Hyperbitcoinization: How Currency Crises Are Driving Nations to Crypto
Venezuela, Turkey, Iran and Zimbabwe: these countries are all facing ongoing economic crises. They’re suffering from high levels of inflation, and as a result the people living within them are increasingly turning to crypto as a store of value and a means of exchange. Their recent troubles have heightened the distant possibility that, at some point in the future, hyperbitcoiniztion will take place, with Bitcoin (or some other coin) replacing the bolívar, the lira, the rial and other struggling national currencies, and perhaps even becoming the world’s dominant form of money, as predicted by the likes of Steve Wozniak and Jack Dorsey.
However, as encouraging as such developments are for Bitcoin’s reputation as a store of value, it’s unlikely that the moves of Turkish, Venezuelan and Zimbabwean citizens toward it and other cryptocurrencies are an immediate precursor to the kinds of blanket adoption processes outlined in the noted 2014 “Hyperbitcoinization” article by Daniel Krawisz. Even though they’re conspicuously increasing, the BTC volumes traded in the affected countries above are not significant enough relative to global volumes, while the isolated nature of most of these nations means that adoption has little chance of spreading outward.
Added to this, for as long as such global reserve currencies as the U.S. dollar, the euro and the Japanese yen remain stable, crypto adoption won’t be boosted by high inflation in nations where the population has access to such currencies — and not to mention gold.
The textbook case of crisis-driven crypto adoption is Venezuela, with the first report on Venezuelans turning to Bitcoin arriving in October 2014. According to Reuters, Venezuelans were being driven to the cryptocurrency by the capital controls imposed by President Hugo Chavez in 2003, which made it excruciatingly hard for them to obtain U.S. dollars. Given that, even then, hyperinflation was in motion in Venezuela (at 68.5 percent), locals began purchasing — and mining — Bitcoin, which stood at $388.30 by the beginning of that October, despite having fallen by around 49 percent since the beginning of the year.
While data on the actual number of people using Bitcoin at this point isn’t available, the Reuters article states that Venezuela “already [had] at least several hundred Bitcoin enthusiasts.” Somewhat less vaguely, Coin Dance records that 625,573 Venezuelan bolívar (VEF) was traded for Bitcoin on the LocalBitcoins peer-to-peer (p2p) crypto-exchange in the week of Dec. 12, 2014, equivalent to about $99,403.55 at the conversion rate of the time. Similarly, CryptoCompare lists a high for 2014 (on Dec. 24) at VEF 553,633.30, which, at around $87,972.33, underlines how the volumes being traded weren’t massive — particularly for a nation with a gross domestic product (GDP) of $482 billion — even if they were growing as a result of economic pressures.
Since 2014, things have picked up gradually. In the week ending on Dec. 17, 2016, there were Bitcoin trades worth a total of VEF 527,945,763, which, due to inflation of around 275 percent in 2015, translated to $105,589.15 at then-current conversion rates. That year, individuals involved in the Venezuelan crypto-economy had begun speaking in favor of Bitcoin and other cryptos as genuine alternatives to the bolívar and even the U.S. dollar, with the founder of Bitcoin Venezuela, Randy Brito, telling Cointelegraph in January 2016 that BTC could be “a genuine savior of the Venezuelan economy.”
“The Bitcoin market in Venezuela is indeed big and growing at a fast rate. The absence of exchanges have seemingly gone unnoticed as most Bitcoin miners within the country trade informally with people they can trust — basically for reasons of privacy, as they seek to conceal their source of wealth from the public.”
Coupled with the ability Bitcoin grants Venezuelans for resisting a government that has effectively robbed people of wealth by presiding over an inflationary regime, its growing value over the course of 2015 and 2016 gained it increasing popularity. Indeed, the local Surbitcoin exchange told the Washington Post in March 2017 that the number of Bitcoin users expanded from around 450 in 2014 to 85,000 in 2016.
Once again, such numbers aren’t massive for a country with a population of approximately 31.5 million, but the deteriorating situation in Venezuela has meant that they only increased further in 2017 and 2018. For the week ending on June 24, 2017, the VEF/BTC market on LocalBitcoins alone had reached a volume of VEF 9,210,450,540, according to Coin Dance. This equated to around $1,151,306.32 at the time, while the week of Dec. 30, 2017 saw a trade volume of VEF 281,525,042,307 on LocalBitcoins — or $2,815,250.42, according to then-current black market exchange rates.
