With the current economic and political situation in Venezuela, there has been an increase in the volume of people within the crypto space discussing the virtues of cryptocurrencies in volatile economies. Playing out in real time, the problems of Venezuelans are real and present, but is crypto the savior that people proclaim?
There is no doubt that cryptocurrencies like Bitcoin have merits that need to be discussed. It provides people with a mechanism to “store” their money in a way that is not controlled by an organization that is subject to the whims of the central bank or government of the day. It is (generally) safer than keeping physical cash or other hard currency e.g. gold, and it isn’t at the mercy of capital controls imposed by a citizen’s government. During periods of stability, or relative stability, Bitcoin is a safe haven removed from the economic forces driving hyperinflation and is more readily accessible.
Looking specifically at the situation in Venezuela, the International Monetary Fund estimates that inflation will reach 10 million percent in 2019. In August of 2018, five 0s were removed from the currency in an attempt to restore some stability. Those people who have jobs are being paid at rates that don’t and can’t keep up with inflation, consequently their real incomes are slashed between pay day and spending their salary. By almost every definition the fiat currency, the bolívar is failing to function as a currency.
Volatility has been the enemy of currencies throughout history, and for that reason – and despite its own recent experience with extreme volatility – Bitcoin has been seeing a surge of usage in the Venezuela.
The government has put capital controls in place to limit in and outflows and reduce external influence on the currency. And that is where Bitcoin and other cryptocurrencies step up. By circumventing traditional banking and (regulated) remittance providers, citizens can regain access to an important source of inward funds, and park their fiat in a more stable asset class.
Cryptocurrencies are largely limited in their utility to being a currency safe have (assuming the price of the crypto doesn’t crash) and a remittance mechanism.
There are four primary reasons that Venezuela isn’t the use case that the crypto world wished it was.
- Low internet penetration rate
Cryptocurrencies need the internet plain and simple. Without it, there’s no way to transact or transmit the contents of a crypto wallet. In fact, a crypto wallet is step one, and without the internet, you can’t get one.Venezuela lags many of its South American neighbors in internet users.Sitting at around 60% (and falling) without access to the internet, there is no next step. Smartphone penetration in Venezuela is around 40% and the number of cell phone subscribers is falling faster than the internet penetration rate.
During the political unrest there have been frequent rolling blackouts across the country with as much as 70% of the country being without power at any one time. Power and capacity is being progressively restored though it is a slow process with much of the infrastructure damaged. As goes the power, so does the internet and the ability to use cryptocurrency.
This is a two part issue. The first, the age of the population, and emigration.Less than 45% of the population is aged 20 to 50. This is the age group responsible for the vast majority of cryptocurrency ownership and usage. A technical instrument, cryptocurrencies around the world are generally avoided by older people and is amplified by distrust.Since 2015 it is estimated that around 1.5 million people have left Venezuela with the median age of 32 and largely those from the educated and higher-income socioeconomic groups. These groups represent a larger proportion of cryptocurrency adopters.
The lack of cryptocurrency income, and the lack of locations to spend it through the supply chain is a complicated element. Merchants are reluctant to accept cryptocurrencies in part because it adds complication and potential volatility (and instability) to their business. A store that cannot use accepted cryptocurrency to restock the shelves is adding uncertainty to their business. The fewer merchants that accept cryptocurrencies, the fewer people will adopt crypto over fiat. For the majority, it’s a case of better the devil you know. Handling a second currency particularly converting to fiat adds expense to running a business, something that most business owners aren’t willing to shoulder.
All is not lost…
People tend to act when the costs of inaction outweighs the gains of action – and people are acting. Spurred by economic incentives, the increasing availability of “crypto education” through online and offline groups, and some high profile branding and customer acquisition campaigns from some major cryptocurrencies, the economic and demographic hurdles are slowly eroding. The population can do little about the reliability of electricity and internet connections, but when they work, so can cryptocurrencies.
- Low internet penetration rate