Living Under Hyperinflation

In the turbulent times that might result from a post-war crisis or a long-lasting decline in a national economy people often have to turn to the stores of value that become life savers: precious metals, currencies and, in the 21st century, cryptocurrencies such as Bitcoin or Ethereum.

This article explores the situation where some communities adopt Bitcoin faster than others – not due to some libertarian impulse, but as an act of desperation.

Hyperinflation and Bitcoin in Venezuela

Along with Argentina and Lebanon, one example of such a nation that adopts Bitcoin because it has no choice is Venezuela.

According to a study published by the UN World Food Programme, Venezuela’s severe economic contraction and political upheaval has resulted in one out of three citizens (32.3%) experiencing food insecurity and needing assistance. In situations like that, families get used to food-related coping strategies: cut portion sizes, accept food as payment for work and, as you’ll see soon, invest in Bitcoin as a store of value.

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

Dugleidi Salcedo complains to a neighbor about the high price of food as she prepares arepas for her three sons in her kitchen in the Petare slum, in Caracas, Venezuela, in February 2019. Photograph: Rodrigo Abd/AP

The economy of Venezuela, largely based on the manufacturing and petroleum sectors, showed steady growth from the 1950s to the early 1980s. However, during the collapse of oil prices in the 1980s, the economy contracted, the currency saw a progressive devaluation and inflation skyrocketed to reach peaks of 84% in 1989 and 99% in 1996. Since then, these rates were only growing, exceeding 1,000,000% in 2018 under the presidency of Nicolás Maduro. 

In 2018, the government announced a new national cryptocurrency petro tied to the oil reserves and untied to the U.S. dollar. It was important for Maduro to launch a national sovereign currency to avoid U.S. sanctions, so he chose crypto. The sanctions were in response to repression during the 2014 Venezuelan protests, drug conspiracy indicted in 2016 by the U.S.,  the 2017 Venezuelan protests, activities during the 2017 Venezuelan Constituent Assembly election and the 2018 Venezuelan presidential election. The ban included freezing of individuals’ accounts and assets, prohibiting transactions with sanctioned parties, seizing of assets, arms embargoes and travel restrictions.

David Smolansky in Public Radio International said the sanctions targeted Maduro and Chavismo “elites” while having little impact on average Venezuelans. However, as it turned out, they did have impact. As some locals report, they haven’t used the sovereign bolívar for months because it has lost its value once and for all.

According to a Chainalysis report, Venezuelans account for the third-highest number of transfers on LocalBitcoins and Paxful, two of the most popular worldwide P2P exchanges.

In 2021, the economic situation in the country looks very much like in Weimar Germany did in the 1920s and similar to current conditions in Zimbabwe and Lebanon where, following the pandemic, the prospect of hyperinflation has become very real.

Similarly, Bitcoin purchases in Lebanon are up considerably. In a country with a broken banking system, digital gold seems to be a more stable and reliable store of value than the national currency. It is no wonder people are turning their eyes to cryptocurrencies.

On the other hand, in Lebanon, it is more difficult to trade Bitcoin than in Venezuela where the government supports the development of the crypto sector. Users in Lebanon are not allowed to buy bitcoin with a credit card and banks have set limits on withdrawals. 

Hedging Against Risk

Bitcoin appeals to different people for different reasons. For many, this is not about getting rich quick. It is about protecting one’s assets, securing the safety of your family, or preparing for difficult times ahead.

The way hyperinflation continues to play out in Venezuela, leaving millions of people hungry and distraught, may not be familiar to most readers, and may not play out as such in most countries. However, with everything that’s happening in the world, from excessive money printing to lockdowns, the time to gauge the situation and prepare for the years ahead, is now.

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