Fortune gets it totally wrong with “Venezuela’s Cash Is Now Worth Less Than Currency in ‘World of Warcraft’”

Twenty Five Million Drachmas back in 1944

This Fortune article gets it completely wrong in a very annoying and misleading way. I understand it’s just a catchy headline but in the Bitcoin Era, everyone should be well aware of the fact that exchange rates mean absolutely nothing, when seen in isolation.

I will explain ways to derive meaningful narratives from exchange rates, but first let’s have a quick look on some historical facts. Back in 1946, the Greek currency, Drachma, had extraordinary low “value”. A coffee used to cost 1,000,000 drachmas and within a single reported month, the price of a newspaper raised from 10,000,000 to 21,000,000 drachmas (source with some interesting photos in Greek). In the 50’s, Spyros Markezinis, orchestrated the “drop” of three zeros (!!!) from the currency and a thousand drachmas, almost overnight, turned to a single drachma (source in Greek). As expected, the drop of three zeros, didn’t have, by itself, any impact on people’s lives. As far as I can remember, in 2000, just before Greece started using the Euro, about half Hiliariko (five hundred drachmas) was still a reasonable price for a coffee. Now, in 2017, it costs about 3 times as much, in the Euro currency.

Germany experienced terrible hyperinflation back in World War I. “In 1914, the exchange rate of the German mark to the American dollar was about 4.2 to one. Nine years later, it was 4.2 trillion to one” (source with some must-see photos). I remember reading that, at some point, in the time it took to hand a German Mark to someone, it had already lost half of its value!

I believe that those two examples are enough to convince you that the “number” — the “value” or the — “exchange rate” are completely meaningless. They are just numbers. One way to judge if a thousand Venezuelan Bolivar per USD is good or bad is to compare the exchange rate with the same rate in the past. Yes, when you see a currency in millions, it likely means that something went really wrong in the past, but, it doesn’t say anything about what is happening now. It doesn’t say what salaries are like nor how expensive food and housing are. A Greek family used to make millions of “new” Drachmas (billions of “old” Drachmas) per month, but it meant absolutely nothing unless you were putting it into the context of the equally multi-zero’ed expenses. This was the case for decades in Greece.

Undoubtedly, these are very dark times for Venezuela and Venezuelan Bolivar. Let’s see if we can make something meaningful out of the exchange rates, though. According to Fortune’s article, the black market price is 12,000 Bolivar per dollar. Looking at this CNBC’s article from March 2017, the black market price seemed to be 3,000 Bolivar per dollar. It would seem that it’s now way cheaper for foreigners with USD, to acquire valuable Venezuelan assets, since they get 4 times more Bolivar per dollar when compared to a few months ago. Of course it’s likely that holders of really valuable assets have also risen their prices, in which case the fall of exchange rate means nothing for them. At the same time it’s likely that foreigners, too, aren’t interested in buying, due to political instability. If that wasn’t the case, there would be some support on the currency and it wouldn’t fall so sharply.

What, the exchange rate certainly means, is that only very few extremely rich Venezuelan people, can afford imported goods as well as traveling and living abroad (using their Venezuelan incomes). That’s the only strong conclusion we can draw. Any currency reserves locals had, are now 4 times less valuable if they want to spend them on things valued in foreign currencies. To the extend that the local economy doesn’t depend on imports for everyday necessities, we can’t conclude anything on how prices feel for locals. It’s highly likely that it’s very bad, according to what I’ve seen in the news, but I would seriously doubt that people got 4 times more poor in the last 5 months, in the context of their isolated local market. I would expect a bag of locally produced tomatoes to cost “just” about 20–30% more than it used to, and not 3 times more. Of course this doesn’t make it any less terrible :( I so much wish things become more stable and start improving.

Summarizing, comparing the “value of a currency” or the “number” of the “exchange rate” of Venezuelan Bolivar and World of Warcraft tokens is completely meaningless. They are all arbitrary numbers. The big message of Bitcoin and other Digital Currencies, is that those numbers don’t represent anything meaningful! Before one compares a number with another, they must put some effort to present a comparison that makes sense, and this article fell flat in that aspect.