Are Currency Crises Leading to “Hyperbitcoinization”?

Currency crises, precipitated by economic woes, have become everyday realities in Venezuela, Turkey, Iran, Zimbabwe, and other Emerging Market countries. With fiat currency in each country significantly devalued by inflation, limited by capital controls, or both, citizens have been turning to cryptocurrencies as a dependable store of value and means of exchange.

Cryptocurrency enthusiasts are, in turn, excited by the prospects for blanket adoption in those countries and elsewhere – a process called ‘hyperbitcoinization,’s which signifies the point where people exit fiat currency for bitcoin after extensive fiat devaluation. Others have tempered their enthusiasm, convinced that the relative isolation of these occurrences means adoption has little chance to spread outward.

Venezuelans have turned to crypto in increasing numbers, driven by both extraordinary inflation and capital controls imposed by the government in 2003 that make it difficult to obtain US dollars. Data is inconsistent, making exact numbers difficult to come by, but trading has increased gradually since 2014. Numbers aren’t massive, but “the Bitcoin market in Venezuela is indeed big and growing at a fast rate,” says Randy Brito, founder of Bitcoin Venezuela. The oil-backed, state-introduced cryptocurrency ‘Petro’ has failed to gain much traction, but the use of Bitcoin and other cryptocurrencies, like Dash, continue to grow. More than 540 merchants accept the latter, known for quicker confirmation times and lower fees.

Iran has also felt the effect of sanctions, with their currency, the rial, hovering around roughly 18 percent inflation. The government announced plans for a state-run cryptocurrency, and as Forbes reported in May, Iranian residents had traded $2.5 billion in crypto despite an April ban on banks working with digital currencies. Data indicate, however, that inflation is not enough to spur mass crypto adoption, as the Iranian market is hamstrung by government-sanctioned bank bans.

Turkey has endured similar inflation woes (roughly 12 percent in October 2017, since rising to 15.39 percent as of July) resulting from a variety of issues. Adoption was initially not as significant as expected for a country of Turkey’s GDP size, but a recent 131.9 percent increase in trade volume on the LocalBitcoins exchange from July to August (the result of Turkish citizens noting Bitcoin’s resilience in the constantly-fluctuating crypto market), coupled with an ING survey indicating that 18 percent of Turkish people own cryptocurrency – the highest rate in the world – means that seems to be changing.

Zimbabwe abandoned its national currency in 2009, after 10 years of rampant hyperinflation; its government initially permitted the use of certain foreign currencies before introducing capital controls in May. The Zimbabwean Golix exchange has seen price increases exceeding the global average since the end of 2017 as Zimbabweans searched for a currency without government controls. November saw it quadruple its number of monthly transactions following a fresh round of destabilization, with monthly trade volume increasing tenfold from all of 2016 to $1 million.

It appears that, despite significant difficulties facing each country, inflation alone isn’t enough to drive hyberbitcoinization – at least for now. Cryptocurrencies retain huge potential during financial crises but seem unlikely to gain mass adoption on that level while the US dollar and the euro remain strong. But, to the delight of crypto enthusiasts, each is proving their worth in tough economic times, while providing a blueprint for future adoption.
 

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