Hyperbitcoinization: How Currency Crises Are Driving Nations to Crypto

Inflation is driving these nations to crypto, but there won’t be hyperbitcoinization as long as reserve currencies remain strong.

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.

Venezuela

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

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.

Zimbabwe

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.

Turkey

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.