This year, even with the advent of the state-controlled and oil-backed Petro cryptocurrency, Bitcoin and cryptocurrencies more generally have continued to enjoy a strong increase in usage. In fact, Reuters has recently reported that no crypto-exchanges are trading the Petro and that no Venezuelan shops currently accept it, while the likes of Bitcoin have continued to see growth. Assuming the same crude volume-to-users ration that was evident at the end of 2016 (i.e., Bitcoins worth $105,589.15 traded by around 85,000 users), there were around 926,500 Bitcoin users in the week of Aug. 18, 2018, when 673 Bitcoin was traded against 27.28 trillion Venezuelan bolívars on LocalBitcoins. At the black market exchange rate (i.e., 1 VEF = $5,921,486.23) that applied prior to the Venezuelan government officially devaluing the bolívar by 95 percent, this equalled around $4.6 million.
It’s not clear to what extent traded volumes will continue to grow now that the government has devalued the bolívar, yet the economic pressures faced by Venezuela have caused its population to adopt Bitcoin more speedily than other nations with comparable GDP. For instance, in New Zealand and Romania — two countries the International Monetary Fund (IMF) puts next to Venezuela in terms of GDP — the LocalBitcoins BTC market has grown by 875 percent and 2400 percent respective since 2013. By contrast, the LocalBitcoins BTC/VEF market has grown by a staggering 67,300 percent since 2013, with 536 Bitcoin being traded in the week ending on Aug. 25. If nothing else, this underlines the kind of boost hyperinflation can give to cryptocurrency adoption. And seeing as how the IMF has predicted that inflation could reach 1,000,000 percent by the end of 2018, the boost is likely to be even bigger in the coming months.
It’s not only Bitcoin that has enjoyed the fruits of Venezuela’s economic disaster, as other cryptocurrencies have also made inroads into the South American nation. Since at least September 2016, Venezuelans have also been avid users of Dash, whose faster confirmation times and lower transaction fees generally make it more convenient as a means of payment. Buoyed by active moves on Dash’s part to promote their coin among Venezuelans as an alternative to the bolívar — and to Bitcoin — it’s reportedly the most popular cryptocurrency among local merchants — at least, according to Dash themselves — with upward of 540 merchants in the country now accepting it as a means of payment.
Iran is another country that has been on the wrong end of U.S.-led sanctions in recent years, and like Venezuela, its national currency — the rial (IRR) — is suffering from high inflation, although its current rate of 18 percent doesn’t quite match the 82,766 percent currently seen in Venezuela.
As recently as this April, the rial’s rate of inflation was only 7.9 percent, yet this jumped to 9.7 percent, 13.7 percent and then 18 percent in May, June and July. Much like Venezuela, the Iranian government responded to this precipitous increase by announcing plans in late July for a state-run cryptocurrency, while the Iranian population had by that point already traded crypto worth $2.5 billion, according to a May report from Forbes. This was despite the government having introduced an April ban on banks dealing in cryptocurrencies.
And since April and May, there has been a noticeable uptick in the IRR/BTC market on LocalBitcoins. For instance, between July 7 and July 28, the volume of this market increased by 109.1 percent, from IRR 9.467 billion to IRR 19.796 billion (i.e., to roughly $176,758.31, according to black market conversion rates).
By contrast, a country with a similarly sized GDP — Thailand — witnessed only a 27.6 percent increase over the same two-week period, from 12.2 million Thai baht (THB) to THB 15.6 million. That said, this latter figure equals $476.410, meaning that the BTC market is bigger in Thailand in absolute terms. More importantly, it also means that an inflation crisis alone isn’t enough to bring about widespread crypto adoption overnight, since it’s clear that the Iranian market for crypto is not only small, but is hampered by legislation that makes it illegal. It has also been undermined by the enduring popularity of gold, which rose by 300 percent against IRR in the three months leading up to June and which has reportedly replaced the U.S. dollar in local Iranian markets, according to the Iran Gold & Jewelry Association.
Another nation that has its own economic woes is Zimbabwe. In 2009, it abandoned its own national currency (the Zimbabwean dollar), doing so after a trillion-dollar note was introduced and after the currency had braved 10 years of hyperinflation — the rate of which reaching as high as 231,000,000 percent in July 2008.
