Will Cryptocurrency Solve Hyperinflation?

What do you do with your money when your country has devalued it?

Where should you put the value that you’ve worked so hard for? Stocks? Bonds? Land? Crypto?

Many people have been forced into this decision before they were ready to deal with it. Let’s take a look at how a few different countries have handled financial unrest.

What’s the Best Currency?

In general, people are interested in two things when they evaluate an asset to invest in (which may be qualities of the same asset, or different ones):

  • A store of value
  • A medium of exchange

Sometimes assets provide both these functions well, as in the case of the U.S. dollar. Sometimes they primarily function best as one, such as land. Sometimes an asset’s function changes over time, as in the case of gold.

Volatility is the main challenge for a medium of exchange or value store. When it is a government’s responsibility to issue currency to denominate debt, it is also their responsibility to manage that debt, including preventing counterfeiting, facilitating lending, and ensuring a reasonably money supply.

However, they’ve not always exactly been so responsible.

In fact, many countries undergoing irresponsible currency management by the government have been turning to Bitcoin and other cryptocurrencies as an alternative store of value. But why? Let’s take a closer look with a few examples.

Venezuela

Venezuela has been having problems for a few years.

Starting in 2003, new capital controls implemented by Hugo Chávez created a parallel U.S. dollar denominated market as an alternative to the Venezuelan bolivar. Although originally intended to target the rich that the government worried were moving capital abroad, these constraints ended up limiting the amount of foreign currency citizens were allowed to travel with.

However, even dollars were eventually hard to come by, and further devaluations led people to seek out a reliable alternative.

A wave of state takeovers of private industries, as well as central bank printing money have led to hyperinflation that caused grief across the country.

Then Bitcoin stepped in.

Though it’s not clear if the investors are trying to conceal the source of their wealth (due to most of the trades occurring within peer-to-peer, or LocalBitcoins exchanges), or if Bitcoin has actually become a “coin of the people” in mass use, one thing is sure:

Bitcoin popularity soared in Venezuela, with the BTC/VEF market growing by 67,300% since 2013.

Cryptocurrency has boomed so much since its introduction that the Venezuelan government itself has attempted to capitalize on this popularity by introducing the “oil-backed” Petro cryptocurrency.

Strangely enough though, the Petro has neither been mined, nor has it seen any trading activity whatsoever except for some suspicious transactions on a Singaporean exchange, according to Reuters.

In addition, other cryptos have seen the uncertainty in Venezuela as a chance to rush in and promote their own alternative. One prime example is Dash, which has accelerated its usage with merchants across the country by promoting its faster confirmations and lower transaction fees.

Zimbabwe

Another country experiencing hyperinflation is Zimbabwe.

After over 10 years of hyperinflation, during which the Zimbabwean dollar has become little more than toilet paper, the government abandoned its own currency, and began officially accepting multiple alternative currencies, including the euro, U.S. dollar, and South African rand.

However, this led to shortages of useful currency, because the government could no longer print extra, but instead had to rely on imports to acquire enough cash to function. To stop this problem, the Zimbabwean government start using capital controls much like Venezuela, with the predictable result that people ran screaming towards an alternative.

The Golix exchange, based in Zimbabwe, saw a quadrupling in trading volume, after a period of 50% inflation rocked the country in November 2016.

Although they are yet to release their own cryptocurrency, (despite the finance minister’s urging), it’s clear that crypto will play a large role in any country with such violent uncertainty.

What’s the Best Alternative?

Overall, it seems that people will shift to the most stable alternative available in situations where the state-issued currency has failed them to be a useful store of value.

If it is available, most will turn to the U.S. dollar or euro if they can get them, and secondly will turn to gold. As long as the world reserve currencies are available, people are placing more trust in them than cryptocurrency.

However, when access to a reliable fiat currency is not available, or when capital controls are in effect, you can expect to see some of the fastest increases in trading volumes yet.

While it hasn’t yet seen a complete shift, it seems that Bitcoin, and other currencies with faster confirmations and lower fees will be contenders in the future to take over any government-issued currencies which fail to meet citizens’ expectations of stability and reliability.

While most governments have a habit of inflating the money supply in order to pay their own bills, some that get too greedy can create situations where a cryptocurrency is a strong alternative for people looking to protect their hard-earned wealth.

What about you? Do you trust government-issued fiat? Or do you believe in the borderless future of finance?

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