How Cryptocurrency is Helping Unstable Economies
“Stable” is not necessarily the first word that comes to mind when one thinks of cryptocurrency. But although cryptocurrencies like Bitcoin can vary in value dramatically from day to day or even hour to hour, they are still far more stable than some other currencies currently in circulation.
While this might be a surprise for some, it’s important to note that rapid changes in value aren’t a problem restricted to cryptocurrencies — all currencies, whether they are fiat or crypto, risk fluctuations in value. Many times, these fluctuations turn into freefalls. History is littered with tales of drastic hyperinflation, like the inter-war Weimar Republic. But unfortunately, these stories of drastic inflation aren’t just restricted to the past. Inflation still poses a dangerous risk to many countries today.
Zimbabwe is a recent example: after unimaginably rapid inflation in 2008, Zimbabwe officially adopted the U.S. dollar. But that didn’t solve all the financial woes. Because there was limited access to U.S. currency, the government limited bank withdrawals to $50 a day. Bond notes have since been introduced to help with hyperinflation — but the currency is still limited, so withdrawal limits are still largely in place.
Venezuela is another example. After oil prices fell rapidly, the entire economy was thrown into turmoil. A 100 Venezuelan bolivar note (which was once the highest denomination of the currency) is now all but worthless. Higher denomination notes are being printed so consumers don’t need to bring armfuls of cash for basic transactions, but that does nothing to address the underlying economic issues. Venezuela now has the highest inflation rate in the world.
How Bitcoin is Helping
In this situation of uncertainty and economic chaos, Venezuelans have turned to another currency: Bitcoin. Between August of 2014 and November of 2016, the amount of Bitcoin users in Venezuela skyrocketed from 450 to a staggering 85,000. There are a number of reasons that using Bitcoin helps Venezuelans without access to other stable currency. Humanitarian agencies and family members abroad can send Bitcoin securely to Venezuelans in need. Many then use the Bitcoin to purchase Amazon gift cards, where essential goods and services can then be delivered to them. The financial crisis in Venezuela has been catastrophic for healthcare, and Bitcoin is often used to purchase much needed medicine.
Others see Bitcoin as a place to secure their savings. “I save in bitcoin and when I need money, I convert it into bolivars, I just changed 0.14 bitcoin and that was enough to live for quite some time,” said Lili Beth Grela, who runs Cryptobuyer’s finance department, told the Guardian.
Why Crypto Works
Bitcoin is accessible to anyone with an internet connection, which is an advantage in a developing country like Venezuela where those in need may not have a physical bank account.
Citizens can use either peer-to-peer services such as LocalBitcoins to conduct Bitcoin transactions in person, or an exchange brokerage to convert Bitcoins into bolivars or the reverse.
While Bitcoin is objectively not a very stable currency, it’s on much better footing than the Venezuelan bolivar. That means that consumers are more open to using Bitcoin for everyday transactions than they otherwise would be. In fact, some companies are even exclusively accepting payment in Bitcoin, because they know it’s more convenient and useful than the local currency.
Another positive factor is that Bitcoin is completely free of government control. The Venezuelan government can’t print more Bitcoin, or regulate its value. There are no laws regulating Bitcoin in Venezuela, unlike the United States where it’s considered a commodity. Still, many Bitcoin users are cautious and use encrypted communication apps to talk with one another. “We’re afraid because there has been a foreign exchange control in Venezuela for years so we don’t want to openly talk about changing bolivars into another currency, especially not at the black-market exchange rate,” a Bitcoin user told the Guardian. The fears are not without basis: Countries including Iceland, Bolivia, Ecuador, and Vietnam have banned Bitcoin.
Despite all these positives, it’s important to keep in mind that there are still restrictions that make using Bitcoin prohibitive for many would-be users in developing countries. Bitcoin transaction fees can vary, sometimes to the point where they’re too high for some developing nations. And Bitcoin is still seen as too volatile for many countries, particularly those with a strong central bank. But in countries where the national currency is more volatile than Bitcoin, using this currency is an appealing — and necessary — option for its citizens. Could Bitcoin and other cryptocurrencies become a reliable form of aid for future countries hit with recession and rapid inflation? Governments and citizens of nations with plummeting economies are certainly paying attention to the possibilities.