Venezuela’s adoption of Bitcoin is a tale of rampant hyperinflation and cryptocurrency evangelism.
Venezuela has been living with hyperinflation since at least 2014. Its national currency — the Venezuelan bolívar — hit an official inflation rate of 57.3 percent in February 2014, while independent currency analysts were reporting that, by that September, the real inflation rate had already topped 100 percent. In other words, the bolívar (VEF) was depreciating rapidly in value, and ordinary Venezuelans needed something to fill the void it had left as a one-time viable means of exchange.
By definition, hyperinflation is a state in which, as described by the International Accounting Standards Board, "the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency." However, due to capital controls that had been in place since 2003, Venezuelans were restricted in their ability to obtain U.S. dollars or any other foreign currency. They had no freely accessible outlet for their devalued VEF, with the Venezuelan economy expected to contract in 2015 by 1 percent, according to the IMF.
It was into this economic quagmire that Bitcoin and altcoins (particularly Dash) entered, providing struggling Venezuelans with stores of value and mediums of exchange they could rely upon more than the nosediving bolívar. Ever since 2014 and the onset of hyperinflation, they've seen marked increases in ownership and trading, with impressive rises being witnessed in the past few months, as Venezuelan inflation topped an eye-watering 46,000 percent and as the IMF predicted an inflation rate of 1,000,000 percent by the end of 2018.
However, as the following will show, the meteoric rise of crypto in Venezuela doesn't simply result from the desire to avoid the worst effects of hyperinflation. It also stems from the proactive attempts certain cryptocurrencies have made to establish themselves within Venezuela, as well as from a desire among the population to resist and circumvent an authoritarian government, which has used capital controls as one way of starving likely opponents of funding.
As an indication of the extent to which crypto usage has grown in Venezuela, it's worth looking at the trading charts provided by the Coin Dance website for the LocalBitcoins exchange, which enables peer-to-peer trades between any two parties anywhere in the world.
In November 2013, around the time Venezuela had an official — i.e., massaged — inflation rate of 'just' 43 percent, a grand total of two Bitcoin were traded for VEF on the LocalBitcoins exchange. This modest volume, however, quickly rose almost as soon as the country firmly entered hyperinflation territory, with the peak for 2014 being the 64 Bitcoin traded in December, at a time when the BTC value had sunk to as low as $311 — after having stood at around $932 at the beginning of the year. It was at this time that inflation was at 63 percent, according to the government, and given that the country had been caught in hyperinflation for well over a year, many groups and individuals were beginning to recognize the vital role crypto could play in giving Venezuelans a lifeline.
One Venezuelan Bitcoin trader told Reuters in October of that year:
"Even though Bitcoin is volatile, it’s still safer than the national currency."
While Gerardo Mogollon, a business professor at the University of Tachira, told the news agency:
"I’m teaching people to use Bitcoin to bypass the exchange controls."
2015 was an even better year for Bitcoin, despite — or rather because of — it being a worse year for VEF and for Venezuelans. Annual inflation reached as high as 335 percent in June 2015, according to currency economist Steve Hanke, while 319 Bitcoin were traded on LocalBitcoins for VEF in the month of February alone. This figure excludes volumes on Venezuelan exchanges such as Surbitcoin, which in 2015, was reported by Bitcoin Venezuela as being the "second largest in transaction volume in Latin America after Brazil." It also pales in comparison to the number of Bitcoin traded over the entire year, which — at 2059 — was 983 percent bigger than 2014's total (190) and was worth around $1,281,223 (based on a crude average annual price for Bitcoin of $622).
In 2016, the total number of Bitcoin traded via LocalBitcoins was 8624, a 318.8 percent increase over the previous year that coincided with Venezuela's annual inflation rate reaching as high as 500 percent. In 2017, the total number of BTC traded on LocalBitcoins rose again, ramping up to 21,556 — a 150 percent increase over 2016's total. Given that Bitcoin itself became more expensive in 2017 — rising to $19,000 in December — this expansion offers a stark indication of just how sought-after Bitcoin and crypto had become, as inflation surged to yet another peak of 1,369 percent, according to figures released by the opposition-led Venezuelan parliament.
