Bitcoin, black markets and the Venezuelan economy

This article deals with Venezuela`s gravitation towards bitcoin and cryptocurrencies, however the same can be said for a great number of nations. Nations with unstable governments, currencies, geopolitics, you name it, they need bitcoin and want bitcoin or other cryptos to at least sustain the current real term value of there money. Very interesting read and certainly a reason for the base value of bitcoin I believe. The article first appeared at FSUNews here and was written by Ryan Beehler.

 

Most people believe bitcoin and other cryptocurrencies are just a passing fad. Until recently, bitcoins were only owned by devout libertarians and criminals who used the digital currency to buy and sell illegal goods and services on hidden parts of the internet. Cryptocurrencies are also difficult for a layman to obtain, and the value of bitcoin is so volatile that it dissuades investors. For these reasons, bitcoin has remained relatively obscure.

However, in the past couple years, Venezuelans have been using bitcoin as an alternative to the country’s rapidly inflating currency. Venezuela’s decades of failed socialist policies have destroyed the country’s economy, but the same policies also laid the groundwork for bitcoin’s insurgency as a legitimate currency. The role of bitcoin in the Venezuelan economy demonstrates that normal people are capable of understanding and using bitcoin for regular transactions, and that what works in Venezuela can work in the rest of the world.

What is bitcoin?

Bitcoin is an electronic payment system that uses cryptography to secure transactions. It was created in 2008 by an unidentified programmer and first introduced to individuals on a cryptography mailing list. Bitcoin transactions do not use an intermediary, the encrypted ledger of all transactions are available to the public and bitcoin’s software is open source. These elements are why bitcoin is considered to be the first decentralized virtual currency.

Cryptocurrencies work in complex ways. For an individual to obtain bitcoin, they could either buy existing bitcoins from someone or trade goods and services for bitcoins. Individuals can also be rewarded bitcoins for recording transactions on the ledger, also known as the blockchain. The blockchain is managed by a network of individual miners, or people who record encrypted transactions to the ledger by solving computational problems on the bitcoin software. Each individual miner is able to view the entire blockchain, and the entire network of miners is needed to create new portions of the ledger, after which the ledger is updated. This process both standardizes and decentralizes the way in which transactions are recorded.

Anyone who runs the bitcoin software could be a bitcoin miner, but the computational power of regular desktops is so weak compared to miners who use supercomputers, that the price of electricity to run the mining software ends up costing more than the bitcoins they would be rewarded.

You never really “possess” a bitcoin, you just have credentials to access its location on the blockchain. This location has both a public and private cryptographic key, and in order to have access to bitcoins at this location on the blockchain, you need to know the private key. The existence of public keys allow you to target where you want to send or receive bitcoins, and private keys allow you to confirm ownership and approve transactions.

Very few people owned bitcoins or had an interest in cryptocurrencies during the first three years of its creation, so the price of bitcoin stayed below $1. Since then, there have been several boom and bust cycles, and now the price of bitcoin is $1173.09 at the time of writing. Most people rightfully wonder if there is anything inherently valuable about bitcoin, and in order to conceptualize this, it helps to compare it to the inherent value of the US dollar. The US dollar, like other fiat currencies, is not backed by a commodity like precious metals, instead it is valuable because it is the only form of payment accepted by the US government. If you want to do business in the US, you need to do it in dollars. Likewise, bitcoin’s value is derived from the fact that there is great demand for encrypted, decentralized, digital currency.

Online black markets

Bitcoin is infamously known as the only accepted form of payment on online black markets, accessible via the dark net. Illicit marketplaces exist in hidden networks on the internet that do not appear in search engine results, and almost always require specific software or authorization to access websites. These websites can only be reached on encrypted internet browsers, and if performed properly, browsing habits are completely anonymous and impossible to track. Since bitcoin is also encrypted and anonymous, it thrives in this clandestine atmosphere.

You can buy anything you want on the dark net. Any drug can be purchased, hitmen are available for hire, human trafficking is disturbingly accessible, hacking tools and scamming software are easy to find and respective forums exist for deviants to discuss their illegal escapades. The dark net existed before cryptocurrencies, but bitcoin allowed dark net marketplaces to flourish.

The most well-known example of a dark net marketplace is the Silk Road. From the period of 2011-2013, the Silk Road mediated over 1 million transactions, generated $1.2 billion in total revenue and produced almost $80 million in commissions for Silk Road’s owner and operators. Although Silk Road was shut down by the FBI in 2013, and its creator sentenced to life in prison on various related charges, new dark net marketplaces have been created to fill the void.

Bitcoin in Venezuela

For various reasons, both internal and external, Venezuela is suffering hyperinflation and economic depression. The country has the largest oil reserves and has been one of the world’s leading exporters of oil, which has been the focal point of Venezuela’s economy for the past few decades. The petroleum sector accounts for one third of the country’s GDP and one half of the government’s revenues. Because of this, any decrease in oil prices sends a shockwave throughout the country’s economy that compounds negative effects far beyond the energy sector. Modern Venezuela history is punctuated by recessions caused by decreases in the price of oil.

With the condition of its economy in a precarious place, the Venezuelan government for the past two decades has not been able to appropriately handle economic downturn. In response to recessions, Venezuela has devalued their currency, set fixed price controls for goods and nationalized industries. These polices have led to a capital flight of foreign direct investment out of the country, and tend to make recessions much worse. However, one government policy has had a peculiar unintended consequence.

The Venezuelan government subsidizes electricity, and as a result all of the costs associated with mining bitcoin are shifted from the individual to the government, making it profitable for the individual to mine bitcoin. A relatively small group of computer savvy Venezuelans have caught onto this, and have begun mining bitcoin to buy food and goods from Amazon Prime Pantry service. Since domestic goods are scarce and no one accepts the Venezuelan bolivar, this seemingly roundabout process is the only way to acquire goods that would otherwise cost months’ worth of savings.

Bitcoin mining and the resulting black markets created by it can be dangerous for participants. Venezuela’s secret police targets bitcoin miners, arresting them for charges of possessing contraband or misusing electricity, since mining bitcoins is not yet illegal in the country. Despite this, bitcoin mining has enabled a black market for imports bought with bitcoin. The most visible example of this is Bitcoin Venezuela, a Facebook group with 7,000 users who can buy and sell goods using bitcoin they either mined or bought from someone who was mining.

It is unclear how much of a role bitcoin will play in the future of the Venezuelan economy. After all, not only is the government bearing the cost of the mining, but the use of bitcoin further delegitimizes the Venezuelan bolivar and increasing the size of the black market. However, it is clear that the once esoteric hobby for geeks and far-right libertarians has finally reached the mainstream. Regardless the fate of bitcoin in Venezuela, bitcoin has proven to be useful in everyday transactions and not just illicit services.

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