Two Real Use Cases for Bitcoin in Latin America
There are two strong narratives circulating around Bitcoin today: Bitcoin is a pyramid scheme that’s ultimately going to 0 or Bitcoin is a new world reserve currency ready to destroy the state. Both are hyperbolic and belie its real use cases. Having lived for substantial time in both the United States and Latin America, we feel strongly that those use cases exist primarily in emerging markets. That’s not to say that Bitcoin can’t or won’t become useful in the U.S. and Europe. In time, we believe it will prove valuable as a hedge against excessive money creation around the world.
But Bitcoin solves at least two hair on fire problems in Latin America today as: 1) a hedge against rampant inflation or bank takeovers and 2) a cheaper, uncensorable network for remittances and international payments. We’ll examine each of these cases supported by observations and data from experiments that we (in partnership with Give Crypto) ran in Mexico in late 2018.
1. Bitcoin as a Hedge Against Rampant Inflation or Bank Takeovers
By now, everyone knows about the rapid deterioration of Venezuela at the hands of government mismanagement and hyperinflation, the rate of which is conservatively estimated at 80,000% in 2018 alone. In such scenarios, most recently experienced in countries like Zimbabwe, Argentina, and Weimar era Germany, the value of one’s salary earned today may be worth essentially nothing within a week or less.
Cryptocurrencies like Bitcoin have begun attracting meaningful attention as an alternative store of value in Venezuela due to their borderless nature, censorship resistance, and (in the case of at least Bitcoin) demonstrably limited quantities. While the Venezuelan government has shut down all Bitcoin exchanges, local peer to peer trading sites like LocalBitcoins experienced exponential growth in the country at the end of 2018:
Even with Bitcoin’s massive volatility over the last year (it fell > 90% in 2018), holding BTC was still far superior to holding Venezuelan Bolívares. Indeed, this sort of hyper-inflationary environment is the most obvious scenario where holding bitcoin is an absolute no-brainer.
Unfortunately, Venezuela may not be a complete aberration as several other countries are creeping in that direction. Check out The Spectator Index’s 2018 global inflation list:
Many of these estimates (particularly Argentina at 34%) seem very conservative. But even with this baseline, people living in countries like Argentina, Turkey, and Iran would be wise to consider stocking up on an inflation- and censorship-resistant asset to hedge against the possibility of hyperinflation or frozen bank accounts.
Indeed, even in Mexico, a country with a relatively light inflation rate of ~5% in 2018, we’ve seen firsthand desire for such a hedge. In our study of 28 middle class Mexicans, >70% expressed fear of peso devaluation in the next 1 to 3 years.
And almost no one can act on this fear by hedging in Dollars or Euros, as <14% have access to even a simple savings account in a foreign currency.
Given that opening a US or European bank account is not feasible for most, we recommended two solutions to help these savers prepare for potential inflation: 1) stablecoins like TrueUSD (the most liquid stablecoin in Mexico) as an option for short-term savings (< 3 years) and bitcoin as an option for long-term savings (> 3 years).
We explained that both options come with risk. In the case of fiat backed stablecoins, this is largely counterparty risk — the entity custodying your dollars could prove untrustworthy or be forced to freeze your funds. In the case of experimental stablecoins like DAI, there is black swan technological risk (e.g. the Ethereum network quickly goes to 0) and liquidity risk. With Bitcoin, there is both the proven volatility risk (although that volatility has been clearly up and to the right for anyone holding for multiple years) and a similar technological risk of Bitcoin going to 0 (although this seems by far the least likely of any cryptocurrency given Bitcoin’s unmatched run of 10+ years of network security and dominant liquidity).
Of course, we recognize that all of these risks are quite large relative to more stable options like FDIC insured U.S. bank accounts or stocks/bonds and should accordingly represent only a small portion of a balanced investment portfolio for those with access to such options. But for people in emerging markets with limited access to stable vehicles, storing wealth in the most robust, censorship resistant cryptocurrencies seems a reasonable protection against their local currency losing the majority of its value. We saw this point in person as almost every participant in our study planned to put some portion of his or her savings into either TrueUSD or Bitcoin (and most decided to split between the two).
