Bitcoin Case Study: Venezuela

Bitcoin is Confusing

Bitcoin is hard for many people to understand. The difficulty makes sense when you think about it as it is both a currency and a payment/transaction system among other things. We don’t talk about Cash and the Mastercard/Visa network like they are the same because they aren’t even though you use both cash and credit cards to pay for things.  Bitcoin has terms thrown around in it like digital money, cryptocurrency, proof of stake and consensus that can be tough for non-technologists (like me) to understand, let alone the general public.

It’s decentralized so no one owns or issues it like a government, which also means that there is no focused concentrated effort on getting the word out and educating people about it. All of us Bitcoin enthusiasts have to educate people one by one, or if we are lucky maybe in some small groups.

What we need are good practical use cases for why people would adopt Bitcoin. There are some countries where Bitcoin is very popular and can help show us the way for a good case study.

We are going to look at one of them in some detail with both the conditions that led to Bitcoin adoption and what it’s done for the citizens there.

Let’s look at Venezuela.

Most Bitcoiners know it’s a mess there but not necessarily why or how or where Bitcoin fits in other than the fact there are people using it there.

Started before Chavez

Bitcoin has gotten mass penetration and adoption by the people of Venezuela. Much of the West doesn’t know what is going on there or why just that things seem like they are a disaster there. And they are.

Many have heard of Hugo Chavez, the Venezuelan President that led the country down its current path until his death in 2013. The truth is the decline of their economy started in 1996, 2 years before he was elected for the first time. Inflation hit a peak of 99% in 1996. This is where it starts.

Terrible economic conditions for the next 2 years that included a 0% GDP growth in 1998 and -7% GDP growth in 1999 led to the election of Chavez, who started as a democratically elected garden variety socialist. The consolidation of power to where he becomes a dictator comes later.

It’s important to understand that one of the big drivers of Bitcoin adoption is Inflation. In Venezuela, inflation has been rampant and ongoing. Another big driver is Capital Controls.

Enter Capital Controls

In 2003, the Chavez government nationalized the oil industry into a state-owned company called Petroleos de Venezuela or PDVSA. The oil strikes of 2002-03 where management fought against their new boss, the government, led to a number of changes including the implementing of capital controls nationwide.

Most of the time capital controls are put in to prevent the flight of capital out of the country, attempt to keep inflation in check and help domestic industries be more competitive on a global scale. Managing the flow of capital in and out of the country is one of the primary reasons the Chavez government implemented these controls and further tightened them in 2010. These controls have many downsides too, as you'll soon see.

The controls are getting worse as of December 2016. The Maduro government just outlawed the BsF 100 note saying it will reissue the denomination as a coin. The capital controls are extended, as reported in CNN Money, to stop ‘mafias’ from trying to get across the border from Colombia to exchange their now banned currency. The entire border with Colombia was closed for 72 hours. As of today, citizens have 72 hours to exchange the 100 for a coin while 5 other denominations from 500 up to 20,000 VEF are also being reissued starting today.

You might be wondering what does the history of a socialist government and a closed border between 2 South American countries have to do with Bitcoin? A lot, actually, just stay with me. The background is important.

Exchange Rate or Rates?

One of the byproducts of the capital controls is the setting of a fixed exchange rate. Venezuela doesn’t have 1 exchange rate though, they have 4. Yes, 4 different exchange rates. Let’s take a look at them.

Exchange Rate #1: The Printed/Stated Rate

The current stated rate for the Bolivar (VEF or BsF) is 9.95 VEF per 1 USD. Here is a Google screenshot of the stated rate as of this writing (December 2016):

Google View VEF Exchange Rate early December 2016

 

You can also see in the chart on the right that the stated rate has declined from 3.5 VEF (28 cents) to 1 in 2012 to the 9.95 VEF (10 cents) today. A Bolivar is buying ~⅓ of what it did 4 years ago at this stated rate. You can see how this would be a problem for the Venezuelan people when all items, especially basic items like food, cost ⅔ more than they did just 4 years ago. This is the stated rate. Each of the following rates is lower (worse) in terms of purchasing power than this rate.

Exchange Rate #2: The Preferred Rate

The preferred rate is the rate that preferred companies and items get. Imported items like car parts, food and government priority goods fall into this category.  This rate was called the SICAD rate for the exchange where it was traded. There were 2 rates known as SICAD 1 and SICAD 2, where the preferred rates were 12 VEF to 1 USD and 50 VEF to 1 USD, respectively. However, there have been exactly zero transactions at either of these preferred rates since August 2015.

Exchange Rate #3: SIMADI

The next rate down the list is the first rate where someone can actually exchange their VEF. This rate, known as the SIMADI rate, for the SIMADI exchange where it is traded. This is the rate that some individuals and businesses can trade their VEF for foreign currency, the most attractive of which is USD. When this exchange was started, the original rate was 200 VEF to 1 USD.

Notice the devaluation so far, not just from 3.3 down to 9.95 of the stated rate but the 9.95 down to 12 or 50 to 1 USD, down to the first rate where people can actually exchange at 200 to 1.  Things at this stage are already 20x more expensive that the stated rate of Exchange Rate #1.

That’s not even the worst part. The SIMADI rate is no longer 200 VEF to 1 USD. Today, the rate is 674 to 1.

