Foreign Policy / Technology

Can Bitcoin Challenge Hyperinflation?

In the economy of a nation, few things can be as devastating as hyperinflation.  But as internet access and mobile phones continue to rapidly expand throughout the developing world, they are setting up a natural infrastructure for Bitcoin. Given time to develop and mature as a global ecosystem, Bitcoin could become an alternative to a failing national currency.

Zimbabwe provides one of the most devastating examples of how crippling hyperinflation is for an economy. At its peak in November of 2008, the inflation rate was at the astronomically high rate of 79,600,000,000% per month and prices were doubling every 25 hours. The human cost of hyperinflation has been just as tremendous; current economic data on Zimbabwe is sparse, but some measures of unemployment have it as high as 95% and the poverty rate at 72%.

It is important to recognize that hyperinflation isn’t something that just happens to a country, like a flood or an earthquake, it is a series of willful and conscious decisions by corrupt human actors. Hyperinflation most commonly occurs in developing nations where short-sighted leaders ease their monetary woes via the printing press. What starts as high inflation often becomes ‘hyper’ if the people start losing trust in their country and selling government bonds. This in turn shorts the government the funds it needs to operate, so even more money is printed. This vicious cycle culminates as prices rapidly rise to accommodate the flood of new money in the market.

During the 20th century 55 countries descended into hyperinflation of various levels. So, given the political reality that hyperinflation can, and will continue to happen, how can we counter it? The easiest way is by simply providing the people with an alternative currency.

The key to having a viable competitor to a failing national currency is the ability to flaunt any attempt to stop it. During the height of hyperinflation in Zimbabwe, the government enforced major restrictions on the ability to bring foreign currencies – like the US dollar – into the country. Yet, this policy didn’t reduce the enormous demand for the dollar; the demand was just driven underground. Without the ability to easily exchange the mandatory Zimbabwean dollars for U.S. dollars, shopkeepers and citizens were forced to participate in shady back-alley deals and night-time black markets just to buy the vital goods they needed to survive (and at rates eight times the official rate). Yet so long as people have access to the internet or a mobile phone, Bitcoin can provide instant, peer-to-peer transactions that the government is powerless to prevent because of Bitcoins decentralized nature. As Jon Matonis, former Executive Director of the Bitcoin Foundation, asserted: “One doesn’t drive Bitcoin underground. A free Bitcoin was designed to be ‘underground’ for its own survival otherwise it wouldn’t need such an inefficient, decentralized block chain.”

Russia provided an early snapshot at how this transition might occur last December. As the Russian central bank has largely failed to stop their national currency from tumbling, currency traders began dumping the ruble for other currencies. Despite Bitcoin being classified as illegal, transaction volumes between the ruble and Bitcoin spiked up 250 percent. Bobby Lee, the CEO of BTC China commented: “The news coming out of Russia is indeed unparalleled… The high trading volumes with the ruble is to be expected, given the flight away from this struggling currency. Bitcoin is therefore a natural destination.” It is unlikely, however, that Bitcoin will supplant the rubble anytime soon; the price is too volatile and there are not enough Russian merchants built into the infrastructure. But with each passing year, as the Bitcoin network continues to grow, mature, and stabilize, it makes it all the more likely that the next failing currency will face a strong challenge from Bitcoin.

If Bitcoin continues to expand into these markets, a possible (albeit idealistic) scenario is easy to envision:

It’s the year 2020; access to mobile banking and Bitcoin has rapidly expanded and is now readily available to the majority of people in South Sudan. However, in order to pay off their massive national debt, the President decides to rapidly expand the monetary base. The population remains unfazed, and transactions easily transition to Bitcoin as opposed to the South Sudanese pound. Though the state-controlled banks attempt to restrict the use of other currencies, the Bitcoin wallets that are now favored by merchants completely bypass the banking system, so the controls are ineffective. The neighboring government of Uganda takes note of this failure and is eager to maintain responsible inflation levels in response.


100 Trillion dollars by Drew Stephens is licensed under CC BY-SA 2.0