Can Bitcoin Step In And Save A Failing State?
Miners from Venezuela to India have tried to use bitcoin in place of failing national currencies — can it work?
The Venezuelan economy is in tatters. Though it contains one of the world’s largest oil deposits, dependence on that single resource has left it at the mercy of plunging global prices. On top of that, last year a Venezuelan congressional commission accused the state-run petroleum company of misappropriating $11 billion in funds — an amount that’s worth more than the annual budget of five Central American countries, an opposition leader pointed out.
The sputtering of Venezuela’s single-engine economy means that its currency is in turmoil. Officially, the dollar-to-bolivar exchange rate is 10:1. On the “black market,” where most Venezuelans are forced to trade, it’s closer to 4,000 bolivars to a dollar. High prices mean rampant food shortages. There’s also an employment rate expected to top 20 percent. Hospitals running out of gloves and gauze. Skyrocketing infant mortality rates.
In short, people are desperate. Yet the country does have one advantage, albeit an obscure one. Thanks to its socialist government, which tightly controls prices, electricity in Venezuela is cheap. In America, the average cost is 12 cents per Kilowatt-hour. In Venezuela, it’s 2 cents. Cheap power has helped spawn an underground network of bitcoin miners who use the cryptocurrency to supplement the volatile bolivar. Which raises an intriguing question: Could bitcoin, a decentralized, completely digital currency, ever replace “real” money — the kind issued (and controlled) by governments?
In the most abstract sense, anything can have value when enough people agree it does (say, pogs). But even extremely valuable things can become worthless if there’s too many of them (or if the market loses interest: R.I.P., pogs). That’s partly why governments tightly control currency production, adding and removing bills and coins from circulation to maintain value.
Bitcoin is different. There’s no central authority regulating the issuance of bitcoins. Instead, like gold before it, bitcoin is “mined” — by computers solving increasingly complex math and earning coins in exchange. That requires computing power and lots of electricity to drive it: in a way, all a miner is doing is converting electricity into bitcoin. That’s why Venezuela’s rock-bottom rates give miners there an advantage.
In an in-depth story for Reason, writer Jim Epstein profiles a man he calls Alberto, who claims to make nearly $1,200 a day mining bitcoin and other cryptocurrencies. That’s in a country where every citizen receives a stipend of $9 a month. Mining gives Alberto a stable currency that can be exchanged across borders; he then converts it to gift cards to use on Amazon Prime Pantry, and — through another set of complex, covert shipping logistics — has food and other basic supplies sent to his home. Electricity becomes bitcoin becomes basic survival needs.
Venezuelans aren’t alone in using bitcoin as an alternative to their country’s troubled currency. In November, India’s prime minister withdrew all 500 and 1000 rupee notes, trying to quash the “black market” by banning nearly 80 percent of the currency in circulation. Interest in bitcoin surged as a result. There, too, volatility in a government-backed currency led people to seek out stable alternatives.
Unsurprisingly, governments have begun clamping down on bitcoin. The Venezuelan state has already denounced bitcoin as a tool of “cybercriminals,” and more recently pressure has increased. On January 25, federal police announced the arrest of four Venezuelans who were running “more than 300” mining computers. The charge wasn’t mining, but “electricity theft” and “internet fraud.” According to Douglas Rico, the director of the country’s federal police, the quartet had affected “the consumption and stability” of electrical service. (While it’s cheap, electricity isn’t incredibly reliable; to keep the grid functioning, the country has instituted measures like rolling blackouts and a two-day work week for some government employees.) Rico even made a show of the arrest with a long Instagram post.
Venezuela isn’t alone in its apparent crackdown. In January, the Central Bank of Nigeria announced it’d no longer be accepting bitcoin as “legal tender.” This came a few days after the People’s Bank of China issued notices that bitcoin should be considered a commodity, not a currency, likely in response to its citizens using the cryptocurrency to send money outside the country, evading government controls.
