Latin American Bitcoin Trading Follows the Heartbeat of Venezuela
Electrical outages reveal the nature and scale of Bitcoin usage across Latin America
Some seventy percent of all of Venezuela’s electrical power originates from a single dam on the Caroní river in Bolívar State, Venezuela. And on Thursday, March 7th, 2019, a fire near power lines of that dam caused the largest electrical blackout in the nation’s history.
The blackout, so widespread that it could be seen from outer space, lasted for days in urban areas and weeks in rural areas. It was estimated to cause $200 million a day in economic damage, 43 deaths directly, and scores more indirectly. During the outage, schools were cancelled, hospitals were encumbered, and residents locked themselves up at home as most economic activity across the country came to a halt.
Netblocks.org, an observatory for global internet connectivity and freedom, picked up on the blackout that week and was able to measure its scale by tracking the number of active internet connections during that time:
As researchers of Bitcoin usage in Latin America, we decided to take a look at the largest bitcoin trading platform in Venezuela, LocalBitcoins.com, and see the effect of the blackout there. Almost all of LocalBitcoins transactions in the country are trades of bitcoin for electronic bank transfers in the local currency, the bolivar.
The approach we took was to first estimate the expected number of hourly transactions based on the twelve weeks of data leading up to the blackout. This gives us a baseline of what an average week of activity should look like:
**Charts may not be viewable from mobile device. Try landscape mode**
Next, we overlaid the actual number of the transactions that took place during the week of the blackout to show the difference between a normal week and the blackout week:
And finally, we overlaid the number of active internet connections data provided by Netblocks, to showcase the vicissitudes of the blackout as they compare to the number of bitcoin trades:
Upon fully digesting these three data layers, there shouldn’t be any surprises — if the power is out in the whole country, bank transfers and bitcoin trades in that country will stop working. The story takes an fascinating turn, however, when looking at the transaction activity of other Latin American currencies during that time. Here are the number of trades between bitcoin and Colombian pesos (COP) during that week:
And look at Peruvian sol (PEN) transactions, where the effect seems to be most pronounced:
All other Latin American currencies with significant volume on LocalBitcoins exhibited some semblance of this behavior as well.
Here’s the Mexican peso (MXN):
The Chilean peso (CLP):
The Argentine peso (ARS):
Even LocalBitcoin trades involving the US dollar were affected by the blackout in Venezuela:
What exactly is going on here? Why would online bank transactions for currencies of countries not experiencing a blackout be so deeply impacted by a country which is? For the next section, we will explain and diagram the process which caused these knock-on effects in other currencies and show that Bitcoin is primarily being used as a vehicle currency across Latin America.
Bitcoin, the vehicle currency
It is sometimes said that Bitcoin provides different utility to different groups of people. In the Latin American markets of LocalBitcoins, our research indicates that it is primarily being used as an intermediate currency between fiat currencies for people transferring value in and out of Venezuela. In its simplest form, each value-transferring process harnesses two peer-to-peer exchange transactions on LocalBitcoins and is demonstrated in the slideshows below:
Using Bitcoin to transfer value into Venezuela
Using Bitcoin to transfer value out of Venezuela
Together, these two value transfer flows act as counterparties to each other and have created an ecosystem where those selling bitcoin for bolivars are met by those seeking bitcoin and who have bolivars to offer. In practice, the two transaction process described above is only one variant of several possible methods described in the appendix¹.
Given the description of trades detailed in the slides about how Bitcoin is being used to transfer value from one fiat currency to another, the data observed during the blackout should make more sense. When the lights go out in Venezuela, bitcoin trades across Latin America dive as well — because money transmitters outside of Venezuela are no longer able to communicate with their counterparties in the country to complete the cross-border value transfer.
Now that we have established how Bitcoin is being used to transfer value, we will now ask who is going through this process and dig deeper into why they are using Bitcoin instead of other methods. For these answers, we will turn to the feedback we gathered from informal money transmitters, companies, and end users within this ecosystem.
Who is selling Venezuelan bolivars to obtain bitcoin?
Venezuela’s currency has succumbed to hyperinflation and devaluation. It has performed so badly that, at times, a Friday paycheck in bolivars could only purchase half as many goods the following week. For a long time, those in the Bitcoin community had surmised that the increase in bitcoin volume there must mean it was being used as a store of value against the devaluing bolivar. We can now confidently say that this isn’t the primary use case. Bitcoin is being used not as a store of value endpoint, but as a channel on the road to obtain more stable currencies such as the US dollar, Colombian peso, Chinese yuan and various stablecoins. The money transferred out of Venezuela may be held in a host of fintech applications such as PayPal, Zelle, Uphold, Alipay, WeChat Pay, AirTM; in crypto exchanges such as Bitfinex or Binance; or as deposits at many popular banks².
