Venezuela, which operates an economy that is crumbling down in debt and hyperinflation, announced the demonetization of 100 bolivar fuerte (Bf) banknotes effective in the next 72 hours. Until the central bank releases higher denomination bills, an India-like panic is presumed to occur.
Since mid-2016, the Venezuelan economy worsened, as hyperinflation continued to lessen the value of its national currency that was already virtually worthless. By September, simple products like eggs or bread were sold at US$150 to the general population which in Venezuela was equivalent to stacks of cash.
Nathan Crooks, a Bloomberg journalist and the Bureau Chief for Bloomberg Venezuela, also stated that a Subway lunch costed US$900 at Venezuela’s official foreign exchange rate, which is 1 Bf for 0.1 US dollars. In the local black market rate however, it was valued at $3.9.
The intriguing aspect of Crooks’ coverage of the Venezuelan economy is that even with the black market value of Bf, a $3.9 lunch at a fast food chain accounts for 10% of Venezuela’s monthly minimum wage. Due to the declining economy and the state of financial systems in Venezuela, most employees are operating at the minimum wage, which fails to reach $40.
With 100 Bf banknotes now demonetized, the government is planning to release 20,000 Bf bills for the foreseeable future. The government is yet to provide an official road map or strategy in rolling out higher denomination bills and thus, until the government distributes 20,000 Bf banknotes, the announcement of the government is likely to cause market shock and panic.
Hyperinflation & Struggle in Daily Living
In the past, the Venezuelan government was hesitant towards the idea of creating higher denomination bills. The government was concerned about two potential outcomes: even higher increase rate of hyperinflation and resurgence of criminal activities.
Currently, the highest denomination bill in Venezuela is the 100 Bf bills the government is demonetizing. Although the government announced the issuance of 20,000 Bf banknotes in October, it is nowhere close to completing the distribution of the high denomination banknotes. Until banks successfully distribute the newly created bills, businesses, traders, households and workers will have to deal with 50 Bfs, which is equivalent to $0.01 according to the Venezuelan black market rate of 4400 VEF / Bf per $1.
Ultimately, the demonetization of 100 Bf banknotes means that everyone within the country is forced to use the 50 Bf banknotes, which is the second highest denomination bill in the country’s chaotic monetary system. Businesses, students, workers and investors will now have to use $0.01 bill to finance their day to day operations.
People Turn to Bitcoin
As the Venezuelan economy rapidly transforms into turmoil, an increasing number of entrepreneurs and self-financed individuals are beginning to turn to bitcoin mining to gain a currency or a store of value with actual real world value.
At the moment, electricity is one of the cheapest and most common commodities within the country. Purchasing electricity with Bf and using that to mine bitcoin is a very profitable venture compared to other businesses in the country.
However, because bitcoin mining is an illegal operation based on Venezuelan financial and money transmission regulations, most bitcoin miners are keeping their operations confidential.
A recent interview with a recent college graduate that moved to bitcoin mining to protect his wealth and money. During the interview, Alberto, a 23-year-old Venezuelan bitcoin miner stated that most job opportunities paid nearly $20 a month, which is less than 50% of the country’s minimum wage.
“There were job opportunities, but they paid like $20 a month, and we were used to traveling and buying things from abroad so we couldn’t settle for that,” said Alberto.
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Last modified: March 4, 2021 4:52 PM