For years, inflation has struck Venezuelans right in the pocket. Many people have left the country in search of a better life, while others have remained, facing very unfavorable economic conditions. Now, after a long time, many of them are finding themselves making a living from Bitcoin mining.
Understanding Venezuela’s financial situation
Over the last years, the Venezuelan economy has been characterized by an acute crisis and the government’s heavy intervention in many aspects — like currency exchange control, which reigned over fifteen years and was lifted only three years ago, in 2018.
Until then, the country’s central bank treasuries were sustained by the inflow of US dollars from the oil industry bonanza of the early 2000s, as Venezuela is home to the largest oil reserves in the world. However, the national government and Petróleos de Venezuela (PDVSA) — the state-run and leading oil company — took advantage of this profitability period and contracted significant debt. One that became unsustainable after production fell abruptly in the following years.
As Alberto Torres explains, the fall of the oil industry put the government — heavily dependent on its income — between a rock and a hard place. Consequently, due to the lack of resources, the Banco Central de Venezuela (Venezuela’s Central Bank or BCV) took over, financing the political policies through emission. Logically, the hyperinflation arrived soon after.
Venezuela’s inflation rates reached an exorbitant 65,374% in 2018, and although it’s been decelerating since then, it’s still among the highest in the world, around 2,355%, according to Statista.
The steep rise of prices and devaluation of the Venezuelan bolivar led the people to look for alternatives. Many people — around two million to be precise — left the country. On the other hand, those who remained relied on the US dollar as a store of value.
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Cheap electricity, the driver for Bitcoin in Venezuela
After the rise of Bitcoin, a new scenario has developed. Subsidized by the government, electricity prices in Venezuela are the lowest on the planet, at ~0.05 cents per kilowatt/hour. And with BTC being obtainable through mining rather than buying, its accessibility has decoupled from the bolivar’s plummeting value.
Unlike the dollar, which becomes harder to acquire as devaluation deepens, Venezuelans can use cheap electricity to mine Bitcoin and earn revenue in a robust and deflationary currency. Indeed, in a country stricken by a prolonged crisis and a sky-high inflation rate, proof-of-work mining and Bitcoin is a breath of fresh air for the people who can enjoy a steady income.
As we’ve said before, Venezuela is home to the largest oil reserve in the world. However, the Venezuelan people have never seen the richness and wealth that this natural resource and its exploitation provides. It has always remained in the hands of corporations and the government.
According to Juan J. Pinto, we can see Bitcoin mining as a way for people to receive some of the oil industry’s wealth with no middlemen involved. That said, we can say that mining is effectively redistributing the country’s wealth among the Venezuelan people.
“Bitcoin mining is effectively redistributing the country’s wealth among the Venezuelan people.”
This mining profitability period has brought a new, fresh wave of interest in cryptocurrency in general. According to the research firm Chainalysis, Venezuela has climbed through the ranks to become one of the most active countries regarding cryptocurrency transactions and usage, especially P2P exchange volume.
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The current state of mining regulation in Venezuela
The rise in popularity of Bitcoin and mining didn’t go unnoticed by the government, which recognized cryptocurrency mining as a legitimate activity. The National Superintendence of Crypto Assets and Related Activities (SUNACRIP) — the government’s dedicated institution for these activities — has issued a document establishing the legal framework to add regulatory clarity around it.
Indeed, in September 2020, SUNACRIP determined:
- All crypto miners have to register for a mandatory “operation license.”
- Hardware manufacturers will be evaluated and granted a “quality certificate” should they meet the organization’s standards.
- Creating an “integral registry for miners” where all who want to take up cryptocurrency mining activities have to apply for the pertinent licenses.
- Creating a national mining pool operated by SUNACRIP, to which all miners located inside Venezuelan territory must be mining against to avoid sanctions.
However, many miners often choose to go around these regulations to avoid taxation and maintain anonymity. Venezuelan miners operating without a license have seen their equipment seized by the police. That said, after some violent episodes, SUNACRIP — with the president’s approval — determined that any police officers that took mining equipment without the organization’s permission would face up to five years in prison.
It’s not surprising that cryptocurrency and mining keep gaining traction in places where they are most helpful: vulnerable economies with high inflation and weak national currencies. Bitcoin is a perfect fit for Venezuelan people, and as we mentioned, usage and adoption data shows that they’ve started to realize it.
Venezuela, like El Salvador, is just the beginning. Stories like this are popping up in every news portal, whether from Latin America, Africa, or Eastern Europe, where cultures are very different, but economic and financial conditions are similar.
The case of Venezuela is just another example of how Bitcoin and cryptocurrency can become a device of financial inclusion, a store of value, and a hedge against inflation and devaluation for the common people, who don’t have the privilege of being bailed out by the government. As more people realize it, the closer we will be to adopting a truly democratic, decentralized, and fair global financial system.