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.
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.
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 investment.
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.
So, even 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.
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