Both individuals and businesses in Venezuela want to sell their bolivars for bitcoin to acquire other fiat currencies, either to save or to pay for a range of goods and services, both digital and physical, purchased all around the world. One may use services like PayPal to pay for VPN subscriptions, streaming services like Netflix, video games on Steam, or even physical goods on Amazon — which can be sent to Venezuela via courier services.
Looking through advertisements and trading data on LocalBitcoins, we also found that a sizable chunk of those selling bolivars to acquire bitcoins on LocalBitcoins are members of the Chinese-Venezuelan community. We were unable to get any of them on record about the details of their trading activity, but it seems likely that they are channeling profits from their bolivar-heavy cashflow businesses within Venezuela (restaurants and general stores), converting them and sending them to Chinese yuan accounts in China or US dollar accounts in Panama or the United States for saving and commerce payments.
Who is selling bitcoin to obtain bolivars?
Given that the bolivar is one of the world’s worst performing currencies, one might ask who would be willing to part with their bitcoins to acquire some. When Bitcoin usage first started picking up in Venezuela years ago, it was theorized that those hungry for bolivars were government-connected Bitcoin miners with access to special, more favorable bolivar-to-dollar exchange rates. They would sell as many bitcoins as possible to obtain bolivars, which they could then sell for more dollars than the general public would be able to. For a few years now, however, that special exchange rate for the well-connected is almost extinct, and the new use case of remittances has emerged.
Latin American Bitcoin remittance
Over the last four years, the economic and political crisis in Venezuela has caused over 10% of the population to leave the country in search of greener pastures. According to the Council on Foreign Relations, these Venezuelans have headed in droves to Colombia, Peru, Ecuador, Chile, the United States, Spain, and others as shown in the graph below:
These migrants, both documented and undocumented, have set up new lives and have started earning incomes in the currency of their host countries. When they do get on firm enough footing, often the first thing they desire to do is to send money home to their struggling families in Venezuela. However, as was alluded to in the slideshows above, the Venezuelan government does not allow for its currency to be freely exchanged with other currencies. Any officially sanctioned money transmission business is compelled to honor government-mandated exchange rates to the point where such businesses have become mostly abandoned³. As a result of this, remitters and anyone else wishing to transfer value into or out of Venezuela are best served by using the vast network of informal money transmitters available to them through social networks and on LocalBitcoins. We heard this story multiple times over the course of our research and some of their testimonies are described here:
- Anyi, a documented Venezuelan migrant residing in Chile, uses her Chilean bank account and the CryptoMKT Bitcoin exchange in Chile to buy Bitcoins, which she then loads into her LocalBitcoins wallet to sell for bolivars deposited into her family’s bank account. She states that this is the most efficient way for her to send money home, with traditional, hawala-style transfers taking second place.
- Eduardo, a documented Venezuelan migrant residing in Argentina, earns Bitcoin for his salary as a customer support manager and sells it on LocalBitcoins for deposits sent to his own Venezuelan bank account. His mother in Venezuela then uses his bank card to make purchases there locally.
- Tomás, a Venezuelan migrant and economist residing in Argentina, has a Facebook group and popular YouTube videos where he teaches Venezuelan migrants across Latin America how to send money home through the exact two-transaction process we describe in the first slideshow.
- Valiu, a remittance startup based in Colombia, helps thousands of documented and undocumented Venezuelans in Colombia convert their Colombian pesos into Venezuelan bolivars, using LocalBitcoins and other services in the backend to achieve this.
In addition to examples above, we spoke to four professional money transmitters who worked informally in Colombia, Peru, Mexico, and Argentina, and three out of four reported that the majority of their volumes was related to remittances to Venezuela.
Other Learnings from Market Participants
- The four informal money transmitters we spoke with averaged thousands of recorded trades each on LocalBitcoins and, according to all of them, LocalBitcoins accounted for a minority proportion of their total Bitcoin trading volume — the majority was done through private messaging groups like WhatsApp, Telegram, and Facebook groups.
- They also told us that Bitcoin is but one tool in their chest of money transmission methods and that access to foreign bank accounts alone is oftentimes perfectly sufficient to facilitate the value transfers that their customers require.
- During the value transfer process, traders told us that they generally jump into and out of Bitcoin as necessary and only hold it for as long as they need to in an attempt to avoid the price volatility. Before going to bed, most traders convert their Bitcoin holdings into dollars or stablecoins.
- While Bitcoin’s use as a vehicle currency seems to account for the majority of activity we observed, some we spoke to did state that they also used it as a hedge or as a store of value as well. There are few people in the world who have experienced Bitcoin’s utility as much as these informal money transmitters, and many of them describe themselves as long term Bitcoin believers and hold an allotment of coins permanently.