Because of Venezuela's economic misery, many locals had begun finding it difficult even to secure enough food to eat, as the wages they were paid (in VEF) increasingly dwindled in value. "It’s like an obstacle course. You have to find money to buy food, a place to buy it and then get there in time," one Venezuelan told the Guardian in August 2017. Meanwhile, the percentage of children suffering from acute malnourishment sneaked from eight percent in the previous October to 12 percent that July. "They are getting younger, and the cases more serious," explained Susana Raffalli, the leader of a Caritas project aimed at combating youth malnutrition in the country.
With most Venezuelans going to bed on an empty stomach, the need to source alternative currencies was acutely felt by the population, not least because the national poverty rate had climbed from 48 percent in 2014 to 82 percent in 2016, and then 87 percent in 2017. And it's likely to climb yet again this year, given the quintuple-digit inflation currently in motion — something which has unsurprisingly kept the Bitcoin-buying rate noticeably high.
According to Coin Dance, 14,886 Bitcoin have been purchased with VEF on LocalBitcoins between the beginning of 2018 and Aug. 18. This is almost 1,000 fewer than the 15,868 BTC purchased over the same period last year, yet there has been a distinct upswing in trade volumes over the past month — just as the country's economic crisis has reached a new fever pitch, after the government devalued the bolívar by 95 percent in August. Already, before figures for the final week of August are even available, the total number of Bitcoin traded on LocalBitcoins has reached 2,532, in contrast to the 1,558 traded for all of August in 2017.
This could presage an accelerated rise as Venezuela sees out the rest of the year. Either way, trade volumes are high, and Bitcoin's reputation as an alternative to the bolívar is firmly cemented in the eyes of many Venezuelans. "Luckily, I've always been a fan of Bitcoin and the blockchain technology," wrote one Venezuelan Bitcoin user in a Reddit AMA from July:
"I spend my spare time teaching people how to change their bolivares to crypto so the inflation doesn't wreck their money. So far, I've helped many [businesses][…] i.e, restaurant owners who try to sell dishes every day and the next when they're trying to buy some meat there's no profit (sometimes they can't even afford it), because inflation hits us so hard. Right now the inflation is 1.000.000 percent++. I'm looking forward to a plan [to] help people get food through crypto […] I'm pretty much focused on training on Bitcoin use and saving [whomever] I can from hyperinflation, I believe Bitcoin is the solution!"
This linear picture of Bitcoin's rise is, however, complicated by three simple facts: a) it's not the only cryptocurrency available to Venezuelans, b) its growth was hindered by a government crackdown on Bitcoin mining between March 2016 and January 2018, and c) it has suffered (particularly in 2017) from relatively high transaction fees and confirmation times. As a result, Venezuelans have increasingly dabbled in other coins as their economic crisis has unfolded, including Ethereum and Zcash.
However, it's Dash that's leading the charge as the most popular altcoin — and possibly the most popular cryptocurrency.
In August 2016, Dash was added as a tradable cryptocurrency to the Caracas-based Cryptobuyer exchange, which was reporting "soaring demand" for cryptocurrencies at the time. "Our partnership with Dash is valuable," explained Cryptobuyer CEO Jorge Farias in a press release, "especially for customers using unstable fiat currencies, and the perfect example can be found in Venezuela right now. Alternatives for accessing money without traditional banks are gaining traction fast, and we are incredibly confident that Dash will flourish in this economy."
Unfortunately, it’s difficult to find websites that offer specific volume data on the DASH/VEF market, so there's no objective and publicly available reading of just how quickly Dash usage has expanded since the end of 2016, or of how it compares to Bitcoin volume. Nonetheless, the indications that are available suggest that it has become enviably popular since 2016, with the Dash Core Group announcing on Aug. 22 that Venezuela was the cryptocurrency's second biggest market, after the United States.
