We recently caught up with researcher Alejandro Machado, who spent part of 2018 investigating how people are using cryptocurrencies in Venezuela.
The country is in the throes of a prolonged hyperinflation spiral, which basically means the government-backed Venezuelan bolivars are becoming worthless. In fact, the bolivar is now among the most worthless fiat currencies on the planet.
“Prices in Venezuela double every 18 days,” says Machado, a researcher with a background in computer programming and human-computer interaction. “So if you are planning for the future, or trying to manage your cash flow, you are losing purchasing power really quickly by keeping money in bolivars.”
The Venezuelan bolivar has had an interesting ride. In the currency’s 139-year history, it’s been backed by silver, gold, the dollar, and most recently tied to the controversial petro digital currency. Petro or petromonedas, was launched this year by the Venezuelan government as a way to use state-owned oil and mineral deposits to collateralize crypto, which in turn would be used to back the latest iteration of the bolivar, the bolivar soberano (the sovereign bolivar, which was created to drop some zeros of prices listed in bolivar fuerte (the strong bolivar), which was created to drop… you get the idea).
For stretches of decades, the bolivar was a useful currency. It became a stable store of value and an accepted way to settle debts and payments across the entire region. During those times, the Venezuelan economy flourished.
But beginning in the 1980s, government officials started issuing currency controls to stave off economic fears fueled by increasing foreign dept, lack of currency reserves, and dim oil futures.
All of the currency controls and heavy-handed economic policy has shattered the Venezuelan economy, leading to scarcity of basic goods and services. The economic wobbles were made worse by Venezuela’s heavy-handed government and policies over the past 20 years.
In the face of worsening money-related issues, Venezuelans have gone looking for alternatives, which is where the underlying strengths of cryptocurrencies start to emerge.
Crypto, despite its volatility, provides a liquid form of value that can be transferred peer-to-peer both locally and globally, it’s resistant to government censorship and seizure, and it can be used as a long-term store of value (compared to the bolivar, at least, which has experience inflation of 224,900% in the past year alone).
“If you are living in a liberal democracy, you can trust institutions,” Machado says. “In Venezuela, there is zero trust in institutions, including the institution of money itself. So crypto might not be good money when compared to the dollar, but it is good money compared to the bolivar.”
Venezuela’s hyperinflation during 2018 as illustrated by Bloomberg’s café con leche index, which tracks the price of a simple cup of coffee in bolivars. As of January 1, 2019, the price of a cup of coffee cost 450.00 bolivars, representing an inflation rate of 224,900% in the past year. (graphic courtesy Bloomberg)
On the ground
Machado and his colleague Jill Carlson, an independent crypto researcher and consultant, were hired by Zooko Wilcox, the founder and CEO of Zcash for four months during the summer of 2018 to find out more about how people are using cryptocurrencies in Venezuela.
While the team did learn some specifics about Zcash, they also found out that despite the privacy emphasis of the Zcash technology, many Venezuelans are mostly still using just bitcoin as their crypto of choice.
More specifically, what the research team found out is that despite its volatility and reputation as a speculative asset, people in Venezuela are using crypto in four main contexts: As a means to earn an income, a store of value, protection against government seizures, and a way to send and receive money.
Mining: Make money, making money
Crypto mining requires computer equipment to run specially designed software to compete against other miners to solve mathematical puzzles. If miners win the competition, then they get the block reward of whatever crypto they are mining (block intervals are crypto-specific — some payout rewards every two minutes, while cryptos like bitcoin, pay a block reward every ten minutes).
In most parts of the world, mining for valuable crypto is becoming harder. For one, the mining competition for bitcoin, for example, requires specialized equipment, and lots of it. This has led to the consolidation of mining power to industrial-strength operations. The second issue is that mining requires heavy computation, which requires lots of electricity. In many parts of the world, the economics of mining (especially in a down market) doesn’t make sense, because it costs more money in electricity bills than the current value of the crypto.
