Abstract
Using Bitcoin trading data in Venezuelan bolivars from the LocalBitcoins peer-to-peer market place and using the theory of Purchasing Power Parity (PPP), Bitcoin, as a single universal asset, is substituted for the ‘basket of goods’ normally used in the PPP, allowing the estimation of the relationship between the Venezuelan bolivar and the United States dollar. In this analysis Bitcoin is used as a tool to enable the calculation of the bolivars to dollars unofficial exchange rate and consequently the implied inflation rate. Using Bitcoin’s publicly available prices in this way enables a government’s economic mismanagement to be identified more quickly than the typical approach of measuring changes in the Consumer Price Index. Venezuela is currently in crisis, which this approach identifies as a problem as far back as 2014, as official and unofficial exchange rates diverge and inflation rates increase yearly reaching an unbelievable 70,000% in 2018 alone.
Highlights
For a country in the grip of hyperinflation, the news that the Venezuelan Central Bank is printing more money only adds to the political turmoil and economic uncertainty within the country.[1]
There is one other alternative, Bitcoin, a decentralised peer-to-peer (P2P) payment system proposed by Satoshi Nakamoto in 2008,3 built to bypass traditional financial systems, outside of government control, which can be purchased in quantities as small as one satoshi (0.00000001 of a bitcoin)
While calculating the Argentinian peso’s variation to the Bitcoin Price Index (BPI), it becomes obvious that it has had a similar problem to Venezuela, of a significant difference between official and unofficial exchange rates, which their government dealt with on 18 December 2015
Summary
For a country in the grip of hyperinflation, the news that the Venezuelan Central Bank is printing more money only adds to the political turmoil and economic uncertainty within the country.[1]. Venezuela is a gold-producing country, purchasing gold with bolivars is difficult and small amounts are not easy to purchase or sell. The United States (US) dollar is a reasonable alternative but the country is short of dollars to even import basic necessities. There is one other alternative, Bitcoin, a decentralised peer-to-peer (P2P) payment system proposed by Satoshi Nakamoto in 2008,3 built to bypass traditional financial systems, outside of government control, which can be purchased in quantities as small as one satoshi (0.00000001 of a bitcoin). The advantage of Bitcoin is that it can be purchased outside of Venezuela in any currency for Venezuelan residents to sell in Venezuela for bolivars, keeping pace with inflation. Bitcoin’s fortune over 2017-2018 fluctuated, it has not lost as much value as the bolivar, which, at the time of writing, is almost worthless
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