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How Crypto Has Taken Over Venezuela…Will This Be A Trend When Other Economies Crash?

If you bought 1 million USD worth Venezuelan bolivar in 2013, it would now be worth 3.40 USD. Not a bad deal!

Venezuela has hogged the international limelight recently for all the wrong reasons – bankrupt economy, empty shelves in supermarkets, rampant street violence, rigged elections, and desperate citizens fleeing to other countries. Yes, this is even worse than LA and Chicago where violence is rampant and people are fleeing to other states.

In the midst of all the chaos, there is one aspect of the Venezuelan society that seems to be exciting the imagination of a section of the tech world. This aspect relates to the growing acceptance of cryptocurrencies in Venezuela as the de facto currency.

How the Venezuela Economy Crashed

Venezuela owns one of the largest oil reserves in the world, and not so long ago, these reserves played a central role in propelling Venezuela to become the richest country in Latin America.

After the crude prices began soaring in 2004, the sales of crude oil brought nearly $750 billion over the next 10 years into Venezuela.

On top of this massive cash inflow, the late President Hugo Chavez used these oil reserves as a guarantee to borrow heavily. A catastrophic management of funds led to annual budget deficits running up to 15% in the country.

Chavez spent lavishly on corruption-ridden welfare programs instead of using the money to diversify the economy and reduce its dependence on oil. He also nationalized the oil business in his country which compelled outstanding talent and knowledge from companies like Exxon Mobile to take off leaving Venezuela without the knowledge on how to maintain the equipment.

Moreover and at one time, oil revenues formed 96% of Venezuela’s total foreign earnings. Expectedly, once the crude prices tanked in 2014, so did the economy of Venezuela.

Other factors such as the nationalization of cement and steel industries (as somewhat just mentioned), the monopolization of dollar exchange, artificial over-valuation of the bolivar, price controls, and corruption in high places played their part in the devastation of the Venezuelan economy.

Chavez’s name will live in infamy. Another Latin American terrible dictator.

How Inflation Hurts the Fiat Currency

The collapse of Venezuelan economy has led to galloping inflation in the country. IMF projections cast the inflation rate at 13,800% for the year 2018.

Inflation refers to the depreciation in the purchasing power of the fiat currency. Since the fiat currency has no intrinsic value of its own and its purchasing power is based on the faith posed in it by the public, its value can quickly spiral downwards, if things go wrong.

That is exactly what has happened with the Bolivar. The Venezuelan currency has become practically worthless. Its value has become so low that shopkeepers are simply weighing the currency, instead of counting it.

Cryptocurrency as the Economic Refuge

Venezuelans took to cryptocurrencies to counter the decimation of the Bolivar. The number of Bitcoins traded in the local exchanges rose from two in 2013 to 21,000 in 2016.

The proliferating use of cryptocurrencies in the country is, however, not limited to just the average citizens. To combat the sanctions imposed by the US, the current Venezuelan President Nicolas Maduro announced a new national cryptocurrency named Petro.

The difference between cryptocurrencies like bitcoin and petro is profound – while the virtual Bitcoin does not have any solid backing and works pretty much like a fiat currency (in other words, on public trust), the petro is backed by the oil and mineral reserves of Venezuela.

Maduro claims to have raised more than $700 million in Petro’s ICO (initial coin offering). The government has placed so much faith in a crypto-based economy that the country’s new sovereign Bolivar issued by the government has been pegged to the petro!

For now, petro seems to be Venezuela’s last but high innovative route to beat an economic crisis of historic proportions.

 

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