… and why you should definitely consider it as a means of payment for your
Whether you take gigs for international companies or you
hire freelance workers from abroad, chances are you’ll end up with a business
partner who prefers to deal in cryptocurrencies, despite the landslide losses
suffered from the end of 2017 to date.
It may sound weird for folks used to deal in pretty stable
currencies such as Dollar and Euro, as it does not look like real money. Plus,
it may sound a little awkward to convert it to the “real” money. And they are
pretty volatile in price too. That makes many folks think that they can’t and
never will be used as money. But that’s far from the truth.
However, cryptocurrencies are the easiest way to send value
(money) through borders instantly and with low fees, usually much lower than
wire transfer alternatives. The way blockchain was built, functioning as a
validated and encrypted public ledger ensures your money cannot be faked. If
the transaction is confirmed, it’s final. They cannot also be censored. You can
send money to anyone you want without fear of being blocked.
A word of caution
though: despite the high security of blockchain transactions (Bitcoin is more
than a decade old without any security incident of note, having worked well in
the most volatile and trustless environments such as the deep web), the threat
is on the user’s side. Once transactions are final and irreversible, you should
be as careful as possible to keep your wallet seed words private. Preferably,
you should never save your seed in electronic form, a media that allows easy
copy of it, such as your computer, smartphone or pen drive. Here is a good article on keeping it safe. If you are going to use cryptocurrencies
for daily payments, use of a hardware wallet is strongly advised.
But are they real money?
While volatile, traditional cryptocurrencies like Bitcoin
have one feature that distinguishes them from traditional Central Bank issued
fiat currencies: a stable and predictable supply. Currently, only 12.5 Bitcoins
are generated per block (roughly 10 minutes apart of each other). And that
number will be cut to half by the middle 2020. That means that volatility
exists only in the demand for it. The supply cannot be altered.
As fiat currencies tend to be issued frequently over time,
as Central Banks manipulate inflation and exchange rates, the long term
prospect for any supply-capped cryptocurrency like Bitcoin is to go up in value,
despite volatility in the short term. That would not happen only if there is a
fundamental flaw discovered in its design or if something external, such as a
better cryptocurrency or a worldwide ban, renders it completely useless.
Plus, people always have a tendency to change their fiat
currency for something else. Even in Dollar and Euro zones, investing in assets
that can keep value or appreciate is pretty common sense. But it is even more
so in countries ravaged by inflation and that effect can last for decades after
the high inflation issue was solved. Venezuela is often cited, but there are
other cases. Let`s look at one of those situations in one of the world`s
largest economies, Brazil.
The Brazilian hyperinflation case
Note: We will mostly
use Brazilian sources for this article. Please, translate them if you want to
check the data.
Brazil is currently facing a severe crisis, but inflation is
considerably low yet, considering that situation. However, it has not been
always so. Brazil has a long track record of high inflation, and even suffered
a Venezuela-style hyperinflation back in the 1980s and early 1990s, with inflation
rates usually above 1,000% per year. From 1950 to 1995, only in one year (1957)
inflation was below 10% per year. During that period, seven
different currencies were used in the country, including cruzado novo and
cruzeiro real, that lasted only months.
Do you think Maduro’s
five zeroes cut on Bolivar were too much? Every time Brazilian currency
changed, three zeroes were chopped off. The exception was during the transition
from cruzeiro real to real, where CR$ 2,750 became R$ 1. While Venezuelan
hyperinflation is steeper, Brazilian one lasted longer and, therefore, led to even
steeper currency devaluation.
High inflation rates kept for such a long time caused
Brazilians to have a very peculiar way to deal with money. Often, Brazilians
resort to alternative forms of money.
During the more acute stage of hyperinflation, durable goods
that could retain value were normally purchased in quantity, because they could
be bartered for other goods. Essentially, they became money and a sort of
investment. That was more pronounced with non-perishable food, such as sugar,
rice, beans, cooking oil and so forth, things that families could use to store
value for a few months. Between
November 1989 and January 1990, there was even a sort of non-perishable bubble,
with food prices raising 43% when compared with gold. Most Brazilians in
their 40s and 50s still remember that even used cars were considered an
Surprisingly, not only Brazil solved the hyperinflation
problem in 1994, but also boasted a very strong economy and currency, that used
to be among the top performers after the 2008 crisis. One could wonder that
more stability would lead to a better acceptance of local currency by the
population. While that’s true to some extent, fact is that people adapt to
economic systems, and once they acquire some traits and customs, it’s hard to
get rid of them. We go back to our previous example of used cars as an investment,
a myth that
garners headlines from serious financial publications even today.
However, not all customs are economic nonsense. Many
commodities are actually very good performers in any economic environment. Of
course their price can go up or down depending on a surplus or a shortage in
the market, but they can retain value overtime and serve as a hedge against
inflation. That’s especially true when that commodity is produced within a
country, such as soybean in Brazil.
in 2012, when Brazilian Real was deemed as a very strong currency and
Brazil were among the top five markets in the world in most industries, soybean
sacks were still strongly used as money in several important economic areas,
such as Mato Grosso, where
its use as money is widespread; famous
heavy machinery supplier New Holland usually accepts soybean sacks as a payment
for their products; it’s very common, indeed, that farms and high-priced
real estate in the soybean produced areas are actually priced in soybeans (go to this page and search
for ‘sacas de soja’ and you can verify what we said here).
Bear in mind that we are not even talking about futures
market. Soybean prices can vary widely across the country, not rarely reaching a
20% different in distant states. Such variations present a great
opportunity for arbitrage and there are companies that take advantage of it,
especially in the futures market. But fact is they only happen so because
usually soybean deals are closed in physical sacks, having to be trucked from
the seller to the buyer. Plus, physical soybean has to be dumped in the market
after a certain period of time, because the product decays and cannot be
properly used for consumption, i.e., it has to be spent. And while it’s not
spent, it has to be stored in a silo, usually at a high storage cost.
Now compare the inconveniences of transporting soybean as
money in trucks to those of Bitcoin, such as the high fees and delayed
transactions that happened back in 2017. Plus, Bitcoin does not have to be
dumped in the market, as it does not decay overtime. And storing it just
requires a seed. Plus, if you are not happy with Bitcoin limits, there are
altcoins that show lower transfer fees and a faster network.
While Dollar and Euro are pretty stable currencies boasting
low inflation rates, that’s not true for most of the world, even in the largest
economies such as Brazil. People around the world resort to several money
alternatives to hedge against their national currencies, gold being the most
popular of them.
However, gold is also inconvenient to transport in large
quantities and especially to use in daily transactions. While durable, melting
and weighing the exact quantity needed for a transaction is a slow and
expensive process and that’s why people resort to non-perishable food sacks to
barter in extreme hyperinflation cases, as that food is already divided in
adequate quantities to be exchanged.
But in one thing cryptocurrencies beat all of those
alternative forms of money: remittances. And that’s where you should consider
using them if you need to send or receive payments across borders or distant
places in your country. Cryptocurrencies are designed to transfer value via
Internet, equivalent to sending a message.
The cryptocurrency market, however, is very young and
technology is still being developed, with a considerable risk of some coins
reaching near-zero values in the long run. But you can still use
cryptocurrencies for remittances even if you don’t want to run short term
volatility risks or long term valuation risks. Most countries in the world have
exchanges that allow you to buy them right when you need to send a payment and
sell them as soon as you get them, converting them to your local money.
Just make sure to check the laws in your jurisdiction about the legal uses of them. Some countries, such as India, are even considering to ban them.
Edson Santos is Brazilian, owns some Bitcoin and was a child during the Brazilian Hyperinflationary period.