Venezuela’s economy is crumbling, while bitcoin volume is on the rise

Venezuela’s international reserves fell to a 12-year low recently, US$15.3 billion, as the South American country faces substantial debt repayments this year. US$1.5 billion is due this month, with another US$3 billion due in November.

"It’ll have to sell some of its gold reserves to make the debt payments," says Edward Glossop, emerging markets economist at Capital Economics. "[Cash] reserves are almost virtually zero."

According to the Central Bank of Venezuela, the government had US$14.5 billion in gold reserves in the beginning of the year. In May however, the Central Bank reported that the government sold over 19% of the gold reserves, around US$2.8 billion, to repay a small portion of its debts.

Reserves fell a further $614 million on Oct 16, the central bank said recently, taking reserves to the lowest level since May 2003.

“The bottom line is that the spending is unsustainable with oil below $50 and needs to be reined in."
— – Win Thin, Brown Brothers Harriman Global Head of Emerging Markets

Venezuela’s economy is dependent on its oil reserves, while oil prices have tumbled by more than half since June last year, led by a global supply glut.

Worries about the glut were fed on Monday, when Russia reported that its October oil production hit a post-Soviet record of 10.78 million barrels per day. Brent crude futures, the global benchmark, traded down 79 cents at US$48.78 a barrel.

Venezuela’s economy is crumbling. The currency has plunged, annual inflation rate has surpassed 100% and the country cannot afford basic imports.“Venezuela is broke, but a disorganized default would be a disaster,” Venezuela’s former minister of planning, Ricardo Hausmann, told Financial Times last week. “The country needs an [International Monetary Fund]-led reform program that can put $20 billion or more on the table for the market to understand that Venezuela won’t go to hell. But that won’t happen with Maduro on the president’s seat.”

The IMF has projected that Venezuela will experience a deep recession in 2015 and 2016, while inflation is projected to be well above 100 percent in 2015.

“The inflation rate is projected to increase in 2015, but this reflects the sharp increase in the inflation forecast for Venezuela (more than 100 percent in 2015) and Ukraine (about 50 percent). Excluding these countries, inflation in emerging market and developing economies in 2015 is projected to decline from 4.5 percent in 2014 to 4.2 percent in 2015.”
— – International Monetary Fund

Venezuela has maintained strict currency controls since 2003 and currently has three legal exchange rates of 6.30, 13.50 and 199.76 bolivars per dollar, used for priority imports. On the black market, where people and businesses turn when they can’t obtain government approval to purchase dollars at the three legal rates, the bolivar has weakened to 785.92 per dollar, according to dolartoday.com, a widely watched website that tracks the exchange rate in the Colombian border city of Cucuta.

In an effort to find a store of value, Venezuelans have turned to the used car market, the value of used cars is climbing, along with the volume of bitcoin trade. LocalBitcoin.com data shows that trading volume in the Venezuelan Bolivar has increased dramatically since the start of 2014.

The situation is reminiscent of the Greek debt crisis, which peaked in July. While much of the financial world was focused on whether Greece would abandon the euro, the digital currency’s value increased more than 15%, during June alone.

Operators of bitcoin exchanges reported that trading volumes had greatly increased as the Greek crisis unfolded. "We’re seeing about a 300% increase in bitcoin buys across all Europe in past few weeks," reported San Francisco-based exchange Coinbase in a tweet.

During the Greek government’s debt restructuring the government imposed strict capital controls, much like Venezuela has done for over a decade. Greece, however, implemented controls overnight, freezing bank accounts, restricting ATM withdrawals, and prohibiting overseas cash transfers. “[T]he problem here is foresight,” Kevin Rinta, vice executive officer at Exmo.com said in an interview with CoinTelegraph.

“If the banks are already closed, then people can’t access their money to purchase bitcoin. However, those people who saw the writing on the wall and were prepared could have converted their euros into bitcoin and held them until this crisis blew over.”
—  – Kevin Rinta, Exmo

Venezuelans clearly have the benefit of experience when it comes to capital controls, and perhaps realize the magnitude of the financial crisis the country is in. Once the government empties its gold reserves and IMF funds, it will have very few options.

During the Greek crisis, Bitcoin enthusiast and researcher, Nick Szabo, recommended that greeks avoid using fiat money, or even Greek-based-fiat-bitcoin exchanges. “To have value as a medium of exchange, bitcoin must be taken up by a community of people who already frequently trade with each other, and who have a strong need to use it in these trades.”

As emphasized by Szabo in a series of reports, simply purchasing bitcoin in the black market and holding onto them will not solve the country’s financial crisis. Szabo suggests a complete, closed cycle for bitcoin: Store to suppliers to workers and back to the store.

Szabo explains that bitcoin is one of the substitute currencies capable of addressing the urgent needs of a country under serious financial crisis, like Venezuela.

“It doesn’t help much to sell bitcoin to isolated individuals: as a mere store of value its volatility is much greater than most existing currencies; as an investment it only makes sense as a tiny high-risk fraction of one’s portfolio. Bitcoin does have some political-affinity and status value in developed countries; by contrast in many developing countries and in countries under financial crisis such as Greece, there are urgent needs bitcoin potentially can address,” Szabo stated on his report.

As freelancer programmer felix Weiss says, "Bitcoin can now show people that they don’t have to fight the old system. The solution is to stop using central bank issued paper bills and start using free, open source money: bitcoin."