But miners in Venezuela are taking advantage of the country’s subsidized energy, which makes it a great place to run a crypto mining operation. Most of the computer hardware available is lightweight (old desktop GPUs, mainly), so tech-savvy Venezuelans are setting up small-time mining operations focused on some of the easier to mine cryptos (like Zcash).
“Cryptocurrency mining is like a money printing machine,” Machado says. “People are taking advantage of the cheap energy, but generally miners keep a low profile because they’re required by law to be part of a central registry. So there is some distrust.”
For Venezuelan crypto miners, cryptocurrencies present opportunities beyond just investing or speculating on future valuations.
“I have friends who are doctors and engineers and they should be making a good salary,” Machado says, “but they are now mining $100 or $200 of Zcash or ether. They mine these smaller coins and then trade to bitcoin, hold the bitcoin, or they cash out.”
Store of value: During hyperinflation bitcoin is better than storing money in a mattress
In the developed world, and against the backdrop of the crypto boom of 2017 and the bust of 2018, the argument about bitcoin’s suitability as a store of value rages on. But the fitness of bitcoin as a store of value varies depending on perspective.
“In the context of Venezuela, the bolivar is not working,” Machado says. “So people are flocking to other (fiat) currencies, but there’s no way to store them. So the question becomes, how do you enable people to store money in a way that isn’t physically offshore. And if this becomes possible, what kind of activity would it unlock? Well, we have a way to do it with cryptocurrency, and then people are no longer subject to the restrictions of traditional finance.”
While crypto is still maturing, it may not be the easiest solution in terms of day-to-day price stability. Nonetheless, in places like Venezuela, where suitable alternatives like cash or public markets don’t really exist, bitcoin and other cryptos present an option or an alternative that wasn’t available before.
“I think crypto gives tools to solve super bad problems of monetary policy,” Machado says. “It’s good that we have other systems that we can go to.”
Control: Cryptocurrency is censorship- and seizure-resistant
These foundational criteria ensure that cryptocurrencies offer superior privacy and security when compared to centralized systems (such as the current banking and payment services model). These features will ultimately give crypto users more choice and control over their data and finances.
But, right now, real-time in Venezuela, seizure-resistant isn’t just some ideal that gets thrown around Twitter by crypto diehards, it’s an actual feature that people are using to protect their day-to-day financial activity.
Since most forms of information, anything from utility bills to work records and bank information can be weaponized by Venezuelan authorities against everyday citizens, having a means of sending, receiving, and storing value in an encrypted format on a smartphone is a critical security blanket.
While bitcoin may not be completely private, it does still offer — at least for now — more layers of protection for everyday users than just storing money in state-controlled financial institutions.
Relief: Money that doesn’t recognize borders
Crypto is sometimes portrayed as rebel money, or as a form of money that doesn’t respect the lines drawn by authorities. In some contexts, that can be problematic and lead to situations that benefit people or organizations that are already operating outside the rule of law.
But the lack of centralized control is also a great utility when people welding power are infringing on the basic human rights of others. In those situations, having a form of money that doesn’t recognize borders — or currency exchange laws — is beneficial.
Right now, in Venezuela, fiat money is subject to search and seizure. The law also gives the government the authority to control the flow of money to international development and relief agencies, effectively making money a tool of control.
But it doesn’t have to be that way. Instead of traditional bank and wire transfers, crypto can be sent peer-to-peer, ensuring privacy and becoming a more cost-effective way to transfer value.
“If you want to send money to someone in Venezuela,” Machado says, “An app like Abra can become your bank. Crypto becomes a more scalable and more interesting way to send money, store the money wallets on phones. If I go through the Abra network, I could send money to my friend’s account and he could use it selectively, keep it in dollars, and only use whatever necessary.”
Most people in Venezuela use LocalBitcoins as an exchange between bitcoin and bolivars and back again. There currently aren’t a lot of options for exchanging between crypto and fiat, although as inflation continues to increase, there’s been a sharp uptick in bitcoin exchanges.