Do governments see bitcoin as a threat? Will it ever be able to fully replace a sovereign country’s currency? The answer is likely no.
First, bitcoin’s value is too volatile. In 2010, the first bitcoin transaction traded 10,000 bitcoins for two Papa John’s pizzas, at a value of about two-tenths of a cent per bitcoin. By November of 2013, the rate had risen to $1,242, before dropping all the way down to $340 in April of 2014. As of March 2017, it has hit another peak at over $1,290.
That’s not a history of stability. Venezuelans, for example, might find short-term security in bitcoin relative to the bolivar, but what if the former takes another nosedive? “For more than 2,000 years, there has always been one dominant international currency. It has always been a relatively stable unit of account,” says Steve H. Hanke, Professor of Applied Economics at the Johns Hopkins University. “Bitcoin is not a stable unit of account, and doesn’t play a bit role in this drama.”
Stability aside, there just aren’t enough bitcoins around for it to become a prominent currency. “[T]he worldwide value of all bitcoins is only about $20 billion,” says David Yermack, professor of finance at NYU Stern School of Business. “[That’s] not nearly enough to be an alternative to the sovereign currency in a country of any size.” (To compare, Bill Gates alone is worth around $86 billion; there’s also this visualization from 2015 that shows how far bitcoin lags behind, well, everything else.)
On top of that, for all its vaunted high-techness, the bitcoin network simply can’t process enough transactions quickly enough to compete with the trade in other currencies. Because the bitcoin is present in only a decentralized form, a bunch of distant computers need to work together at the same time for any transaction. Distances take time to travel, even in the world of broadband internet, and as such only seven bitcoin transactions can be processed every second. Researchers believe tweaking the system might up that number to 27 per second, but that’s it. That may seem like a lot, but compare it to Visa, which can process 56,000 transactions per second. One of bitcoin’s strengths—its decentralized nature—makes it unsuitable for the speed of modern finance.
So today, even in an economy as dysfunctional as Venezuela’s, bitcoin’s unlikely to be a viable long-term alternative. It’s not going to replace money. But the technological hurdles (nearly all of which can be overcome) belie the underlying power of the concept behind a decentralized digital currency.
Take a longer view: with the ease of global travel and the proliferation of devices that digitally weave the world together, markets are reshaping. Borders have become increasingly irrelevant — to money, at least — as the free flow of capital makes its way around the world. This process has been happening for a long time — we’ve called it “globalization,” both enthusiastically and warily, depending on your political leanings. Money has adapted to reflect it. Why shouldn’t we expect cash, like so many other things, to become software, bits of information surfing its way around the globe?
We’ve already created the infrastructure for this to happen, and while many consider the dollar the global currency, we’re still dealing with the messiness of competing government-issued currencies. To make a historical analogy, you could say we’ve progressed beyond the 1860s United States, awash in literally thousands of private currencies — but only by a little. The world of money is less fragmented today, and it’s coalescing.
Brexit and the rise of Donald Trump show that nationalism is not a totally spent force, and governments like Venezuela will fight to keep their controls. It’s hard not to see, though, that money is headed toward greater fluidity. Government control becomes irrelevant as multinational corporations continue to accept bitcoin and its brethren — 69 of the top 100 economic entities are corporations.
Maybe bitcoin won’t become the unifying global currency. Maybe the technical hurdles are too high, or government power (for now) too entrenched. Maybe the other fledgling cryptocurrencies — with their cyberpunk names, like Ripple, Ethereum, and Litecoin — won’t be the future, either; maybe what we’re seeing now is a kind of Cambrian explosion for currency, when technology and global society is producing a surplus of possibility and experimentation, with the market eventually sorting out winners and losers.
The fundamental concept, though, is what matters. It may not be in our lifetime, but when your great-grandchildren buy their incredibly rare holographic Alf Pogs, if it’s not by using bitcoin, it’ll be with something else just like it.
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