Since then, the government has permitted the use of a variety of currencies — including the U.S. dollar, South African rand, and the euro — yet, this drastic measure introduces problems of its own, such as acute shortages of foreign cash. To combat this, the Zimbabwean government has been imposing capital controls, setting the latest this May, when the central bank limited the amount of USD people can withdraw from ATMs and send out of the country to $1,000.
In the face of such restrictions, Bitcoin witnessed price increases above the global average on the Zimbabwean Golix exchange at the end of 2017, with the price even doubling in November as locals sought to obtain currency that wasn’t controlled or restricted by the government. It was also in November that Golix celebrated a quadrupling of its monthly transactions, around the time when the country had been destabilized by fresh dollar shortages, 50 percent inflation — affecting the new bond notes the government introduced in November 2016 — and a military coup. Consequently, Golix saw its monthly trade volume increase to $1 million, which was an impressive feat considering that, over the entire course of 2016, it handled a grand total of $100,000.
A similar picture has emerged from more recent Turkish history, with inflation issues provoking a comparable — if not quite as dramatic — swing toward crypto. These issues first became acute when the inflation rate of the Turkish lira (TRY) climbed to 11.9 percent in October 2017, as the nation’s banks took on risky levels of private debt, as foreign investors moved out of the country, and as President Recep Tayyip Erdoğan refused to increase interest rates in response.
Following this, Turkish people began looking toward crypto, although the volumes at the time weren’t significantly larger than those for nations with similar GDP levels. For instance, in the week ending on Nov. 4, 2017, 41 Bitcoin was traded for Turkish lira via the LocalBitcoins exchange, while in Mexico — which has a similar GDP, but an inflation rate of around 4.5 percent — 38 Bitcoin was traded for Mexican pesos. In other words, relatively high inflation can give a slight boost to crypto adoption, but without hyperinflation, it doesn’t result in a dramatic increase (e.g., 303 Bitcoin was traded for Venezuelan bolívars on the week that ended on Nov. 4).
However, this year there has at least been the threat of hyperinflation, as Turkey entered a nascent crisis, which saw inflation rise to 15.39 percent, at the beginning of July. As a result, there was a 131.9 percent increase in volume on the LocalBitcoins exchange between the beginning of July and the beginning of August, with the BTC trade volume in Turkish lira rising from 327,295 to 759,026 between the week ending on July 7 and that ending Aug. 11.
Between these two dates, the price of BTC actually sank from $6,670 to $6,145 (-7.87 percent), meaning that this rise can’t be accounted for by a strong bull market in Turkey. Similarly, figures from CryptoCompare, culled from the BTCTurk and LocalBitcoins exchanges, reveal that there were trades in Bitcoin worth TRY 31,592,628 on Aug. 10, representing a 424.3 percent increase when compared to the 24-hour volume for July 10, which was TRY 6,026,033.
Speaking of the Turkish inflationary crisis and its positive effects on demand for crypto, ShapeShift CEO Erik Voorhees noted on Twitter that Bitcoin’s recent resilience in the face of crypto-market turbulence had raised its stock as a store of value and made it a viable alternative to the Turkish lira.
We’ve entered a time now where some fiats are far less stable than Bitcoin. Turkish lira plummeting ~20% in one day. https://t.co/ct1GnrCnKG #BackedByGovernment #TRY #forex
— Erik Voorhees (@ErikVoorhees) August 10, 2018
It would seem that an increasing number of Turkish people agree with him, given that a June survey from ING Bank revealed that Turkey has the highest rate of cryptocurrency ownership in the world — or rather, out of 15 countries, including the U.S., Australia, the U.K., France, Germany, and the Netherlands. 18 percent of Turkish people own some cryptocurrency, compared to 12 percent for the next highest — Romania, which also happens to have the highest rate of inflation among the 14 other nations — and eight percent for the United States.
However, an inflation rate of around 15 percent isn’t enough on its own to drive widespread adoption of cryptocurrencies, nor is it sufficient to trigger the process of hyperbitcoinization. For one, even if the TRY/BTC market has enjoyed increases in volume in recent weeks and months, absolute numbers are still comparatively low, with the market currently being the 16th largest for Bitcoin at the time of writing, according to CryptoCompare. This equals a 24-hour volume of BTC 226.09, which is only 0.08 percent of the total amount traded in a day, and only 0.48 percent and 0.68 percent of the volume traded against the U.S. dollar and Japanese yen respectively.