Data from LocalBitcoins, an exchange where Venezuelans trade bitcoin and bolivars back and forth. The data show an increase in exchanges for bitcoin. (graphic courtesy coin.dance)
The Open Money Initiative
This summer’s Zcash-funded research project, lead Machado and Carlson to realize that really what’s needed is more research.
“We came to the conclusion that if we want crypto adoption to happen in Venezuela,” Machado says, “There needs to be someone with a mandate of making that happen. And they have to be crypto agnostic.”
So, along with Jamaal Montasser, Machado and Carlson founded the Open Money Initiative, a San Francisco-based nonprofit that will continue studying how people are using crypto in places like Venezuela. They will use that research to make recommendations to the wider crypto community about what kinds of features are needed for crypto to become the kind of tool that matches the grand mission of true economic freedom for everyone.
“We want to bridge the gap,” Machado says, “between crypto companies with grand visions, and people that need services today.”
In the latest Crypto Bite episode, Abra founder and CEO Bill Barhydt sat down with Zooko Wilcox, the creator and CEO of Zcash.
Their conversation covers a lot of ground — both have been working on encryption and secure internet technologies since well before the launch of Bitcoin.
One main focus of the conversation is how privacy relates to everyday internet users and to the function and future of cryptocurrencies.
“There’s been a shift,” Wilcox said. “That whole notion that nobody cares about privacy is actually being disproven. It turns out that people do care.”
Wilcox also explained the importance of the Bitcoin breakthrough — and about how it solved for the decentralization of money problem, which allowed people to conduct peer-to-peer transactions over the internet without a trusted third party for the first time.
Early forms of digital cash, which Wilcox worked on, failed to gain traction because they still relied on some kind of central hub, like a company or organization to make them work. In other words, they were just a new version of an old system and not necessarily a full-fledged alternative way of conducting transactions on the internet.
“The world had to wait for Satoshi (Nakamoto) to figure out how to make decentralized money before we could start making progress again.”
Wilcox goes on to explain, “But Bitcoin sacrificed privacy. Satoshi and Hal Finney (the first developer to work on Bitcoin with Nakamoto) and others tried to figure out how to build privacy into Bitcoin because they valued it and they knew it was important,” Wilcox said. “But they couldn’t figure it out. There was no way to keep the decentralization and also add privacy in Bitcoin in those days.”
In the ten years since the launch of Bitcoin, researchers have continued to improve the technologies underlying cryptocurrencies. One development is a cryptography system that allows both high levels of privacy and complete decentralization.
“Some other scientists came up with a breakthrough that allows you to prove the truth of information without disclosing that information and making yourself vulnerable to some third party to hold that information,” Wilcox said. “That’s called zero-knowledge proof and it could eventually turn out to be a solution to our pressing social problems of our increasing centralization.”
While zero-knowledge proof is often mischaracterized as a way to hide illicit behavior, Wilcox explained that the technology is really a fundamental security layer for general internet users.
“More and more people are more and more vulnerable to having their data exploited,” Wilcox said. “Well, potentially the zero-knowledge technique might allow us to decentralize and protect that data, while still getting all of the functionality that you want.”
What crypto can learn from the http to https migration
Barhydt and Wilcox then talked about the parallels between crypto and when the internet moved from http to the more secure https.
Twenty years ago,” Barhydt said, “I remember the first sites, they would crawl when you typed https instead of http. So you wouldn’t do it unless you were at secure checkout or looking at your bank account. But then fast forward to literally five years ago when Google makes https the default — I’m not even sure that you can use http on Google anymore, I think you have to use https, for everything — but we don’t notice the difference anymore form a performance perspective… it’s become mainstream.”
And continuing to draw out the comparison between https and crypto, Barhydt and Wilcox talk about how when https was first proposed, it was nearly banned by regulators — and at one time the encryption tech was even considered “weapons grade cryptography” by government officials. Now, after twenty years of incremental evolution, it is now used daily by everyone on the internet (including the very government agencies that tried to ban the technology in the first place).