So if you are keeping track we have 3 rates already that range from 9.95 to 674 per US Dollar. And there’s one more.

Exchange Rate #4: The Real Rate/ The “Street” Rate

Known as the street rate because it’s the rate on the street or the real rate or the black market rate, this rate is what people on the street are able to trade VEF for with other people. The current street rate is 2504 VEF to 1 USD. Earlier this month this rate was over 4100 to 1 (check out the rate on December 7 and 8 on the same chart). The overall lack of cash due to the recent currency ban has brought this rate down since fewer people have the cash necessary to make the currency conversion.

If you visit Venezuela and exchange currency with a broker there or trade with other individuals then this is the rate you get.

The High Value of the US Dollar

All these rates are pretty confusing although the one that applies to most people most of the time is the Street Rate. The result of this tremendous devaluing on the street among the people is that dollars are valued very highly.  Anyone who gets a chance to get dollars gets as many of them as they possibly can for all the Bolivars they can buy on the street.

Remember there are strict capital controls in place so there’s a limit to the number of USD or EUR or GBP in circulation down there and those that have them, like a bank or a multinational company, are unlikely to part with them. Of all the western currencies, the dollar is valued the most.

If the USD is valued the most highly but is essentially inaccessible, what does a Ven do to protect himself and his family from such a fast declining home currency?

The Case for Bitcoin

Bitcoin trades at the USD equivalent in Venezuela, meaning at the street rate. For the average Ven, this means that Bitcoin can be a proxy for dollars if it is both available and trusted like the USD.

And in Venezuela, it is both available and trusted.

One of the largest exchanges in South America is SurBitcoin which is based in Venezuela. Also popular for access to BTC here like in many markets is LocalBitcoins . Latin American exchanges Yabit and Cryptobuyer also serve this market.

Nearly 100 BTC changes hands daily on exchanges without confirmation of the OTC/LocalBitcoins market trades so BTC is available there for those that want to buy and trade it. Also, electricity is cheap and subsidized by the government so there’s lots of little miners there, often with old equipment like S3 Antminers. We also have with Bitcoin that it is divisible out to 8 decimal places (called a Satoshi) so it can be bought in very small quantities.

BTC’s Low Volatility=Trust

Admittedly, the bar for trust in Venezuela of any other currency is pretty low when you compare anything to the lowly Bolivar. Bitcoin is pretty highly trusted by comparison. The Vens see fluctuating and devaluing currency on a daily basis so lower volatility in BTC is important to them. Bitcoin is going through a period of record low volatility. The Bitcoin Volatility Index as seen below shows the 30-day average volatility keeps declining from an average of near 5% to around 1.5% now over the last year.

The less volatile any other currency is to the VEF, both relatively and in absolute terms, the more highly trusted it is likely to be by its citizens instead of the VEF. The combination of availability, low volatility, divisibility and its price as a proxy for Street Rate USD make Bitcoin a popular choice among the Vens.

The Emerging Market Safe Haven

Not just in Venezuela, but in many emerging market countries, the ‘major’ currencies of the West are not available at all, or not widely available. Bitcoin’s properties as a digital currency, crypto-based currency and that it can be bought and sold privately make it a safe haven store of value in these emerging economies. BTC is cheaper and more accessible than gold in these markets since you can buy such small quantities as a single satoshi. This makes Bitcoin a better safe haven option for these markets than gold, which we generally recognize as a safe haven in the West.

India is going through its own currency ban and since the conversion and issuance of new notes have gone so badly so far, more Indians are finding their way to Bitcoin. Unocoin, India’s largest Bitcoin exchange is selling BTC at a 10% premium to the market or at an equivalent of Rs 74 per USD instead of the current exchange rate of Rs 67 per USD.

Back to Venezuela, as recently as late September, the Street Rate was 1061 VEF per USD and Bitcoin’s price was around $600, per Surbitcoin. Check out this chart:

 

Date VEF to USD BTC Price in USD BTC Price in VEF
Sept 28 2016 1061 600 650,000
December 7 2016 4402 756 2,424,000
Currency Change -75.90% 20.63% 273%

A BTC purchase in Sept helped a family retain their value while the VEF declined. A Ven protected themselves from a 75.90% decline in value of BsF with a 273% GAIN in value in their BTC holdings. If they could ever convert their BTC to USD, they would not only protect against this decline but they would gain 20% in USD terms based on Bitcoin’s price increase.

Conclusion

Many of us know Venezuela is in a shambles and there are people using Bitcoin there. Understanding the how and why helps us explain the benefits Bitcoin provides.

Bitcoin enthusiasts are into the cryptocurrency for many reasons including the potential for privacy, lack of government influence and use as a payment system, just to name a few. Some believe it will become some kind of global currency. I’m not one of those people. I don’t think that will ever happen.

Regardless of your reasons for being into Bitcoin, we all need solid use cases to present to others and share amongst ourselves about the utility that Bitcoin provides. The emerging market safe haven case study, as specifically outlined in Venezuela here, is one of those cases. Ordinary citizens anywhere in the world no longer need an international bank, private Swiss-style bank or other overseas connections to protect themselves from an eroding home fiat currency. If they have a computer and can log in, they can protect themselves with a secure wallet and some Bitcoin.

 

About the author

Stu

Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending.

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