In 2005, Randy Brito, aged 14, and his family fled Venezuela.
Back then, the country’s oil-based economy was still booming. But under President Hugo Chavez’s socialist agenda, widespread nationalisations and takeovers of private enterprises compelled many middle-class families such as Brito’s to leave.
In 2011, while browsing the internet, Brito discovered the world of bitcoin on a dedicated forum.
A post described “bitcoin mining”, a fully decentralised process where “miners” compete by making their computing power available to process and confirm transactions coming from a peer-to-peer network.
Miners who perform faster transactions earn transaction fees paid by other users, while, in turn, new bitcoins are issued into existence.
The next year, Brito founded Bitcoin Venezuela as an educational forum to spread knowledge about the digital cryptocurrency.
“At the time, there were maximum 10 profiles on the internet talking about bitcoin in Venezuela,” Brito says.
The platform expanded quickly and today has a community of more than 7,000 users. It serves as a beacon for a fast-growing digital currency mining community in a country mired in an economic crisis.
Bitcoin mining in Venezuela
Once Latin America’s top performing economy, Venezuela now has the fastest contracting economy in the world. Amid political turmoil, Venezuela is currently experiencing violent protests.
According to the IMF, inflation is set to hit 1,600 percent this year.
Long lines of people wait at the government-run grocery stores, where Venezuelans can shop only on designated days of the week depending on the last digit on their national identity card. Shops are suffering from an acute shortage of goods. Hospitals have been forced to operate with inadequate medical equipment and to cope with dwindling supplies. At present, many Venezuelans subsist on a monthly government salary equal to about $14.
In early 2014, Nicolas Maduro‘s government introduced a new price control law aimed at fighting inflation and tackling the issue of goods shortages – customarily experienced because of a fixed-exchange system imposed by Chavez in 2003. Instead of stemming the problems, the law exacerbated the shortage crisis and inflation soared, leading to massive protests in the country. Bitcoin Venezuela provided a means to import water, food and other essentials which were becoming scarce.
“From then on, mining started going viral in the country,” Brito says.
Bitcoin, created in 2008 by Satoshi Nakamoto, a pseudonymous computer programmer, is a peer-to-peer currency that runs exclusively on the internet. It has no government, central bank, corporation, or other institutions controlling it. Mining it has become an increasingly popular undertaking in today’s Venezuela, where the government-issued currency has lost much of its value and even skilled professionals struggle to find work. The last official unemployment rate reported was 7.3 percent in April last year.
“There are some job opportunities, but the pay is truly a pittance,” says Alberto, a former industrial engineer, whose name has been changed for his own safety.
In early 2014, Alberto was working as a logistics director for a company selling goods, when the Venezuelan government first started seizing goods-selling shops. At the time, one bitcoin equalled $1,000 for the first time.
“The job I had was clearly getting me nowhere,” Alberto recalls, “so I decided to give bitcoin a try.”
Within the first five months, he made $5,000, which prompted him to turn to bitcoin mining full time. He bought more computers to mine bitcoins. Alberto says he now makes an average $1,000 a month and saves almost all that he mines.
Other miners, instead, use their earnings, which are invariably much higher than the average wage of $58, either to cope with the shortages or to keep their businesses afloat.
David, 27, a computer scientist living in Maracay, imports basic staples to help feed his family. He purchases Amazon gift cards through the bitcoin-friendly website eGifter, and then channels his orders through a Miami-based courier service.
Fernando, a 29-year-old miner who lives in Valencia, says he uses his monthly revenue to buy insulin from overseas for his diabetic father.
Rafael, 34, who owns a repair shop in Caracas, uses bitcoins to import goods that are no longer available in Venezuela and resupply his store’s shelves.
The three, who all agreed to speak on the condition of anonymity through encrypted channels out of fear of getting caught, illustrate how a growing number of Venezuelans are using bitcoin to overcome the daily hardships of a collapsing society.
Venezuelans living abroad are also venturing into bitcoin mining to help people back home.
“The currency exchanges rates in Venezuela are unfair,” says Jon Valencia, a Venezuelan living in Medellin, Colombia, who occasionally mines bitcoins to send money to relatives and close friends in his native country.
“That’s the reason many people are sending money to Venezuela through ‘proxies’ exchangers or using cryptocurrencies to send to a local buyer,” he says. “People in Venezuela prefer to have bitcoins in their wallet, because they gain value over time while bolivars lose it due to the inflation.”
To start mining, one needs a special-purpose computer able to process complicated computational operations at a fast pace and an internet connection. Bitcoin mining consumes a lot electricity as it is a process of essentially turning electricity into currency. In Venezuela, however, electricity is practically free, subsidised by the state after the government’s decision to nationalise the country’s largest private power producer in 2007.
Mining despite the risks
While bitcoin mining isn’t illegal in Venezuela, early last year the government began a crackdown on miners, painting the activity as a subversive practice that bypasses the capital controls and is linked to “cybercriminals”.
They fear being discovered by the Servicio Bolivariano de Inteligencia Nacional, or SEBIN, the country’s secret police.
“Not only the SEBIN, the national police has also raided miners,” Brito says.
According to some accounts, agents with the secret police have extorted miners, threatening them with arrest.
Miners who have been arrested have been charged with tax fraud, money laundering, electricity theft and other crimes.
Electricity is also a major issue. Two-thirds of the country’s electricity comes from hydropower, but dam water levels are at an all-time low. To conserve power, the government has introduced planned power cuts and scaled back the working week for public employees to two days.
From a currency perspective, Brito believes the benefits of mining outweigh concerns over electricity usage.
“Bitcoin mining is definitely a good use of electricity in Venezuela,” Brito argues, “because it’s giving the country a relatively stable currency with several advantages over paper currency.”
William Luther, an assistant professor of economics at Kenyon College in the US, says, “It’s not surprising at all that many have turned to bitcoin as a currency.”
The impact of the monetary policy carried out by Chavez and Maduro has forced many Venezuelans to become more and more industrious over the past decade, according to Luther.
“Those of us in rich countries, with relatively stable currencies, might find little use for a medium of exchange as volatile as bitcoin. But things are very different in Venezuela,” he says.
“Whereas the government of Venezuela has failed to manage the supply of bolivars in a reasonable manner, bitcoin’s supply is pre-programmed to grow at a steady, predictable rate. Whereas the Venezuelan government can demonetise physical notes and confiscate digital balances, bitcoin balances are secured by encryption. And whereas the oppressive regime can track an individual’s digital balance of bolivars from one bank to another, bitcoin’s blockchain only reveals a string of characters, not the user’s identity.”
One might argue, Luther says, “that the Venezuelan disaster is precisely why alternatives like bitcoin are so desirable.”