Hyperinflation and Bitcoin

In times of turmoil that may result from a post-war crisis or a prolonged recession in a country’s economy, people often have to turn to stores of value that become lifelines: precious metals, currencies, and in the 21st century, cryptocurrencies like Bitcoin or Ethereum.

Hyperinflation and Bitcoin in Venezuela

Like Argentina and Lebanon, Venezuela is one such country that has adopted Bitcoin because it has no other choice.

According to a study published by the United Nations World Food Program, Venezuela’s severe economic contraction and political turmoil have caused one in three citizens (32.3%) to experience food insecurity and require assistance. In such circumstances, families have become accustomed to food-related coping strategies: reducing portion sizes, accepting food as payment for work, and, as you’ll soon see, investing in Bitcoin as a store of value.

In the first week of April 2021 alone, peer-to-peer cryptocurrency exchange LocalBitcoins saw around 9 billion bolivars exchanged on the platform.

Dugleidi Salcedo prepares arepas for her three sons in her kitchen in the Petare slum in Caracas, Venezuela, in February 2019, complaining to neighbors about the high cost of food. Photographer: Rodrigo Abd/AP

Venezuela's economy, which relies heavily on manufacturing and the oil sector, showed steady growth from the 1950s to the early 1980s. However, during the oil price collapse of the 1980s, the economy shrank, the currency gradually devalued, and inflation rates rose sharply, peaking at 84% in 1989 and 99% in 1996. Since then, these rates have only increased, exceeding 1 million% in 2018 during Nicolás Maduro's presidency.

In 2018, the Venezuelan government announced a new national cryptocurrency, the petro, which is pegged to oil reserves and not to the U.S. dollar. It was important for Maduro to launch a national sovereign currency to avoid U.S. sanctions, so he chose cryptocurrency. The sanctions were imposed in response to the crackdown during the 2014 Venezuelan protests, a drug conspiracy indicted by the United States in 2016, the 2017 Venezuelan protests, activities during the 2017 Venezuelan Constituent Assembly elections, and the 2018 Venezuelan presidential elections. The ban includes freezing personal accounts and assets, prohibitions on transactions with sanctioned parties, asset seizures, arms embargoes, and travel restrictions.

David Smolansky of Public Radio International says these sanctions target the "elite" of Maduro and Chavez, and have little impact on ordinary Venezuelans. However, it turns out that they do have an impact, as some locals report that they haven't used the bolivar in months because it has completely lost its value.

According to the Chainalysis report, Venezuelans account for the third largest number of transfers on LocalBitcoins and Paxful, two of the world’s most popular peer-to-peer exchanges.

In 2021, the country’s economic situation looks a lot like Weimar Germany in the 1920s, and also similar to the current situation in Zimbabwe and Lebanon, where the prospect of hyperinflation in the wake of the pandemic has become very real.

Likewise, Bitcoin purchases have increased significantly in Lebanon. In a country where the banking system is collapsing, digital gold appears to be a more stable and reliable store of value than the national currency. No wonder people are turning to cryptocurrencies.

On the other hand, trading Bitcoin in Lebanon is more difficult than in Venezuela, where the government supports the development of the cryptocurrency industry. Lebanese users cannot use credit cards to buy Bitcoin, and banks also have restrictions on withdrawals.

Hedging Risk

Bitcoin attracts different people for different reasons. For many, it’s not even about getting rich quick. It’s about protecting personal assets, keeping your family safe, or preparing for tough times ahead.

Hyperinflation, which continues to play out in Venezuela, leaving millions hungry and upset, may not be familiar to most readers, and it may not be a situation like this in most countries. However, with everything going on in the world, from excessive money printing to lockdowns, now is the time to take stock of the situation and prepare for the years ahead.