Bitcoin and Venezuela’s dollarization
More than a decade of political and economic turmoil came to a crescendo during the March 2019 blackout. Since the crisis, Venezuelan authorities have taken a step back from their rigid monetary policies and have slowly acquiesced to free market forces in some areas⁴. Residents who once had to hide dollars under their mattresses are now allowed to openly exchange them. Merchants discovered that they can set their own rates and are happy to receive either dollars or bolivars for payment as they need a mixture of both to cover their payroll, bonuses, and other expenses. Import restrictions have been relaxed, and grocery store shelves and pharmacies are now comparitively full. According to Yadio.io, a website that monitors exchange rates between the bolivar and the US dollar, devaluation has even stabilized since the beginning of this year:
In concert with this change in circumstances on the ground in Venezuela, there has also been a gradual reduction in Bitcoin-bolivar trading on LocalBitcoins. In February 2020, volumes were only about 60% where they were at time of the blackout a year earlier:
Additionally, if you visit UsefulTulips.org you can see that indeed most Latin American currencies have also followed the bolivar’s volume decline:
There are a number of reasons which may have caused this volume decrease to happen⁵, but what we believe this trend reversal is telling us is that Bitcoin’s utility changes according to the environment that it exists in. That is, economies which create artificial exchange rates, set unhealthy monetary policies, and otherwise encumber their population’s financial freedom are those economies in which Bitcoin thrives. When those economies begin to take steps towards freer and fairer markets as Venezuela has, Bitcoin becomes less necessary. After all, why go through the trouble of using LocalBitcoins to get dollars when you can now get them freely on the street without persecution?
It remains to be seen whether Bitcoin will settle in as a vehicle currency and primarily aid trends like global dollarization, or if it will mature into a more well-rounded form of money with greater versatility, but one thing is clear: Bitcoin, and more broadly the internet as a whole, has begun to poke holes in the once walled monetary gardens of the past. Cross-border transfers which once took place on government sanctioned banking infrastructure are now operating permisionlessly through the internet. And as the government of Venezuela learned after spending years trying in vain to control the flow of money across its borders, guarding the door is not enough anymore because this new technology is sneaking in through the chimney.
This feature of Bitcoin is no longer theoretical or speculative — it is happening routinely. In 2019 alone, LocalBitcoins facilitated the trade of $315 million dollars worth of bolivars. And as we learned through the course of our research, the volumes seen through LocalBitcoins may be a very small fraction of the total of Venezuela-related money transfers that ride Bitcoin rails. It’s not unreasonable to suggest that Bitcoin could have already facilitated billions of dollars worth of censorship-resistant value transfer to and from Venezuela over the last few years. If we take this as a real possibility, then Bitcoin has already played a part in changing the destiny of an entire country.
Lastly, Bitcoin itself is also constantly evolving in the way of user friendliness, cost of use, volatility, and public understanding. And if these changes favor Bitcoin and its network effects continue to grow, it will keep catching fire in countries with financial or monetary issues.
If you are interested in learning more about Bitcoin’s growing impact on the world, please visit my website UsefulTulips.org, where you can read articles and browse LocalBitcoins volumes (and other data) for over one hundred currencies around the world. Additionally, please follow me on Twitter, where I regularly post pithy observations relating to utility use of cryptocurrency around the world.
- The value transfer process often has more intermediaries where an end user tasks a professional informal money transmitter to conduct the trades.
- Sometimes only one of the two transactions in a given value transfer process even involves LocalBitcoins and instead harnesses other Bitcoin exchanges or takes place over Whatsapp, Telegram, or Wechat trading groups.
- One or both of the transactions may also occur as internal wallet transfers on LocalBitcoins between users and would not be registered as offical trades through their API.
2. Zelle, a service for transferring money between American bank accounts, is a surprisingly popular payment method in Venezuela. The popularity of these other fintech applications tends to be contingent upon the accessbility, fungibility, user friendliness, and incumbent network effects native to them. More is discussed in this Twitter thread.
3. This same phenomenon has been observed in the Nigerian market and was researched in another article by me.
4. Venezuela officially started backtracking on its strict dollar controls in August of 2018, but in a country where law and enforcement are two different realities, it took the desperate conditions of the blackout for people to realize that they would no longer get into trouble for pricing and exchanging goods and services in dollars.
5. Other potential reasons for this reduction in volume are:
- LocalBitcoins’ increased identity requirements,
- Migration to dollar trading instead of bolivar trading,
- Traders transitioning away from LocalBitcoins in favor of private messaging groups.
Abig thank you to the team at dlab for their research sponsorship and guidance over the last nine months. And thanks also to Paxful for contributing to a new sponsorship. Lastly, thank you to all of the information resources for this article:
- Alejandro Machado, Eduardo Gomez, Daniel Knobelsdorf, and Mariano Di Pietrantonio
- Several people who make a living as money agents on LocalBitcoins,
- The LocalBitcoins team.
Also thanks to Ben Rosen, Alejandro Machado, and José Rafael Peña for proofreading and editing.