Venezuela currently has one of the highest inflation rates in history and it has reached extraordinary levels over the last year. Venezuela’s annualized inflation rate surpassed 43,000% this June and the cost for a single cup of coffee reached approximately 1 million bolivars. The hyperinflation has only been compounded by the crippling foreign exchange controls imposed by the government, severely restricting citizens’ access to more stable foreign currencies. As a result, more and more Venezuelans are turning to cryptocurrencies, specifically Bitcoin.
Despite the price of Bitcoin has been in a bear market since January and declining nearly 70% since its all-time high, BTC is worth more to Venezuelans now than it was in January due to the sheer magnitude of the accelerated depreciation of the bolivar.
The Current Climate in Venezuela
From scenes of mass protests to vast lines outside of poorly stocked supermarkets, the situation has become completely unsustainable. The bolivar is largely considered worthless to the average Venezuelan and their options for alternatives for a store of value or medium of exchange for basic necessities are critically limited.
Venezuela has long had strict controls on foreign currency exchange compared to other countries. These controls have become significantly stronger under the government of current president Maduro. The limits set by the government allow citizens to only exchange bolivars for the equivalent of a few hundred USD to be used online, per year.
Furthermore, the process is slow and the government reserves the right to refuse exchange services to anyone they deem fit. The additional policy of withholding US Dollars from importers amid price controls has led to severe shortages in basic commodities.
Bitcoin to The Rescue
In spite of this, there has been a growing interest in not only the purchase of Bitcoin but specifically in mining it. The electricity market in Venezuela is largely subsidized by the government, creating extremely cheap electricity for Venezuelans with the requisite mining knowledge to set up a small operation to profit from. Profits may be the equivalent of only a few hundred USD per month, but that significantly outpaces wages garnered by even professions that are highly specialized, such as in esoteric engineering fields.
The Venezuelan government has been cracking down on Bitcoin mining operations as illicit and been charging individuals in mining operations with unrelated or erroneous crimes in order to detain them. Further, the Venezuelan government recently issued its own state-controlled cryptocurrency released in February of this year, called the Petro, and has opened a miner registry for the currency. However, this currency is largely considered to be a farce to outside observers and many Venezuelans who have become disillusioned with the government.
As the bolivar continues to depreciate at an accelerated pace, many people are turning to Bitcoin as a store of value as well as means of purchasing basic goods online that are otherwise unavailable to them. Coin Dance’s LocalBitcoin analytics chart shows that the conversion of the Venezuelan Bolivar to Bitcoin is on the rise again, mirroring similar levels seen at around the same time as last year.
A Unique Environment
Interestingly, the deteriorating situation and living conditions of the Venezuelan people aside, the trend towards greater adoption of Bitcoin in Venezuela brings with it some very important implications for analyzing Bitcoin both from a financial and social perspective, with some very real consequences.
Venezuelans are not simply turning to Bitcoin out of fascination or interest, but out of desperation. It offers a legitimate store of value outside the control of governments and unfettered printing of money that leads to hyperinflation in the first place.
Bitcoin is deflationary, scarce, and exists entirely as a digital peer-to-peer network that has an inherent value from both the mining process itself and the value placed on it by the community that transcends the jurisdiction of geopolitical boundaries. The opportunities afforded to Venezuelans by mining, holding, and using Bitcoin (as well as some other cryptocurrencies) range from mitigating the loss of savings to having a source of purchasing power for groceries.
With a strict limit on foreign currency exchange in place, Bitcoin is often the only avenue for Venezuelans to safely store value, whether that be in the form of selling goods and property for it or exchanging large sums of bolivars for it. While Bitcoin is considered to be highly volatile to outside observers and the rest of the cryptocurrency community, for Venezuelans it is cogently more stable than their national currency.
Venezuela is undoubtedly in a dangerously fragile state of economic crisis right now. Throughout history, we have seen economic crises of this scale lead to the degradation of other institutions. Perhaps this time, a novel technology known as Bitcoin may help to reverse that trend, by giving economic freedom back to the Venezuelan people.