Understanding The Role That Bitcoin Can Play in Venezuela & Beyond

Amid Venezuela’s continually declining economic situation, which is in unprecedented hyperinflation territory, many crypto proponents are interested in speculating on the role that Bitcoin can play in the struggling South American nation.

Even more recently, those sentiments were echoed in Argentina, when a dive in the country’s native currency, the Peso, accompanied unexpected primary election results.

The use case for Bitcoin in such economically troublesome situations comes in the form of its ability to circumvent capital controls and its use as a store of value. And in particular, the notion that Bitcoin may be a unique safe haven asset alongside gold is a narrative also gaining traction.

Economic Worries, Capital Controls, & Interesting Research

The situation in Venezuela is more than bad and has been simmering for years. Formerly a financial gem of South America replete with vast oil reserves, Venezuela has plunged into political and economic chaos. Roughly 12 percent of Venezuela’s population has fled the country amid the problems, constituting one of the largest refugee migrations in South American history, and extending adverse effects into neighboring countries who are absorbing swathes of desperate Venezuelans.

Compounded with a dictatorial regime, spurious cryptocurrency proposition (the Petro), strict capital controls, and spiraling inflation, Venezuela appears on the verge of collapse.

For some observers, such crises should not become situations of speculation for the impact Bitcoin can make, but the argument has made headway regardless, and in several cases, there are signs Bitcoin is helping.

For example, in efforts to skirt capital controls or salvage any value (the Bolivar is virtually worthless), Venezuelans are increasingly turning to the P2P exchange LocalBitcoins.

According to CoinDance, weekly LocalBitcoins volumes (in Bolivars) have continued on a parabolic trajectory upwards since December 2018. Additionally, some excellent analysis by Matt Ahlborg in February detailed how regardless of bubbles, BTC trading in South America — primarily Venezuela — has been on a consistent uptrend for every quarter in the history of LocalBitcoins.

Add in the fact that LocalBitcoins volumes measured as “usage per economic person” are highest amongst Venezuela and financially or politically oppressive regions like Russia, China, Nigeria, and Iran, and you can see that Bitcoin is actually being used for many of its intended cases.

It is challenging at a micro level to discern whether or not people in such regions are tapping Bitcoin for its ability to skirt strict capital controls or use as a store of value, but we can couple rises in Bitcoin trading to more significant macro events to glean some insights.

For example, CoinMetrics’s 12th issue of the State of The Network report dives into the emerging narrative of Bitcoin’s use as a safe haven asset compared to a backdrop of global geopolitical and economic developments. There is a correlation, but it is hard to judge whether or not it is definitive, and analysis by TokenAnalyst is opposed to such a narrative having merit.

CoinMetrics dives into the increasing global quantitative easing and negative bond yields in Europe as worrisome indications of a shaky macroeconomic environment. Additionally, it zooms in on the US-China trade war and the resulting collateral effects. An early conclusion is that the connection between adverse macro events and Bitcoin demand are tenuous at the moment, but that is less so when understanding Bitcoin’s use against capital controls.

For example, strict capital controls in Venezuela limit citizens from swapping the Bolivar for foreign currencies to minimal amounts. Bitcoin, although its access assurances are still wanting, offers an optimal avenue for sidestepping these controls.

Bitcoin ATMs are on the rise in the country, physical bearer instruments like OpenDime offer hope, and any form of value salvage, even if purchasing bitcoins through shady intermediaries in person or online, are worth a shot at this point for many Venezuelans.

Even the hypocritical Venezuelan government reportedly used Bitcoin to circumvent international sanctions by turning airport taxes into Bitcoin. It’s evident that Bitcoin’s permissionless nature is powerful in avoiding centrally-administered restrictions, but still, the extent to which it is used in Venezuela is low and hard to quantify accurately.

Interestingly, in the face of capital controls and a depreciating Yuan, a recent Coindesk piece highlighted that the Chinese prefer Tether to Bitcoin because of its stability anyways. Venezuelans ostensibly don’t have the type of access to tethers that Moscow OTC desks offer to the Chinese, so Venezuelans may, if given the chance, prefer Tether to Bitcoin — just a qualifier to keep in mind.

Argentina & A Dim Yet Inevitable Perspective on Bitcoin’s Use Case

Preferably situations like Venezuela, and now Argentina, wouldn’t arise where real-world scenarios of economies in freefall play out, and Bitcoin’s use case is subsequently scrutinized, but such situations are inevitable.

A shocking election loss for Argentina’s President Mauricio Macri triggered a freefall in the value of the Argentine Peso against the US dollar (shedding 25 percent), alongside a steep stock market dump. Now, as Argentina’s inflation reaches dangerous levels, major economic woes are facing the country amid panicking markets.

Following the crash of the Peso, Bitcoin traded at a steep premium on local exchanges, according to LocalBitcoins. Similarly, LocalBitcoins volumes (measured in the Argentine Peso) are now also surging.

Although the correlation of Bitcoin as a safe haven asset seems weak at a global level, judging by two national, high-profile cases of currency freefall, Bitcoin appears to be a somewhat popular store of value. The volumes of national currency traded for bitcoins, compared to the national scale of money in the system, are very small in both Venezuela and Argentina, but are, nonetheless, distinctly trending.

When you put those trends in the context of many people simply not knowing what Bitcoin is prior to such situations, it makes sense that volumes are low — especially considering Bitcoin’s weak access assurances in many parts of the world outside of the US and Canada, Europe, and a handful of SE Asian countries.

While many Bitcoin proponents may view deteriorating economic and political situations as tangible opportunities to evaluate Bitcoin’s potential, the situation is fundamentally different for those experiencing it. Unfortunately, economic cycles churn, economies bust, and geopolitical tensions flare, causing such scenarios to inevitably materialize.

On the bright side, Bitcoin is showing a penchant for affording optionality to those who need it most, which, at a bare minimum, is a net positive for future situations of economic and political suffering.

   

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