In the Bitcoin country of Venezuela, cryptocurrencies have been fulfilling an important function for years. However, not quite as many Bitcoiners imagined.
A new report from blockchain analyst Chainalysis focuses on Latin America, including Venezuela. This is supplemented by an article on Cryptopolitan with statements from the Venezuelan community. Both together create a relatively clear picture of what crypto is doing in the South American country.
Venezuela is widely known in the Bitcoin scene. The country has been suffering from severe inflation since 2014, which at times became hyperinflation. The cause is, on the one hand, the economic policy of the socialist government and, on the other hand, the financial sanctions of the USA, which make it difficult for the country to generate foreign currency. Bitcoin has long played a role here as a lifeboat for the population’s savings, which are being eaten up by currency devaluation, and as a transaction vehicle to keep payment transactions going despite capital controls and sanctions.
“Cryptocurrencies have helped many Venezuelans cope”
Venezuela, Chainalysis quotes opposition leader Leopoldo Lopaz, who has been living abroad since 2020, “has suffered one of the worst hyperinflation rates in history, sometimes exceeding a million percent. Cryptocurrencies have helped many Venezuelans cope.” This dynamic can be seen in the trading volume of the exchanges: when the bolivar (the currency of Venezuela) falls, the momentum in the order books increases; the slight time delay corresponds to the delay with which the devaluation reaches the consumer market.
Cryptocurrencies are literally saving lives in Venezuela when inflation destroys value. But could one speculate that crypto also allows the regime in Caracas to continue monetary policies that have otherwise long since led to collapse?
Lopez also confirms the second application that has been under discussion for a long time, international remittances: “Until recently, Venezuela did not have high migration rates. But since 2014 there has been mass emigration due to the catastrophic humanitarian situation. Around a quarter of the population has moved abroad, which is why their remittances are playing an increasingly important role in the national economy. Many people use cryptocurrencies.”
Many centralized exchanges, few altcoins
Among the Latin American countries Chainalysis compares, Venezuela has perhaps the strongest push toward cryptocurrencies. Other countries in the region, such as Argentina, also have problems with currency stability or, like Brazil, impose difficult conditions on international payments. But nowhere else is the nexus of inflation, capital controls and autocracy as strong as in Venezuela. Therefore, it is difficult to observe what happens when an economy really needs cryptocurrencies.
What is striking is the following: Nowhere else do so many crypto users use centralized exchanges. The proportion is generally relatively high in Latin America, but drops to around half in the case of Mexico, while it is by far the highest in Venezuela at 92.5 percent. Despite the Maduro government’s autocracy and capital controls, many Venezuelans apparently continue to rely on middlemen. This is at least somewhat counterintuitive.
Another special feature is the low proportion of altcoins (except Ethereum) among the transactions – around 10 percent – with a comparably high proportion of Bitcoin (around 17 percent) and, together with Colombia, the highest proportion of stablecoins – around 66 percent.
How can these two peculiarities be explained?
A de factor dollarization
Cryptopolitan magazine tries to provide an answer by letting various actors in the local community have their say.
Javier Bastardo, organizer of Satoshi in Venezuela, the country’s largest crypto grassroots movement, and Bitfinex’s Bitcoin ambassador for Latin America, says that Venezuelans are primarily seeking access to the US dollar, the global reserve currency, through crypto. Venezuela has been moving for years toward a de facto dollar economy, in which everyone who receives money tries to convert it into dollars. Because people are used to converting bolivars or groceries into dollars, they are much more familiar with stablecoins than Bitcoin or Ether, which also often fluctuate wildly. But although stablecoins like Tether are playing an increasing role in Venezuela’s domestic economy, they are usually only an intermediate step to the real dollars.
Kevin Hernandez, founder of the Venezuelan online magazine “Criptodemia”, also believes that Venezuelans are not particularly interested in cryptocurrencies, but are primarily looking for access to the dollar. Economic uncertainty is pushing them toward the options with the lowest friction, i.e. the platforms that make it easiest to receive dollars. These are usually centralized exchanges. P2P platforms are not very attractive due to the high crime rate in Venezuela and other Latin American countries, while decentralized exchanges are particularly interesting for those who want to trade altcoins (which most Venezuelans have neither the nerve nor the money to do).
In the end, both here and there, it all comes down to the dollar. Bitcoin and other cryptocurrencies are useful – but are increasingly being replaced by stablecoins wherever there is a real need for crypto.