Venezuela, known to have the largest proven oil reserves in the world, has suffered economic turmoil for years now. Stories of people fleeing the country under increasing political tensions regularly make the headlines.
In the crypto community, it’s common knowledge that amidst hyperinflation, Venezuelans have been particularly receptive to Bitcoin and other cryptocurrencies.
But what’s not been adequately discussed, however, is how stablecoins link into this, and what particular benefits they offer.
Bitcoin in Venezuela as a hedge against hyperinflation
Especially since Facebook’s announcement of Libra, there has been increased public interest in stablecoins. But the idea of a tech giant issuing a “cryptocurrency” of its own, has also served to highlight some of the key differentiators of Bitcoin and other cryptocurrencies.
Bitcoin is borderless, truly peer-to-peer, a store-of-value, and beyond government control.
The attractiveness of these features couldn’t have been clearer than in the context of Venezuela’s hyperinflation. With tight capital controls in place, and IMF expecting inflation will hit 10 million percent by the end of 2019, Bitcoin has acted as a true safe haven.
In fact, despite its infamous volatility, people were better off holding Bitcoin than their national currency – even during the ‘crypto winter’ when the Queen of Crypto lost most of its value.
Nevertheless, in Venezuela’s situation, which is not necessarily a unique one, stablecoins are probably a better option than Bitcoin.
What is a stablecoin?
A stablecoin is a type of cryptocurrency, but unlike ordinary crypto that is directly valuated by the market, the value of a stablecoin is pegged to the value of another stable, highly liquid asset.
It can be pegged to fiat currency, like the USD, but also to commodities such as gold or oil.
There are many variations of stablecoin constructions, but in simple terms, we can distinguish between two kinds: fiat-backed and crypto-backed.
– Fiat-backed stablecoins
Fiat-backed stablecoins are coins issued in exchange for actual fiat. For example, you send $1 to the issuer, and the issuer gives you 1 stablecoin in return. Now you have a digital version of your dollar, which you can more conveniently transfer peer-to-peer or use for everyday payments. The issuer holds your actual dollar in a reserve, and promises to be able, at all times, to take the stablecoin back in exchange for $1.
– Crypto-backed stablecoins
Crypto-backed stablecoins are also tied to the value of another asset, for example, USD, but they are not backed by US Dollars.
Instead, they are backed up with an amount of cryptocurrency equal to the value of USD. In fact, the amount of cryptocurrency used to back up the USD stablecoin is usually more than a 1 to 1 ration. Such over-collateralisation serves as a buffer for volatility – keeping the value stable during unexpected market movements.
With fiat-backed stablecoins, we have to trust that the issuer keeps enough money in their reserves to honour redemption. But with crypto-backed stablecoins, the crypto used to back up the stablecoin is locked in a smart contract on the blockchain, meaning they don’t require us to trust anyone.
The case for stablecoins in Venezuela
While crypto-enthusiasts will be pleased to see Bitcoin delivering on its promise as a store-of-value for the people of Venezuela, for people who are more concerned with preserving their wealth rather than speculating and investing in high-risk assets, stablecoins are a much better choice.
In Venezuela, it is relatively easy to obtain Bitcoin through OTCs and Bitcoin ATMs. But instead of holding on to it, Venezuelans would be better off trading into stablecoins such as BitUSD, BitJPY, or other crypto-backed stablecoins. This means they don’t need to worry so much about Bitcoin’s volatility.
With stablecoins, they can be relatively certain that they can preserve their wealth by leveraging the stability of foreign currencies and they don’t have to worry about capital controls.
If for some reason the price of, say, the US Dollar goes down, it’s easy to trade into other stablecoins such as BitEUR, BitJPY, or BitGold. Plus, since their funds have now been digitalised, if they do see an opportunity and want to invest in Bitcoin during one of its price rallies, it’s easy to do so.
Although Bitcoin performs notoriously well during economic crises, in times of turmoil stability is more important than the prospect of profits. Stablecoins offer a way to park your money, spread risk, and stay financially connected to friends and relatives abroad.
Source: Bitspark Hong Kong