“That’s where I think having a sense of history and looking back is important,” Wilcox said. “What would the world be like if the United States government had successfully prevented the development of a secure internet 20 years ago? Well, I suppose some other country would have developed a secure internet and Silicon Valley would be there and not here.”
The value of privacy
“We talked about internet history and how https came around, but let’s fast forward,” Barhydt said. “Everyone is screaming about Facebook and privacy, but as it relates to this new world of cryptocurrencies, why should I care about privacy? Let me put it in context. Unfortunately, our perspective here is that when you try to explain like a non-custodial key, for example, to the average user, they just don’t care until they’ve been hacked. And then they care.”
“Well one thing about privacy is that it’s too late to take it back after you’ve been hacked, similarly with having your private keys stolen,” Wilcox said. “You should care ahead of time if possible.”
As the episode draws to a close, Barhydt and Wilcox discussed some of the on-the-ground applications for a privacy-centric cryptocurrency.
Over the summer, Zcash funded research in Venezuela to try and glean some new insights about the utility of crypto in places where traditional fiat money is not working.
“I think it’s fascinating how this global, decentralized money is effectively teleporting money into this place. There’s no other way — you can’t use a bank transfer, you can’t use PayPal, there’s no other way to get money in there,” Wilcox said. “There is a lot of experimentation in getting teleportable money into the country.
One project Wilcox mentioned was AirdropVenezuela, a campaign led by Airtm, the Mexico City-based digital payment service provider. AirdropVenezuela is looking to send donations of crypto to people in Venezuela.
At the end of the conversation, Barhydt asked Wilcox “What would you like to see in our world in the next five years?”
I would like to see Zcash gain exponential takeoff for the first time. Bitcoin has seen linear growth in usage — it had exponential growth in valuation at one point — but it’s only seen linear growth in terms of usage. And I would like to see someone figure out that this thing is usable and that it makes sense to them and that it is safe and fast and it becomes more and more valuable to them and more and more valuable to their friends and neighbors and people they do business with,” Wilcox said. “And it just explodes.”
Abra is making important changes to our wire program.
The best news? The new wire program will have no limits!*
The new Abra wire program will go live on December 20, 2018. Existing wire users will receive an email detailing what actions may be required to transition to the new program.
If you haven’t yet signed up for the Abra wire program and you would like to, more information can be found here. Setting up wire transfers requires working with your bank and providing the relevant documentation to complete the wire application process, but it only needs to be done once, and then the wire service is available as needed.
Top five reasons for using the Abra wire program
No limits: You will be able to transfer large amounts in a single transaction*
Speed: Once authorized and set up, wire transfers will take place in 1 business day*
Cost: Abra does not charge fees for sending or receiving wire transfers. Please check with your bank about wire fees they may charge
Security: Bank wires are a safe way to send money and allow users to confirm and verify transaction details.
Set and forget: Wire transfers can be used daily to deposit/withdraw money between your bank account and your Abra wallet.
If you have any questions about the new Abra wire program or how these changes might affect your wire activity please email email@example.com.
* Please note that certain transactions may require additional documentation for processing, and may be delayed for further analysis
As of today, bitcoin cash has been reactivated and once again can be deposited, withdrawn, and traded in an Abra wallet.
You might remember that most exchanges and wallets put some kind of restrictions on trading bitcoin cash during the hard fork because it wasn’t immediately obvious which chain would become dominant (either the Bitcoin Cash ABC or Bitcoin SV).
After a couple of weeks of monitoring the post-fork hashing, it is becoming clear that Bitcoin Cash ABC is the dominant chain.
That’s why we have decided to follow the Bitcoin Cash ABC. Most Abra wallet users won’t have to take any action to resume depositing, withdrawing, or trading bitcoin cash just like before the fork.
What you need to know about the bitcoin cash in your Abra wallet
BCH ABC: Abra is following the Bitcoin Cash ABC chain.
