It was the chaos of the global financial crisis that gave birth to Bitcoin. Go back to the original white paper released by the mysterious ‘Satoshi Nakamoto’. You can clearly see that it began as a reaction against centralised control of online commerce.
This came at a time when housing debt had nearly destroyed the US economy. Central banks were printing cash at unheard of levels. Trust in the mainstream finance industry was at abysmal lows.
Bitcoin was intended to offer an alternative to a financial system many no longer believed in. The earliest adopters were trying to escape what they saw as manipulated, corrupt and unstable system.
In the years since, the world’s managed a shaky kind of recovery. Yet clearly the threat of collapse and central banks’ currency manipulation are still contributors to crypto’s success.
But it’s easy for us, sheltered by China’s hunger for resources, to forget how hard the GFC hit elsewhere. Or that even a shaky recovery is far better than some countries could wish for.
And it’s in some of these crisis-wracked economies where cryptocurrencies are beginning to fulfil their true potential.
Venezuela’s economy is in turmoil. Falling oil prices are hitting hard. The economy shrank 18% last year. Unemployment has risen from 7.5% in 2015 to 25% this year. And government money printing is fuelling epic inflation.
The IMF forecasts inflation in Venezuela will hit 720% this year. And 2,068% in 2018.
The Venezuelan government has tried to halt capital flight out of the country, and control their exchange rate. They’ve done this by restricting currency exchange. Venezuelans can only legally change currency through a government department. Anyone who wants to buy or sell overseas has to ask the government. Anyone who wants to move their wealth out of the unstable bolivar, has to ask the government.
Anyone who wants to buy a book on Amazon from the US, has to ask the government.
Naturally, this has created a thriving black market.
A vital alternative
Many Venezuelans simply couldn’t survive without the black market. The nation has suffered from terrible shortages. In 2012, the Central Bank of Venezuela reported that 22.4% of ‘vital’ goods couldn’t be bought.
Since then, the central bank has refused to even publish fresh scarcity numbers. That’s five years running now.
On the black market, the bolivar is worth a fraction of its ‘official’ value compared to US dollars. This black market can be volatile. But you could argue that its exchange rates offer a more realistic reflection of the bolivar’s value.
For individuals or businesses in desperate need of foreign currency or goods, it’s a vital lifeline.
The future of crypto
This is exactly the kind of environment where cryptocurrencies can thrive.
Owning and purchasing bitcoin is currently legal in Venezuela. Technically, it’s not part of the black market. Though, it’s unclear whether using bitcoin for foreign trade will always be allowed. And bitcoin ‘miners’, straining the country’s delicate electrical infrastructure, have recently been the target of a crackdown.
(If you’re not clear on the difference between bitcoin ‘miners’ and those who simply hold or use it, check out Sam Volkering’s new book, Crypto Revolution: Bitcoin, Cryptocurrency and The Future of Money. Click here to learn more.)
But for individual use, rather than mining, Venezuela is a perfect case study.
Remember, bitcoin and its digital infrastructure are largely anonymous. That makes any future restrictions difficult — if not impossible — to enforce.
And more people are taking advantage. Venezuelan users on just one bitcoin exchange skyrocketed from less than a thousand in 2014 to more than 85,000 in late 2016, according to Forbes.
It can be difficult to pin down exactly how many exchanges exist worldwide. That too is part of bitcoin’s anonymity.
Venezuelans are using bitcoin for online purchases from outside the country. It can be used to get around government currency controls. And it’s even being used by humanitarian organisations sending aid.
You don’t even need a bank account to use bitcoin. Just an internet connection on a computer or mobile phone. As long as you know anyone who has bitcoin, they can transfer it to you in exchange for cash. And, of course, enterprising individuals are setting up to do it for a fee. This non-bank option is vital for a developing nation. Roughly 40% of Venezuelans don’t have bank accounts.
Some Venezuelan businesses have even switched to only accepting bitcoin. They refuse to trade in bolivar.
In Australia we look at cryptocurrencies as a potential alternative investment or payment system. But countries like Venezuela show us what happens when government money collapses. An alternative currency like bitcoin, with no centralised controllers to manipulate it, can thrive.
Gold may be the ultimate store of value. But how easily can you use gold to buy groceries or pay your bills? When society hasn’t collapsed…but your local currency has…that’s the need crypto can meet.
Today, Aussie crypto investors are largely interested in capital gains. The kind of incredible gains that you can find by being in at the start of a technological revolution. But Venezuelans’ experience demonstrates the other side of the crypto ‘coin’. Its potential to protect you in a time of crisis. To allow you to buy, sell, and carry on with your life.
It’s remarkable how far bitcoin and other cryptocurrencies have come in just a handful of years. This week in Money Morning we took a stroll down memory lane. We looked at some of our tech expert, Sam Volkering’s past articles on the cryptocurrency revolution.
Sam’s been researching cryptos since the early days of bitcoin. This week’s Money Morning articles are a chance to look back at some of the key moments in the evolution of this disruptive new financial tech. Read on for more.
This week in Money Morning
The first of these walks down memory lane looked at April 2013. When bitcoin cost just over US$100, rather than the US$2,600-plus it commands today. But Sam already understood its potential. As new tech, and as an alternative to the government controlled currencies of the world. To read his early insights, check out Monday’s article here.
Tuesday fast-forwarded to September 2015. By then, bitcoin had already grabbed plenty of headlines in the mainstream — even if most of them didn’t understand it fully. Or simply dismissed it. But less well exposed was the technology behind bitcoin. Sam looked at other ways blockchain tech could disrupt, revolutionise and ultimately improve every aspect of our financial world. You can read all the details in Tuesday’s Money Morning.
On Wednesday Sam brought us an article from 2016. It looked at how far bitcoin, and other cryptocurrencies, had already come. And how cryptocurrencies provide an alternative version of the ‘cash economy’ that many Aussie businesses and workers rely on — along with some criminals! Above, I discussed how bitcoin has provided an alternative for Venezuelans. For a hint of how the same could begin to apply here in Australia, check out Sam’s article here.
On Thursday analyst Ryan Dinse took over with a brand new article. He explains why most of the pros in the mainstream finance world still don’t understand bitcoin. Why is this still such a blind spot for them? It all has to do with their true role within the financial system. To read why, you can find Ryan’s article here.
We finished the week with an article from Sam looking at Russia’s embrace of cryptocurrency. Particularly one crypto that has seen incredible gains this year — even since Sam’s article was first published only a month ago. Many of the factors Sam identified then have contributed to its meteoric rise. To read why, you can find Friday’s Money Morning here.
The world of cryptocurrency changes fast. In just a few short years, it’s rocketed from an obscure idea to a massive emerging industry. One with the potential to change money, trade and finance worldwide. In some parts of the world, it’s already become the alternate currency of choice, and a vital part of the economy.
Most people will only awaken to the possibilities after the fact. Cryptocurrencies will provide them with a better financial system, free from centralised control. But the incredible gains from the early days will have long since passed by.
Early adopters like Sam, Ryan, and their readers at Sam Volkering’s Secret Crypto Network will likely have captured much of those gains. But even for those who missed out, the world will be irrevocably changed. I believe, for the better.
We’ll have more on the rise of cryptocurrencies for you next week, as we return to our regular Money Morning schedule. Until then, enjoy your weekend!
Editor, Money Weekend