In Corrupted Economies, Bitcoin is a Lifeline For Residents
While highly regarded economists, analysts and experts within the traditional finance sector, including Peter Schiff, continue to question the origin of the value of bitcoin and its applicability, bitcoin is operating as a vital lifeline and alternative financial network in underbanked and corrupted economies such as Venezuela.
The concept of intrinsic value is often brought up amidst debates and conversations on bitcoin and its differences from conventional assets and currencies like gold and the US dollar. Bitcoin’s exponential growth within a relatively short period of time has evidently proven that intrinsic value does not exist. Value is subjective and the value of assets and currencies depends on the demand from the market and their supply.
Fiat currencies like the Venezuelan bolivar are unstable and unreliable due to their easily manipulable supply and monetary policy. In a free market, rarity and scarcity provide stores of value, safe haven assets and currencies with actual market value. However, when the supply of an asset or currency can be manipulated through inflation and quantitive easing, its value decreases, especially during global economic uncertainty and global market instability.
Bitcoin’s applicability has been quite clear since its debut in 2009. As a premier store of value and decentralised financial network, it can operate as an alternative financial network against corrupted banking systems, economies and insecure financial networks.
In Venezuela, bitcoin is doing exactly that. Over the past year, the Venezuelan bolivar has lost most of its value. According to various experts including John Hopkins University economist and professor Steve Hanke, Venezuela’s annual inflation is 1582%, the highest in the world. That is a 4% daily inflation rate.
Cash in Venezuela has lost its value to a point where businesses have stopped creating jobs and residents are struggling to obtain food to survive. According to Reuters, Consecomercio, a major retail industry group, reported that Venezuela lost over 1 million private sector jobs in the past 18 months. Consecomercio vice president Alfonso Riera further emphasised that the unemployed population is “migrating to the street, informal work or worse”.
Instead of searching for job opportunities that are rapidly declining in number in the private sector, university graduates and professionals have moved onto bitcoin mining. The Atlantic, which has provided extensive coverage of the Venezuelan bitcoin market since early 2016, revealed that electricity in Venezuela is heavily subsidised. Taking advantage of cheap electric power, many Venezuelans have purchased mining equipment over e-commerce platforms such as Amazon and have begun to mine bitcoin, Ethereum and other cryptocurrencies.
“To survive, thousands of Venezuelans have taken to minería bitcoin—mining bitcoin, the cryptocurrency. Lend computer processing power to the blockchain (the bitcoin network’s immense, decentralized ledger) and you will be rewarded with bitcoin,” reported The Atlantic.
Although there exists no clear regulatory frameworks for bitcoin and cryptocurrencies, local law enforcement agencies have arrested many bitcoin mining center operators for spurious charges. The Atlantic explained that one bitcoin miner by the name of Joel Padron was charged with energy theft and possession of contraband and detailed for 14 weeks.
Other reports revealed that the Venezuelan secret police demanded large sums of money from bitcoin mining center operators. Two brothers in Caracas were asked to pay a bribe of $1,000 for each bitcoin mining machine in order to stay in business.
Despite the crackdown of Venezuelan police on bitcoin mining and the requests of large bribes from local law enforcement agencies, many Venezuelans are continuing to mine bitcoin to survive.