How Bitcoin Can Help Failing Economies

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Estimated reading time: 3 minutes, 50 seconds

Bitcoin has proven itself as a store of value. Yet, 10 minute block times have limited its use as a currency. However, scaling solutions such as the Lightning Network are pushing bitcoin to act as a currency. Now I’m a guy that likes to ask questions, and the possibility that bitcoin could have use as a currency led me to this one.

What places, if any, are more likely to turn to bitcoin?

Since bitcoin is an alternative, maybe even a hedge against, traditional country based economies, I specifically looked at countries with failing economies, as citizens may look to bitcoin to fight hyperinflation.

Hyperinflation in failing economies

If you don’t know what hyperinflation is, first consider yourself lucky that you haven’t lived in a country where this has happened. Basically, because of monetary and fiscal policy, inflation raises the cost of goods and lowers the relative buying power of the currency.

Venezuela is a country that is going through insane hyperinflation. The last year alone, inflation rose 2,600%. The country recently had to release a new highest denomination, the 100,000 Bolivar note. For reference, that note is worth under a USD.

So this situation has led to some rather significant economic issues. Something as simple as buying lunch is extremely difficult. People are taking backpacks full of Bolivar notes just to buy one meal. Going shopping? Well you better have a cargo truck to carry all of those bills you’re going to need carry.

Hyperinflation already effectively makes buying goods require more money, and it has reached such levels where it makes buying in bulk impossible because you just can’t carry the money without a damn forklift.

Maybe Bitcoin can help?

And this is where Bitcoin comes in. The Venezuelan Bolivar has essentially become worth less than the paper it is printed on. Citizens are looking to the cryptocurrency as a means of survival. There are multiple stories of Venezuelans who have families that they are trying to support during this currency crisis. One woman describes how she is working multiple jobs to keep food on the table, but the only real reason she can still feed her family is that she is mining bitcoin.

Of course, bitcoin is only good in this case, if it can be transacted directly. You need people willing to accept bitcoin for it to be viable in this type of economy. So we’ve seen an alternate market arise. The Bolivar is useless for transactions, so we are seeing Venezuelans jump into the Bitcoin economy.

More and more vendors and sellers are exploring accepting bitcoin, really because it is their only means of storing any value. Their life savings is useless. The Bolivar is useless. So they are turning to an alternative that has use, and that alternative is Bitcoin. Many Venezuelans are using LocalBitcoins in order to directly buy and sell the cryptocurrency.

Currency Crisis & Failed Governmental Policy

Now behind every currency crisis, there is failed government policy. We’re not going to get into where Venezuela went wrong, because there were multiple factors that have got them to this place. Venezuela is not the first to institute policies that lead to a currency crisis. Plus, we have seen certain patterns develop in countries that have gone through the same issues previously.

When there is a currency crisis, certain policies are instituted that make it clear that you don’t really own or have control of your own currency. This includes the government printing more currency or simply just taking their citizens money.

What we’re seeing happen in Venezuela has a great impact on the global economic scale. Bitcoin and other cryptocurrencies can be used as a means to get around corrupt government regulation. Now this might be a double edged sword as some corrupt countries may turn to cryptocurrency to dodge economic sanctions.

It’s important to note that Bitcoin doesn’t have to replace a sovereign currency. It can exist on its own. But the impact it will have on failing economies will be great.

WTF IS is our series where we explore some of the most frequently asked questions about blockchains, cryptocurrencies, and the technology surrounding these fields. Looking to get acquainted with blockchain? Then WTF IS is the perfect series for you!

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