To unlock Bitcoin’s full potential to help individuals protect their wealth against government and banking shenanigans, we need:
- More education on why the limited supply and strong security model of Bitcoin (and some stablecoins) are useful for storing value and not just speculation
- Easier options for converting local currency (including cash) into bitcoin and stablecoins
- Better experiences around private key management so that users don’t accidentally lose their keys and all of their money
2. Bitcoin as a Cheaper Payment Network for Remittances
The second major problem that Bitcoin solves is how to send and receive cheap, censorship resistant international payments. There are several types of international payments where Bitcoin may prove better than existing alternatives, such as for:
- The freelance developer or designer who wishes to take a job in another country. Bank transfers are often prohibitively expensive ($50+ USD). Existing tools like PayPal are very limited. In the case of Mexico, our participants explained that they are unable to transfer their foreign balances in PayPal to their local bank accounts. In Argentina, as recently as 2015, PayPal and other international payment providers were forced to honor government set exchange rates substantially worse than the street market price for dollars.
- The non-profit or charitable individual that wishes to give small amounts of money directly to those in need without any intermediary or bloated overhead costs in the middle.
- And, of course, the use case which we’ve begun testing in Mexico: remittances.
The World Bank estimates that every year immigrants send > $450 billion USD back home to their families. In many cases, these immigrants are hard working individuals who have left behind their homes and societies to earn enough money to help their families survive. It is both unsurprising and unconscionable that money transfer services have for generations taken advantage of this most vulnerable class.
Bitcoin (and similar cryptocurrencies) provides a trusted and cheaper alternative for these families. In our first small experiment, we helped 9 people send money from Mexico to their families in Venezuela, Colombia, smaller Mexican towns, and even Japan. They sent an average of $120 USD / month and used alternatives like Western Union, informal traders from Whatsapp groups (in the case of Venezuela where formal channels are limited and monitored by a corrupt government), and creative hacks like sending a Mexican debit card abroad. Among this small group, people were paying average fees of 8–16% along with extra hidden charges in the exchange rate.
We helped each participant save a substantial amount by using Bitcoin to send their monthly remittance: ~9–16% vs. the leading wire service from Mexico to Colombia and ~12% vs. informal traders in Venezuela.
The process, however, was complicated. First, we helped participants convert their payment to bitcoin using a local Mexican exchange called Bitso. Bitso has lots of liquidity and fair prices compared to global norms. Cash-out options varied by country. For Colombia, we found a few competitive local exchanges that could easily link to local bank accounts. In Venezuela, all online exchanges have been shut down, so we used LocalBitcoins. In both cases, we linked the cash-out exchange to the bank account of the participant’s family back home. This way, they never once had to explain Bitcoin to their less technically astute parents. In fact, their parents didn’t even have to know Bitcoin was used at all. They just saw a larger amount deposited into their bank accounts.
We believe there is a big opportunity here to simplify all of these different channels, exchanges, and apps into one simple remittance experience. Our users overwhelmingly cited reducing this complexity as the key factor for them to continue sending payments with Bitcoin.
Ideally, Bitcoin could be abstracted entirely so that users only know that they’re sending more money at cheaper rates.
One final note: why did we choose to use Bitcoin vs. other cryptocurrencies with lower fees for sending international payments? Although we remain open to using any cryptocurrency in the future, we believe that Bitcoin should be the strong default for 2 reasons: 1) it has the least black swan risk of going extinct — after 10 successful compounding years, Bitcoin has by far the most network security of any cryptocurrency and 2) Bitcoin enjoys by far the most liquidity and brand recognition around the world (especially among peer to peer traders on sites like LocalBitcoins). The concern around Bitcoin’s relatively high fees is a legitimate, but we believe, ultimately solved problem. While Bitcoin would NOT have been a reasonable option for sending remittances during the great cryptocurrency hype of 2017, at the time of our experiment, Bitcoin mining fees amounted to only ~$0.10 USD / transaction. We expect those to continue decreasing with the adoption of scalability solutions like SegWit and the Lightning Network.
What’s Next?
We are dedicated to spreading bitcoin (and potentially stablecoins) to those who need it most. In order to design and distribute solutions tailored around the store of value and remittance use cases, we plan to work with organizations that share our values as we:
- Re-run our experiments in Mexico with larger sample sizes to get more meaningful data (especially on the remittance side)
- Run these same experiments in countries with more pressing risk of hyperinflation (e.g. Argentina)
- Experiment with some crazy ideas we have around informal exchanges and merchant adoption
If you’re interested in following our journey or potentially working with us, join our mailing list or follow us on Facebook and Twitter. You can also reach us directly at entiendebitcoin@gmail.com
