Crushing inflation drives spectacular growth in cryptocurrencies
From Eric Wade, Analyst, Stansberry Churchouse Research:
Plagued with hyperinflation, an incredible 90 percent of the population of Venezuela is now under the poverty line. That’s compared to a still-extraordinary 48 percent just four years ago.
So many children are malnourished and adults are going hungry that Venezuelans have coined a term for it. They call it “The Maduro Diet”, in honour of President Nicolás Maduro’s failed economic policies.
Annualised inflation in Venezuela is now running around 1,000,000 percent. A year ago, you could get a cup of coffee for 0.05 bolivars, the country’s currency. Today, that same cup of coffee would cost 3.5 million bolivars… at least, it would if the government hadn’t re-denominated the bolivar by arbitrarily lopping five zeros off the end of it last month. Under the re-denomination, a cup of coffee still sets you back 35 bolivars. That’s a price hike of nearly 70,000 percent (or 7,000,000 percent before the re-denomination).
In most of the rest of the world, inflation of 15 percent (in the U.S. in the late 1970s, for example) is considered nosebleed catastrophic. A million percent is pretty much beyond belief. (We talked about this last year.)
So people in Venezuela are looking for places to store value. Cryptocurrencies are a clear and attractive alternative.
That’s why Maduro announced in February that Venezuela would be launching its own national cryptocurrency, called the Petro. Pegged to the price of oil, the Venezuelan government says it will begin pricing salaries in Petro, and requiring banks to process it.
It’s unclear whether the Petro is actually under development. It may have just been a scheme for the government to raise money. Regardless, cryptocurrency is legal in Venezuela, and while the government isn’t actively encouraging people to use it, it’s not discouraging them from using it, either.
That’s been a boon for bitcoin, and a competing cryptocurrency called Dash.
Crypto to the rescue
Born during the height of the global financial crisis, bitcoin was a direct reaction to the rampant money printing and bank bailouts that happened around the world in 2008-2009. Not only is it the world’s first currency that’s not controlled by any one entity, it’s also anti-inflationary. There will only ever be 21 million bitcoin in existence. So while the supply of national currencies can be inflated with a few waves of a central banker’s hand, bitcoin is designed to hold its value. No amount of political wrangling or currency manipulation can change that.
In countries with stable currencies, the benefits of cryptocurrency may seem abstract. In places like Turkey where the national currency, the lira, is plummeting, residents have quickly adapted. Now, cryptocurrency adoption in Turkey is among the highest in the world, at 18 percent of the population.
And in Venezuela, a non-inflationary currency isn’t just nice to have – it could literally mean the difference between life and death. That has Venezuelans flocking to bitcoin.
There isn’t a perfect way to measure the actual adoption rate, but we can look to places like Localbitcoins.com for an indication of the trend. The Localbitcoins exchange connects bitcoin buyers and sellers around the world who can then meet up in person to swap local currency for bitcoin.
In 2017, Localbitcoins’ trading volume in Venezuela was more than 21,500 bitcoin. Bitcoin’s price averaged US$4,127 in 2017. That means some US$88 million worth of bitcoin changed hands in face-to-face transactions in Venezuela that year alone. That doesn’t include bitcoin traded by Venezuelans on online exchanges.
Dash is also making significant headway in the country. While it was derived from the same codebase as bitcoin, it offers an additional layer of privacy and faster transaction times. Additionally, 10 percent of Dash’s block rewards (the creation of new Dash that enters the marketplace) goes to a treasury fund that can be used for community-pitched projects.
To date, the Dash community has used about US$1 million of that money to market Dash in Venezuela. They’re not just running ads and buying billboard spots, either. They’re hosting educational conferences where they teach Venezuelans how to use Dash – even going so far as giving attendees US$10 worth of Dash and teaching them how to use and protect it.
It’s working. By some reports, their efforts have helped Dash become the most popular cryptocurrency in the country. More than 800 merchants now accept it at stores in Venezuela.
Adoption is growing
To fully understand the benefits of cryptocurrencies, it helps to have a basic understanding of macroeconomics, computer programming, fiat currencies, internet security and payment processing.
A lot of people don’t have that basic understanding, so they don’t see the point. But in places like Venezuela and Turkey, the need for a stable currency is obvious. And that’s spurring adoption, no matter how much – or little – people there understand the technology behind it.
I believe Venezuela and Turkey are giving us a glimpse of the future.
As we approach January’s 10-year anniversary of the birth of bitcoin, we’re finally seeing evidence that it’s a new form of money, a new asset class and a new way for citizens to protect themselves from the devastating policies of corrupt, inept governments.
And as adoption rates quietly grow around the world, cryptocurrency prices will eventually reverse their downtrend – and soar.
Make sure you’re invested before then.
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