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Bitcoin is Set to Displace the Bolívar in Venezuela

Bitcoin is shaping up to be the unofficial legal tender in Venezuela as the country continues to suffer the effects of hyperinflation in its currency. Venezuela has become a shadow of its former self as the once prosperous oil-rich country now struggles to provide citizens with the most basic needs of life.  The global crash in oil prices dealt a tragic blow on the country’s economy – its foreign reserves had $43B in 2009 but it has less than $11B now.

A series of ill-timed government policies such as socialist programs to redistribute wealth triggered economic chaos in Venezuela. However, the most recent economic policy that could cause Bitcoin to displace the Venezuelan Bolívar is the move to withdraw the 100-bolívar note from circulation. This article explores some of the reasons behind the trending shift towards Bitcoin in Venezuela.

Bitcoin comes to the rescue in Venezuela

The 100-bolívar was already practically worthless because it is worth less than $0.03 outside of the government’s ‘unrealistic’ pricing system. Of course, most Venezuelans don’t know what the 100-bolívar note is really worth and shopkeepers have started weighing the notes instead of counting them. Venezuelans have responded with riots and protests and the government have extended the deadline for outlawing the 100-bolívar note until January 20.

However, many Venezuelans have lost confidence in the country’s currency and many of them are starting to move their funds into Bitcoin. Bitcoin is global cryptocurrency and you don’t have to worry that its value would be eroded by the economic woes of any single country. In fact, economic woes tends to boost the price of Bitcoin in much the same way that gold tends to soar during periods of economic uncertainty.

The rushed nature of the move to outlaw the 100-bolivar note is also making people scared of holding fait currencies going forward. The Venezuelan government initially gave a 72-hour window for spending the 100-bolivar note but ATMs were mostly dispensing those same 100-bolivar notes and businesses were hesitant to accept the notes.

Hence, most people would have ended up with hundreds of thousands useless 100-bolivar notes if the window ended and they’ve not been able to replace their 100-bolivar banknotes. However, the decentralized nature of Bitcoin means that people don’t have to worry that the government will decide to outlaw the currency out of the blue.

Bitcoin will embed itself deeper into the Venezuelan economy

The Venezuelan government’s plan to remove the 100-bolívar note from circulation to be replaced with higher denominated notes reveal the level inflation in the country’s economy. In a report published recently, Steve H. Hanke and Charles Bushnell of Johns Hopkins  notes that Venezuela now has hyperinflation because it has maintained a monthly inflation rate of more than 50% for 30 days. In essence, the reality of hyperinflation in the Venezuelan economy makes its expedient to look for alternative currencies.

More so, analysts observe that the problems facing fiat currencies globally will be amplified going forward as isolationism continues in the global geopolitical landscape. Gil Luria, the director of research at Wedbush Securities notes that “the more there is an expectation for new barriers to be erected, the more there is an expectation that Bitcoin will be valuable for moving money across borders.”

Can Bitcoin be the saviour during the next Global Financial Crisis?

The housing collapse in 2008, that shadowed the global financial markets, has had gripping repercussions on the global economy.  With Greece, Venezuela and many other European countries still trapped in high recession, their economies are looking shaky and unstable. This is the consequence of the Great recession and countries are still feeling the ripples of it. As much as we don’t like it, another economic crisis is inevitable if the monetary policies aren’t very effective.

An economic crisis is a signal of how the existing monetary system has failed, which prompts for alternatives. Outside precious metals and the good old barter system, Bitcoin appears to be the best fit alternative to the existing system. Decentralized, border-less, peer-to-peer, and open-access digital currency surely seems to be a best fit in the face of calamity. Let’s look into how prepared Bitcoin is for the next Economic Crisis:

Sailing on both Tides:

An economic collapse can be of two types: Inflationary and Deflationary


Inflationary collapse or hyperinflation happens when an economy experiences very high and usually accelerating rates of inflation. This rapidly erodes the value of the local currency causing the population to minimize their holdings of local money. The population normally switches to holding relatively stable foreign currencies. Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value. The value of economic items remains relatively stable in terms of foreign currencies.

Deflationary collapse or Deflationary spiral happens when a period of decreasing prices leads to a situation whereby the economy collapses. Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods and services than before with the same amount of money. Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt. This may aggravate recessions and eventually lead to a deflationary spiral.

How Bitcoin would fare under both circumstances:


Inflationary collapse:


In an inflationary collapse, people would be scrambling to buy bitcoin and other solid assets such as gold. This would be in an effort to preserve their savings from the debilitating effects of inflation. But for Bitcoin to be favored over other assets, the adoption level of Bitcoin should be very high. The digital currency should evolve to a stage where it can be used for all day to day transactions. This is prevalent in countries like Argentina, Venezuela and Greece. Users are actually looking at Bitcoin as an alternate to acquire foreign currencies and goods.

Deflationary collapse:


In this case, for Bitcoin to actually be preferred as an escape option, the currency should see mainstream adoption. The central banks and lenders should be able to accept Bitcoin in exchange for debt in fiat currencies. Unless the scenario is that positive, you’d see a massive selloff of bitcoin. This is because people would want to get as much USD as possible in order to pay debts.

In a financial crisis, there are limited tools available to sovereign entities to stem the crisis. Devaluation, bail-ins and capital controls are the go-to tools, Bitcoin counters them all. Bitcoin extends the basic properties of good money with extreme, no-cost portability, security and stealth. These properties are extremely valuable in cataclysmic financial collapse. However its utility majorly depends on adoption of the cryptocurrency before the impending crisis.