And as Dash Core's CEO, Ryan Taylor, told Cointelegraph, this success is once again partly a result of Venezuela's economic and monetary difficulties:
"We’ve found that regions of high inflation rates and industries in which cash handling or credit card chargeback rates are high have been most excited to adopt the technology. For us, we focus on those segments in which cryptocurrency can offer the most benefit, and that’s one of the reasons growth in acceptance is so high."
In fact, Dash's superiority over Bitcoin, in terms of transaction fees and confirmation times, is such that the cryptocurrency is now reportedly the most popular in Venezuela among merchants — or at least this is what Dash claimed in a July article, without providing comparative figures. At the very least, Ryan Taylor states that over 800 merchants in Venezuela now accept Dash, and while there isn't an authoritative source for the number of merchants now accepting Bitcoin, Coinmap currently lists a little over 160 merchants in the country that accept BTC (as reported to the website by users, so the actual number may be slightly larger).
Ryan Taylor explains Dash's greater popularity in terms of its greater cost-effectiveness in relation to Bitcoin:
"From the perspective of merchants and businesses, Bitcoin has many uses, including as a means of payment [for] online purchases and for transferring money cross-border at low cost. However, Bitcoin transactions are not instant, which means they are not useful for live transactions such as at a register or for online transactions that customers wouldn’t want to wait [for] — such as a digital media purchase. Bitcoin is also too expensive for micro transactions."
Yet, what's interesting about Dash's rise to prominence isn't simply that it has benefitted from user friendliness and from rampant hyperinflation, but that it has made a concerted effort to drive and encourage its adoption throughout Venezuela. Distinguishing it from other coins, 10 percent of its block rewards go to a treasury fund that allocates finances to projects voted for by Dash master nodes. As a result, the Dash Core Group has been able to invest around $1 million of such funding to promote and raise awareness of Dash in Venezuela, with this funding going toward such things as billboard ads and sales representatives. For example, Dash Caracas — the self-proclaimed first Dash community in Venezuela — began running educational conferences in September 2017, which now accommodate around a thousand attendees. Its leader Eugenia Alcalá Sucre said last September:
"We had a team receiving the attendees and giving them a folder with sheets to take notes, a pen, [instructions] to set up their Dash Wallets and paper wallets with $10 in Dash. Then they got into the hall, where they watched a welcome video, where they also got instructions for their wallets (phone and paper)."
Such evangelism is clearly having an effect on Dash adoption rates, and it's also something that Bitcoin advocates have been doing in Venezuela, even if Bitcoin's lack of a "Core Group" and a treasury has resulted in its propagation being less unified or organized.
Clearly, with Bitcoin and Dash advocates providing support to Venezuelans just when there's a vacuum of hope and help, it's little wonder that the cryptocurrencies have risen to the heights they've witnessed so far in 2018. Not only have these and other cryptocurrencies been in the right place at the right time in Venezuelan history, but they've positioned and promoted themselves in a way that maximizes the advantage they've reaped from the country's situation. Put differently, crypto's rise in Venezuela isn't just about inflation or capital controls, but also about entrepreneurship and evangelism.
Petro and the government
And funnily enough, cryptocurrencies in Venezuela haven't been boosted solely by crypto groups, but also by the Venezuelan government itself — despite the hard line it had initially taken on Bitcoin miners. Given the economic meltdown the nation was going through, and given that cryptocurrency had already enjoyed such an impressive ascendancy in the preceding months and years, the government announced in early December 2017 that it would issue its own oil-backed cryptocurrency, the Petro. While the Petro has been dissected and denounced by crypto experts and the Venezuelan opposition alike, it has at least had the inadvertent effect of providing a more favorable environment for non-centralized coins to flourish.
To begin with, its creation resulted in the Venezuelan government declaring in January that crypto mining was "perfectly legal," despite having prosecuted miners for over a year prior to that. From that point onward, those "people who have been victims of seizures and arrests in previous years will have charges dismissed," according to the nation's new cryptocurrency superintendent, Carlos Vargas. And since then, cryptocurrency mining appears to have continued increasing its popularity, with a May Bloomberg article's headline — perhaps not without some exaggeration — reading, "There’s a Crypto-Mining Machine in Every Home in Caracas."
