Ever since Hugo Chavez came to power in 1999, Venezuela has been subjected to socialist policies. For example, it has undertaken a colossal social spending program, combined with price and labor-market controls. As the Government spent more and more, it was forced to rely on the profits of the State-owned oil company, PDVSA, and and on the country’s central bank, in a desperate attempt to prolong the socialist project. The private sector has been eviscerated by expropriations. Oil now accounts for over 96 percent of export earnings, and represents a massive increase in the past ten years. Furthermore, the State has done such a terrible job of managing PDVSA that production has dropped dramatically.
In order to fund its Socialist experiment, the government of Venezuela has resorted to printing more and more money. This has resulted in astronomical levels of inflation. A report by the International Monetary Fund puts annual inflation in Venezuela at approximately 700 percent. According to Alejandro Werner, the IMF’s Western Hemisphere Director, inflation will surge to 720 percent in 2016 from 275 percent last year. That is nearly quadruple the median 184 percent estimate from 12 economists surveyed by Bloomberg, and exceeding the highest forecast of 700 percent from Nomura Securities.
The financial catastrophe in Venezuela has once again highlighted the failures of socialism and the perils of central banks pursuing unsound monetary policy. As the value of the Venezuelan Bolívar has plummeted, there has been an increase in the use by Venezuelans of alternative currencies. Many Venezuelans have been using currencies which are perceived as more stable and valuable, such as the US dollar. However, there has also been an increase in the number of people using the digital currency Bitcoin.
Bitcoin, a digital currency which is not governed by a central bank nor controlled by a single source, has become increasingly popular in Venezuela. Many Venezuelans are turning to Bitcoin as an alternative to the troubled fiat currency. There have already been several Bitcoin conferences in Venezuela and many in the country have started using the currency as a story of value in order to protect their savings from the rapidly decreasing value of the bolívar. There is now also a Bitcoin exchange, SurBitcoin, which has been set up by two Venezuelan brothers based in New York City and has over 10,000 users.
In an ironic twist, one of the failed socialist policies actually gives Venezuela a competitive advantage when it comes to mining Bitcoins. As the Venezuelan economy contains such strong price controls, Venezuelans pay the cheapest electricity bill pn the planet. This means it is incredibly cost-effective for Venezuelans to mine Bitcoins.
However, the future of Bitcoin in Venezuela is uncertain. Although the governments of Bolivia and Ecuador have both banned Bitcoin in their countries, the President of Venezuela has not made his position clear. Furthermore, under Venezuelan law, Bitcoin is regarded as property and not currency. Although SurBitcoin was approached by Venezuelan authorities under the allegation of illegal money exchange, as Bitcoin is regarded as property, the authorities took no further action. However, as Bitcoin does undermine state control, it could soon be seen as a threat to the socialist values of Venezuela and outlawed as a result.