Also, if you look at the TRY/BTC charts for LocalBitcoins, the recent inflation-driven increase over July-August isn’t that large and is actually dwarfed by the trading volumes in Turkish lira as witnessed in April and early June and particularly during the end-of-2017 rush. And in fact, if you compared the TRY/BTC figures for the week ending on Aug. 11 against those for the week ending on Aug. 18 — during which the crisis reached its peak, with lira falling by as much as 10 percent — there is a drop rather than an increase. TRY 759,026 was traded for the week ending on Aug. 11, while only TRY 573,626 was traded for the seven days leading up to Aug. 18.
In contrast to the growth of crypto visible in Venezuela and Zimbabwe, what this lack of a pronounced upswing points to is access to the U.S. dollar, among other fiat currencies and stores of value. In contrast to Venezuela and Zimbabwe, the Turkish government has opted not to set any capital controls, thereby enabling people to buy and sell as much foreign currency as they like. As a result, Turkish investors and the Turkish people have begun buying U.S. dollars and gold, as indicated by how both have risen markedly against the lira. And in turn, neither Bitcoin nor any other cryptocurrency has seen a big jump in trading volumes recently, even though the longer-term weakness of the lira has played a role in giving Turkey one of the highest rates of crypto ownership in the developed world.
Argentina and reserve currencies
Much the same story can be gleaned from Argentina. At 31.2 percent, Argentina currently has the highest inflation rate of any moderately sized economy — which the IMF ranks as 21st in terms of GDP — and as could be inferred from such a statistic, cryptocurrencies should be enjoying a strong following in the South American nation.
However, despite the early expectation that Argentina was ripe for Bitcoin adoption, it would seem that the population doesn’t currently trade cryptocurrency in impressive numbers. On the LocalBitcoins exchange, the highest number of Bitcoin bought in 2018 using Argentine pesos in a single week was 31, during the week ending on July 7. And for the sake of comparison, Sweden has the 23rd largest GDP according to the IMF, yet during the week ending on July 7 many more Bitcoin — 112, to be precise — were traded for Swedish krona.
According to CryptoCompare, Argentina is only the 45th biggest market in the world for Bitcoin (Sweden is the 31st), despite having the sixth highest rate of inflation in the world. And as with Turkey, a big part of the explanation for this is that Argentina hasn’t had strict capital controls since 2015, when incoming president Mauricio Macri lifted the controls imposed by his predecessor, Cristina Fernandez de Kirchner, in 2011.
Because of this, Argentines have access to U.S. dollars and other currencies, something which circumvents the need for cryptocurrencies as a store of value.
Still, even without any recent jump in crypto trading or ownership, Bitcoin still has a noticeable presence in Argentina. Not only has an Argentine bank recently begun using Bitcoin for cross-border payments instead of the SWIFT network, but the country was also one of the earliest adopters of Bitcoin during the period between 2011 and 2015 — even though capital controls were in place. As reported by Tom Jeffreys in early 2016, Bitcoin was already accepted by 145 merchants in Buenos Aires alone (it’s now accepted by 194), implying that the cryptocurrency wasn’t simply a store of value but also a method of payment:
“For many, the practical, everyday uses of Bitcoin in a country like Argentina are the early lab tests of radical financial overhaul that could have wider implications for the global economy.”
The lesson provided by all of the above examples is the following: Cryptocurrencies have a huge potential as alternative methods of payment and stores of value during financial crises. However, as long as world reserve currencies — such as the U.S. dollar and euro — remain stable, and for as long as people of an unstable nation have access to such reserves, no cryptocurrency is likely to gain widespread adoption and use in that country — at least not as a result of inflation. More simply, there will be no hyperbitcoinization as long as the U.S. dollar remains strong.
As illustrated by Coin Dance’s numbers for markets on LocalBitcoins, trading volumes are highest — and rise the fastest — in nations where there’s very poor access to a reliable fiat currency. Consequently, what’s needed to drive the mass adoption of crypto in any one nation isn’t simply inflation, but also a shortage of US dollars and other stale foreign currencies.