Hyperinflation occurs when the general prices of goods and services rise by over 50% per month. The cases of Zimbabwe and Venezuela have been often discussed. The list of developing countries that have experienced economic hardships as a result of hyperinflation goes beyond these two countries. Earlier today, the Times of Islamabad reported that the US Dollar had reached new highs against the Pakistani Rupee. In this article, we will examine the effects of hyperinflation on the economies of these countries and the role cryptocurrencies can play in solving the problem.
Hardships Brought About by Hyperinflation
The cascading effects of hyperinflation have very severe consequences on the lives of citizens. Due to the rapidly reducing value of the hyper-inflated national currency, people dispose of money they earn as soon as possible to avoid having less purchasing power in the future. This leads to further depreciation of the currency in question and less national saving.
A continuously depreciating currency also means salary earners earn less as time goes on and have less quality of life as a result.
Businesses also struggle to stay afloat. Importers are usually the most severely hit because they would need more local currency to exchange for foreign currency needed to purchase goods from other countries. As a result, the prices of imports go up.
Factors Limiting the Use of Cryptocurrencies as a Solution
Cryptocurrencies are not necessarily the perfect answer to the problem. First of all, governments and central banks tend to be hostile to cryptocurrencies since they often see them as a means to undermine their established financial system. Another reason is that cryptocurrencies by nature fall outside the control of central banks, governments or any organization. In times of economic crisis, governments and central banks take measures to salvage the situation and improve their economies. It is common for governments to place a cap on the amount of money individuals can withdraw from bank accounts or exchange for foreign currencies in times of hyperinflation. These restrictive measures that infringe on the financial freedoms of citizens can be extended to cryptocurrencies. Laws can be passed to ban cryptocurrencies or make it difficult and risky for individuals to use. It has been alleged that the Venezuelan government, for instance, has been harassing citizens using cryptocurrency miners and also prevent the importation of miners by ordinary citizens. Such hostile actions of governments can make it difficult for cryptocurrencies to be freely used to solve the problem of hyperinflation in a legal way.
Another limiting factor is the lack of computer literacy among some citizens of developing countries. Most technology averse people would be reluctant to use cryptocurrencies even if they are aware of the advantages. There would be the problem of safely keeping cryptocurrencies and falling for the schemes of potential scammers.
The volatility of cryptocurrencies makes them equally risky to hold in times of inflation. As the Times of Islamabad reported, the Pakistani Rupee had depreciated by about 14% since December 2017. Bitcoin, on the other hand, has fallen by 31.9% since 1st December 2017. This means wealth being stored in cryptocurrencies in such times could be further wiped away in the short term.
Why Cryptocurrencies are Still Useful as a Solution to Hyperinflation
Most cryptocurrencies are designed to have a cap on the total number of coins or tokens that would ever be in existence. As a result, such currencies become deflationary. This characteristic of cryptocurrencies makes them a suitable replacement went for inflationary currencies that are rapidly losing their value partly due to the irresponsible printing of money by central banks.
With cryptocurrencies, individuals and organizations that have international operations can easily continue to operate normally in spite of hyperinflation. For instance, importers of goods who might lack access to foreign currency to make imports can use cryptocurrencies to make their cross-border transactions. Even family members can use cryptocurrencies to send remittances and avoid any restrictions imposed on exchanging foreign currencies in such times.
As mentioned earlier, the main problem people experiencing hyperinflation face is the erosion of their wealth. Cryptocurrencies are a better option for storing wealth for people in developing countries despite the short-term fluctuations in the price of cryptocurrencies. For instance, in the long-term, with all things being equal, Bitcoin is expected to gain more value than the Pakistani Rupee. Even without hyperinflation, the currencies of most developing countries have performed poorly against the U.S dollar over the years. It, therefore, makes little sense to use such local currencies as a store of value even without hyperinflation. Cryptocurrencies are designed to perform this function better than the inflationary currencies as well as consumer products and durable goods used to protect wealth in hyperinflationary times.
Cryptocurrencies have always been used as a tool for financial freedom and inclusion. They become even more useful and necessary in countries where hyperinflation is rendering local currencies worthless. It is necessary for both governments of developing countries and their citizens to take a serious look at how they can benefit from cryptocurrencies in this regard.