Is Venezuela Foreshadowing Other Financial Crises and an Important Role for Some Cryptocurrencies?

Source: ARK Disrupt Issue 128: June 12, 2018. By @wintonARK

In Venezuela, person-to-person bitcoin trading has again elevated, as shown in the chart below. Apparently, the local population is resorting to the cryptocurrency as it tries desperately to protect its purchasing power and savings.

ARK Disrupt Issue 128 Graph 1

Source: Coin Dance

Threatening to ravage the country’s wealth, the Venezuelan bolivar is in full-fledged hyperinflation, with annualized rates topping 30,000% (6/6/18), 31,000% (6/7/18), 37,000% (6/8/18). At 37,000%, without hedging against inflation, millionaires would become thousandaires in one year, only to watch their purchasing power disintegrate to less than $10 during the following year.

ARK Disrupt Issue 128 Graph 2

While a tragedy for the Venezuelan people, hyperinflation highlights the role that certain cryptocurrencies could play both to benefit consumers and to challenge monetary authorities in countries at risk for hyperinflation.

By transferring fiat currencies into certain cryptocurrencies, consumers will be able to protect their savings against monetary mismanagement but, as their preference for cryptocurrencies causes an acceleration in the rate at which fiat changes hands, they will exacerbate the hyperinflation. Businesses probably will prefer cryptocurrencies over fiat as well, transforming the country into a cryptoconomy in which the local currency no longer serves as a unit of account and the central bank loses its relevance. In other words, the velocity of money will explode.

During the transition to a cryptoconomy, the local banking system is likely to fall into disarray as all of its loans and deposits inflate into meaninglessness, while at the same time it lacks the technical capability to custody new assets. Capital market participants also will be staring at assets that are cratering, with bonds denominated in local fiat worth pennies or less and dollar-denominated bonds rendered unpayable. Indeed, consumers and businesses having resorted to cryptocurrencies will be able to salvage more than bondholders.

In the worst case, contagion could topple other vulnerable monetary regimes around the world as local consumers and businesses begin to diversify into cryptoassets, if for no other reason than “insurance “ in the face of the Venezuelan news, while bondholders begin to unwind holdings to hedge against contagion.

We are watching this space carefully.

View original article and other research here.

 


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2018-07-21T01:16:09+00:00 June 13th, 2018|