How Bitcoin Is Helping to Protect Wealth In Economically Distressed Countries
By Alex Lielacher
To the surprise of many, bitcoin currency has increasingly become a means to store wealth and to make and receive payments in economically distressed countries where local currencies are losing value.
Bitcoin is seen by some as a great investment opportunity and by others as a way to circumvent the banking system. For a growing number of people, Bitcoin acts as an alternative store of value that can help to protect wealth in times of severe economic distress and hyperinflation.
A great case study of how Bitcoin can act as a much-needed store of wealth and a means to make financial transactions outside of a country’s traditional economic system can be found in the South American country of Venezuela.
In the last six months, the demand for bitcoin in Venezuela has spiked, according to bitcoin trading volumes on the peer-to-peer Bitcoin exchange LocalBitcoins. The Venezuelan sovereign currency, the bolívar, has suffered from severe hyperinflation and Venezuela’s already struggling economy suffered a further blow last year when a drought prevented its hydroelectric dams from generating enough electricity for the country to sustain itself.
As the country’s currency is falling into near worthlessness and with no sign of an economic recovery in sight, Venezuelans are struggling to pay for basic goods and services with their own currency, let alone hold onto their savings. Due to strict capital controls, it isn’t easy for the local population to adopt the U.S. dollar or other major currencies to conduct daily transactions. This is why Bitcoin has witnessed such a strong surge in demand there.
Bitcoin can be easily accessed by anyone with an internet connection and the government has no control over who uses it. For individuals who want to store their savings in a more secure currency than the bolívar, bitcoin offers that possibility despite strong volatility.
Another example of how Bitcoin can play a positive role in a struggling economy by acting as an alternative currency and as a store of value can be found in the African country Zimbabwe.
Zimbabwe has been plagued economic distress since the early 2000s when President Robert Mugabe blamed the country’s economic problems on its white minority and incited his followers to violently seize white-owned farms. The fallout from these actions led to food shortages and famine in Zimbabwe as the agricultural sector collapsed. International trade, as well as foreign investment, deteriorated quickly in the years to follow, causing the Zimbabwean economy to collapse and its sovereign currency to suffer from severe hyperinflation. The year after, the Zimbabwean dollar was abandoned and the U.S. dollar became the country’s primary legal tender.
However, in 2016 it became evident that the country does not have sufficient funds to keep its economy afloat using the U.S. dollar, as President Mugabe’s government announced that it would issue a new currency, called “bond notes” to replace the dollar notes in circulation. The new currency has been met with much skepticism by Zimbabweans and fears of a return of hyperinflation are simmering in the country.
Surprisingly, in a country with relatively low internet penetration by global standards, there is a small but growing Bitcoin community and user adoption is growing. Due to a lack of trust in the country’s currency, Bitcoin has become an increasingly attractive alternative to store wealth but also to send and receive international remittances, which many Zimbabweans rely on to live.
Local Bitcoin startups such as bitcoin wallet provider BitMari and bitcoin exchange BitFinance, which recently secured a new round of funding, are providing Zimbabweans with the opportunity to purchase bitcoins and utilize them for remittance purposes. While the Bitcoin community is still very small in Zimbabwe, the demand for the digital currency is on the rise. Given the inability of Zimbabwe's leaders to turn around its failing economy, bitcoin user adoption will likely continue as the need for an alternative currency is imminent.
Since a coup attempt on July 15th, 2016, the Turkish economy has been on the decline. The fallout and policy actions of President Recep Tayyip Erdoğan caused the Turkish Lira to drop by over 20 percent in value against the U.S. dollar. Furthermore, for the first time since 2009, the Turkish economy contracted in Q3/2016 as tourism and domestic demand was heavily hit by the coup d’etat.
The demand for bitcoin, on the other hand, increased substantially since the summer months, as the value of the lira continued to drop and it became evident that Turkey’s economy would struggle to recover. According to data from LocalBitcoins, bitcoin trading volumes shot up in September and continued to increase in the later months of the year. Not only is Bitcoin providing Turks with the possibility of sending and receiving money abroad, but it also provides the ability to temporarily store wealth while the local currency is sharply declining.
Despite Turkey’s largest Bitcoin exchange BTCTurk closing down in August due to an inability to find a willing banking partner, Turkey’s Bitcoin community and user adoption is growing as concerns about the country's economy and the value of its currency are mounting.
It should be noted that in all of the above-mentioned countries, Bitcoin is only being used by a small minority. Having said that, the examples given also clearly demonstrate that there is real-world demand for a truly global currency that anyone with an internet connection can access. Currently, the only currency that fits that description is bitcoin.
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