And as the government prepared for the Petro's ICO and eventual release into circulation, it launched free cryptocurrency lessons for the Venezuelan population. Beginning from the end of February, Venezuelans were able to register at the Granja Laboratorio Petro in Caracas for a course that would, according to instructors, cost them between $500 and $800 anywhere else in the world and that would instruct them on how to "buy, sell and mine digital currencies." One teacher of the course, Carmen Salvador, told a local news outlet that the course was intended to reach the widest possible audience:
"Many of our young people here find it impossible to have this amount of resources, [but] the Venezuelan state is guaranteeing that all can participate through these plans."
There are no statistics available on the number of enrollments in this course, but in view of how popular cryptocurrency had already become among Venezuelans, it's reasonable to assume that signup was relatively high. So, even if the government may have continued to put up some resistance toward cryptocurrencies that weren't the Petro (e.g., closing two crypto exchanges in April, although apparently more for disseminating 'false information' about the VEF exchange rate than for permitting trades in crypto), its desire to cultivate a favorable social attitude toward the Petro most likely had the collateral effect of increasing the profile of Bitcoin, Dash, Zcash and Ethereum even further.
And on the subject of inadvertent effects, there's a direct — though unquantifiable — link between the Venezuelan government's authoritarian tendencies and the attraction cryptocurrency holds for many locals. For one, the imposition of capital controls in 2003 was in part a move by then-President Hugo Chávez to cut off potential funding from any of his opponents who might be tempted to organize a repeat of the attempted coup d'état of 2002, or a repeat of the anti-government strike that precipitated it. As he declared during a televised address announcing the controls, "Not one dollar for coup-mongers."
Venezuelan business leaders were quick to denounce the controls, with the then-leader of the Federation of Chambers of Industry & Commerce, Carlos Fernández, telling that the "exchange control is an instrument of repression. When he says that they will not give dollars to businesses that participated in the strike, this signifies that 80 percent of the companies would not receive dollars."
In the face of such an "instrument of repression," those Venezuelans wanting to resist or subvert the political order had to find an alternative monetary framework for surviving, and as all of the foregoing implies, they found cryptocurrency. Caracas-based programmer John Villar told Reuters in late 2014:
"Bitcoin is a way of rebelling against the system."
That said, there's no indication that cryptocurrency is being used to fund actual opposition groups, while Villar went on to tell Business Insider in December 2017 that cryptocurrency in Venezuela "is not a matter of politics. This is a matter of survival." However, when Bitcoin is being accepted by Venezuelan businesses (and even being used to pay employees in a few cases), and when business has often been 'the opposition' in Venezuela in recent years, there's undoubtedly an underlying political edge to their use of crypto.
As the situation in Venezuela worsens, with President Maduro's approval rating continuing its plunge from 55 percent in 2013 to around 20 percent today, it's only likely that more businesses and individuals will turn to cryptocurrency. Since the beginning of this year, there has already been a 344.6 percent rise in the number of Bitcoin traded for Venezuelan bolívars on the LocalBitcoins exchange, a percentage made even more impressive by the fact that it disregards other exchanges and other cryptocurrencies — such as Dash. Seeing as how the recent devaluation of the bolívar is unlikely to make a positive difference in Venezuela's economic situation, it's highly probable that this situation will deteriorate further, leaving people with even fewer options for survival. In turn, cryptocurrencies will be traded even more heavily.
Although it's likely that much of the Venezuelan trade in cryptocurrencies up until now has come from the country's middle classes — i.e., the 60 percent of the population with internet access, as well as those who know how to mine and program — the near future may see a wider distribution of people involving themselves in crypto. There's little question that Dash-, Bitcoin- and other crypto-evangelists will continue doggedly raising awareness among Venezuelans about the benefits of cryptocurrencies. Their efforts have been highly fruitful so far, providing an important model that they and other currencies can follow if — or when — another nation is unfortunate enough to experience something akin to Venezuela’s crisis. And for as long as the Venezuelan government continues to impose capital controls (which have been one of the main factors in hyperinflation, among others), there's nothing to suggest they won't continue bearing fruit in the coming months and years.