Friday, August 25, 2017

Bitcoin: Yeah, dunno about Venezuela either

Not long after posting the last post on Bitcoin I saw some headlines about Venezuelans using bitcoin instead of the Bolivar fuerte (fuerte meaning "strong") since the Bolivar itself is currently in hyperinflation.  This makes some sense, in that if the inflation rate for a currency is around 700-800%, Bitcoin's fluctuations against the dollar seem like less of a problem.  Bitcoin wallets and exchanges also provide a way to store value independent of the nation's banking system.

On the other hand, Bitcoin is not the only solution to this problem.  Besides buying and selling a reserve currency on the black market, people have historically come up with all kinds of solutions to currency shocks, including IOUs, home-grown alternative currencies, commodities and good old-fashioned barter.

I'm not saying any of these is a good solution.  In a situation such as this one there may not be any good solutions.  The point is that Bitcoin is not the only game in town.

There are also practical issues.  If the problem with reserve currencies is that trading in them is illegal, then the only legal way to buy Bitcoin is with Bolivares at the official rate, which exposes you to the same hyperinflation you're trying to get away from.  If you're willing to trade on the black market, it's not clear why you need Bitcoin.  And for that matter, the Venezuelan government can always make trading Bitcoin itself illegal.

If, somehow, Venezuela switched entirely to Bitcoin, that would currently mean around 800 billion dollars worth of Bolivares chasing around 70 billion dollars worth of Bitcoin, but that seems like a big if.  For that kind of money, one could build one's own cryptocurrency.

But I'm not an economist.  All of the above seems plausible to me, but I've been wrong before.  So, once again ... ¯\_(ツ)_/¯.

(And once again, I don't have any position in Bitcoin one way or the other)

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