Symbol: We have no immediate plans to update the bitcoin cash symbol in the Abra app, wallet, or on the website. Everywhere that you see BCH, it should be understood as Bitcoin Cash ABC.
Other chains: We are not supporting Bitcoin SV (BSV) right now, but we will continue to monitor the outcome of the fork and we may consider supporting it in the future.
Confirmations: In an effort to add a layer of protection, Abra will require 15 BCH block confirmations before completing transactions. This will take about 2.5 hours.
Bitcoin SV Tool: We are developing a tool that will allow Abra app users to split out their BSV coins. We will share more information on timelines and availability soon.
Replay protection: We published a guide on how bitcoin cash holders interested in adding replay protection can add it to their wallets by using third-party tools Please note that this process will happen outside of Abra, so there are risks associated.*
We will keep you updated with new information about bitcoin cash. If you have any additional questions regarding the bitcoin cash hard fork process, check out this support article or please reach out to firstname.lastname@example.org.
*Third-Party BCH Replay Protection Disclaimer
The links to third-party BCH Replay Protection Tools (the “Tools”) made available by Abra are provided “as is” without warranty of any kind, either expressed or implied and such software is to be used at your own risk.
The use of the third-party software links on this website is done at your own discretion and risk and with agreement that you will be solely responsible for any damage to your computer system or loss of data that results from such activities. You are solely responsible for adequate protection and backup of the data and equipment used in connection with any of the software linked to this website, and Abra will not be liable for any damages that you may suffer in connection with downloading, installing, using, modifying or distributing such software. No advice or information, whether oral or written, obtained by you from us or from this website shall create any warranty for the software.
Additionally, we make no warranty that:
The third-party software will meet your requirements.
The third-party software will be uninterrupted, timely, secure or error-free.
The results from the use of the third-party software will be effective, accurate or reliable.
The quality of the third-party software will meet your expectations.
If errors or problems occur in connection with a download of the third-party software obtained from the links on this website, they will be corrected.
The links to third-party software and the related documentation made available on this website are subject to the following conditions:
The software could include technical or other mistakes, inaccuracies or typographical errors.
At any time without prior notice, we may make changes to the links pointing to third-party software or documentation made available on the third-party’s website.
The software may be out of date, and we make no commitment to update such materials.
We assume no responsibility for errors or omissions in the third-party software or documentation available from its website.
In no event shall we be liable to you or any third parties for any special, punitive, incidental, indirect or consequential damages of any kind, or any damages whatsoever, including, without limitation, those resulting from loss of use, lost data or profits, or any liability, arising out of or in connection with the use of this third-party software.
Of course, the risk has to be the right kind and balanced against other factors.
In order to find the right kinds of volatility, portfolio managers have developed tools to study risk and reward to make decisions about portfolio compositions and weights.
To explain how this works “The new frontier” paper looks at three major investing concepts and breaks down how they work in a crypto context — correlation, Sharpe ratio, and efficient frontier.
The paper uses those tools to look at how a portfolio dominated by stocks and bonds would have performed if only small percentages of crypto were added. The paper’s analysis is drawn from cryptocurrency market data and the performance of the U.S. stock and bond market starting in 2010 and ending in late 2018.
Crypto in a traditional investment portfolio, how it works
One of the conclusions drawn by the paper’s analysis is that crypto offers superior risk-adjusted performance. In other words, despite crypto’s inherent risk in the form of volatility, the payoff, or return of crypto investments, has been orders of magnitude greater than the returns of other asset class investments.
The paper also examines what would have happened over the past eight years if only one percent of a traditional portfolio was invested in crypto and then rebalanced to maintain that one percent level through the up and down crypto market cycles.
Not to spoil the ending, but the major takeaway is that adding a small percentage of crypto to a traditional portfolio over the last eight years, lead to outsized returns when compared to a portfolio consisting solely of stocks and bonds.
The paper goes into more depth about different investment risk scenarios and portfolio constraints.
As a reminder: Any content contained in this blog post is provided for informational purposes only and is not intended as financial or investment advice.