmoil in global markets.
The risks are real
Bitcoin has recently seen a sharp decline in tandem with the global stock market crash, its correlation with stocks becoming increasingly evident and its reputation as a safe haven asset beginning to falter. The cryptocurrency’s volatility has led to the destruction of wealth for many.
Take Ashraf, for example: “When the market crashed, I and four of my friends lost a total of Rs 10.5 million,” he said. “But once the market started recovering, we got more than 80% of it back. It was a wait-and-see game,” he added, furtively checking his Binance account every minute.
He urged everyone to invest, explaining the secret to his success, at least so far: “Buy hundreds of thousands of cryptocurrencies before they are launched, when their value is less than one-hundredth of a cent.” This is a tiny investment, he argued, and if the value of the currency rises to closer to one cent, it could potentially pay off more than investing in the Pakistan Stock Exchange at its peak. Of course, it comes with risks.
Investor Profile
Ashraf is one of many small Pakistani traders who rank in the top 10 in Chainalysis’ 2023 Global Crypto Adoption Index.
“As Bitcoin recovers, crypto adoption in Pakistan is on the rise, driven by the tech-savvy youth and remittance inflows from overseas Pakistanis. Despite the Pakistan Stock Exchange hitting new highs, investments in cryptocurrencies have not been deterred. Rather, the positive market sentiment is encouraging portfolio diversification,” said Faruk Kiani, Country Marketing Manager, KuCoin Exchange.
According to a KuCoin Pakistan report released in June 2023, 17% of internet users aged 18-60 identify themselves as crypto investors. This group includes users who have owned or currently own crypto assets in the past six months.
But crypto investors are not a homogenous group, said Zeeshan Ahmed, former country general manager of Rain Financial, a crypto trading platform based in the Gulf States. He explained that there are subgroups of crypto investors as well. People who invest in PSX and cryptocurrencies in general are primarily wealthy.
“People with excess assets or cash are dividing it up into investment portfolios to make more money or protect against depreciation. A large base of this subset is saving a significant amount in USDT,” he said. Tether, or USDT, is a stablecoin used as a medium of exchange to buy cryptocurrencies. “They’re not investors or traders, but they’re saving in USDT,” he said, citing a dollar shortage in Pakistan.
Be careful with opportunities
The introduction of cryptocurrencies could benefit the economy by attracting foreign investment and enhancing financial inclusion, especially in remittances. Kiani said establishing strong regulations and infrastructure development is essential to ensure safe and sustainable growth in the sector and protect investors and the economy as a whole.
However, influencers and crypto experts like Waqar Zaka are cautiously tempering the enthusiasm. Zaka shared a screenshot of a partner trading query on crypto exchange Bidget, showing the balance of $1.5 billion invested in crypto through Bidget in June by his followers alone, most of whom are from Pakistan. This does not include investments made by people on other popular exchanges such as Binance, he said, explaining the scale of crypto investment in Pakistan.
Zaka said that the average crypto investor in Pakistan is more likely to engage in future leveraged trading than simply buying and holding the assets. In the crypto world, leveraged trading involves using borrowed money to increase potential profits, but it also carries high risk as even small price fluctuations can lead to large losses against the amount borrowed. Meanwhile, in India, more people are getting involved in decentralized finance and are increasingly inclined to hold Bitcoin and other cryptocurrencies for the long term.
Cryptocurrency exchanges typically do not have a regulatory license to offer leverage services. As a hypothetical example, let’s say Ali is a cryptocurrency investor with $100. The cryptocurrency platform offers him 100x leverage, meaning he can invest up to $10,000 using borrowed funds. If the market moves significantly against his position, Ali could lose more than his initial investment due to his borrowed funds. Unlicensed cryptocurrency exchanges may not have mechanisms such as auto-liquidation that would close positions before losses exceed an investor’s account balance, preventing a negative balance. In the best case scenario, he makes $10,000.
“About 90% of people lose money on leveraged trading because they don’t do enough research. Once a meme coin crashes, there is little chance it will rise again,” he said.
Research Needs
Ahmed is wary of the inspirational value of success stories like Ashraf’s: “This is a superhero story. Stories like this inspire 50,000 other guys, but will they be successful? Maybe they will, maybe they won’t. It can’t be used as a benchmark. For every guy who buys a Kia Sportage, 10,000 others have lost all their money.”
He recommends a cautious approach to cryptocurrency investments: “Invest the same amount you would spend eating out in a month into crypto and keep it in a safe cold wallet. In 10 or 15 years’ time it may help your kids’ college fees or it may be completely worthless. It’s that volatile.”
Zaca stressed the need for research and strongly advised against investing in meme coins compared to traditional gambling, as demand for meme coins is driven by social media hype and speculation, resulting in high price volatility.
Regarding his investment approach, Zaca said that he should follow the US Consumer Price Index (CPI) data. The best way to understand how investments work and the volatility of the cryptocurrency market is to understand how the global markets work, including the impact of CPI and employment data. These indices affect inflation and interest rates, which in turn have a major impact on cryptocurrencies. “Ultimately, cryptocurrency gains need to be realized through tangible assets and consumption,” he advised.
Dark Side
In Pakistan, much of the USDT traded comes from the black market. If USDT purchased by legitimate crypto investors is linked to terrorism financing, it could land them in serious trouble with federal investigators. Zaka urges USDT buyers to always request wallet addresses and verify them online to ensure they are not blacklisted, and to practice strict digital hygiene. USDT purchased below market price is especially likely to raise suspicions.
Many Pakistanis turn to Telegram for information, but it has also become a breeding ground for scammers promising big payouts. “Double Shah was once a thing, but now he’s everywhere online,” he said, referring to a conman who gained notoriety for his Ponzi schemes.
As cryptocurrencies continue to gain popularity in Pakistan, it is clear that the promise of wealth comes with great risks. For those looking to ride the cryptocurrency wave, informed decisions and a healthy dose of caution are the best allies.
*Name changed for anonymity
Header Image: This image is taken from Shutterstock.
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