Zimbabwe and hyperbitcoinization

The narrative that drives any speculative market needs constant fuel in order to attract new buyers. Bitcoin is no exception, which is why recent events in Zimbabwe have been recruited—albeit sloppily—by the bitcoin press to provide more fuel.

The facts of the matter are this: if you head over to Golix, Zimbabwe's only bitcoin exchange, you'll see that bitcoin last traded at $13,800 whereas its price on an American exchange like GDAX is $8260. That's a difference of around $5000. Strange, right?

The bitcoin press, and I'll pick on Zerohedge here, has interpreted this divergence to mean that bitcoin usage is skyrocketing in Zimbabwe. Zimbabweans are seemingly so desperate to get their hands on some bitcoin that they are willing to pay $5000 more per coin than they would pay if they bought on an international exchange like GDAX.

Recall that one of bitcoin's earliest and most potent use cases was to provide unbanked Africans with an efficient way to transact. The effort to bring bitcoin to Africa has significantly underperformed the earlier hype—but nevertheless the dream of helping out the poorest continent still beckons. Well, we've finally got a real-world case of bitcoin being used by Africans. And if Zimbabweans have adopted the stuff as money, goes the story, then it's only a matter of time before other developing countries and then the whole world goes full hyperbitcoinization. This last term refers to an oft-quoted idea originating from Daniel Krawisz that currencies will fail to compete with bitcoin, leading to a rapid bitcoinization of the world. Think of it as dollarization, except really fast.

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The truth is that Zimbabweans are not paying $5000 more per bitcoin than everyone else. As I've written many times on this blog, and recently at BullionStar (see my postscript at the bottom of this post), Zimbabwe is no longer on a U.S. dollar standard, having had a new Zimbabwean currency thrust on it by the government over the last year or two. This new currency was supposed to be fully convertible into U.S. dollars, a promise that has proven to be illusory. It has since slipped to a large discount to the dollar.

So when Zimbabweans buy bitcoin for $13800—they aren't paying with U.S. dollars, they are paying with this new unit. The Zimbabwean price for bitcoin therefore deviates from the U.S. dollar price for the same reason that the Mexican bitcoin price of Mex$153,000 deviates from the U.S. dollar price—Zimbabwe, like Mexico, has its own freely-floating currency. This explanation for Zimbabwe's peculiar bitcoin price certainly makes for less interesting headlines than the explanation put forward by the bitcoin press.

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Here's why I find the price of bitcoin in Zimbabwe interesting. The prices of easily transportable items with high value-to-weight ratios should trade at the same real price all around the world. Included in this category are things like human blood, diamonds, plutonium, gold and silver, heroin, $100 bills, stock certificates, and of course bitcoin.

From Evil Mad Scientist, the Monetary Density of Things

The law of one price prevails because if the price of gold in a country like Zimbabwe falls below the world price, than arbitrageurs will buy gold in Zimbabwe and sell it overseas until the price has converged back up to the world price. If the gold price rises above the world price, they'll buy overseas and export it to Zimbabwe until the price falls.

Items with high-value-to-weight ratios like gold and bitcoin provide an opportunity to infer currency exchange rates. Because a bitcoin trades for Mex$153,000 in Mexico and $8260 in the U.S., we don't even have to visit a foreign exchange website to know that the exchange rate is about 19 Mexican pesos to US$1. Just divide $153,000 by $8260. Likewise in Zimbabwe. Given a bitcoin price of $13,800 in Zimbabwe and $8260 in the U.S., we can safely assume that the exchange rate is around 1.70 Zimbabwean currency units to US$1.

This ability to back out an exchange rate using items with high value-to-weight ratios is especially handy for researchers and reporters who are observing countries from afar that lack official venues for trading currency. In Zimbabwe, the market exchange rate is set unofficially, on street corners and such. Without an on-the-ground data gathering network to canvas street corners, an outside observer can get a decent proxy for the exchange rate by gathering bitcoin prices on the internet.

In fact, inflation researchers like Steve Hanke have long-since been gathering data on high value-to-weight items to back out exchange rates, although they have typically used the prices of inter-listed stock rather than bitcoin for this purpose. In this post I described the inter-listed stock technique being used in Zimbabwe, and here I describe how it could be used in Greece and Ecuador. In the future, bitcoin exchanges may offer yet another way to formally gather unofficial exchange rates.

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Zimbabwe's autocratic leader Robert Mugabe was put under house arrest by the army on November 14. Let's use what we now know about bitcoin prices to observe what has happened to the exchange rate since then. The price of bitcoin on Golix has been stuck in a range between $12,000 to $15,000 even as the U.S. dollar price on bitcoin exchange GDAX has jumped by ~$1500, or 26%. Golix prices are incredibly variable, far more so than international prices, so I don't want to overstate my case, but it seems likely that the purchasing power of Zimbabwean currency—inferred from bitcoin prices—has actually improved since the coup.

As I said in my BullionStar article (again, see note at bottom), this firming up of the Zimbabwean currency may indicate that markets see some improvement in the odds that a stable new regime emerges in Zimbabwe, one that enjoys acceptance by the international community. Due to its pariah status, the Mugabe government has been unable to get aid from the World Bank or IMF for many years now. If its status changes, a new loan could allow the country to a re-peg the Zimbabwean currency at a 1:1 rate with U.S. dollars.

The improvement in the exchange rate that I've inferred from bitcoin prices is corroborated by looking at the prices of other items with high value-to-weight ratios. As I pointed out earlier, Steve Hanke uses inter-listed stocks to back out exchange rates, in Zimbabwe's case the shares of Old Mutual which are traded both in Harare and London. The ratio between the two listings is known as the Old Mutual Implied Rate, or OMIR. Gareth from Twitter, who knows a lot about Zimbabwe's financial situation, sends me the following chart of OMIR (the green line).

You can see that there has been a big decline (35.1%) in the Zimbabwean price of Old Mutual (white line), but almost no change in its London price (orange line). As a result, the green line—the ratio of the London price to the Zimbabwe price—has moved higher. Which means that the purchasing power of Zimbabwean currency has improved since Mugabe's arrest, albeit just by a bit, corroborating what we already learned from the Golix-to-GDAX bitcoin ratio.

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None of this is evidence of hyperbitcoinization in Zimbabwe. In fact, if you spend some time on Golix you'll quickly notice that volumes are very thin and the trading range incredibly wide. Over the course of a few hours, I saw the price on Golix rise and fall by $1,500 whereas the U.S. price on GDAX has been relatively immobile. Bitcoin is attracting some traders, but it hardly seems popular. Any Zimbabwean who wants a safe haven has probably been buying U.S. dollars on the street corners. Sorry folks, but as far as I can tell Africa still lacks a bitcoin use case.

P.S. I am happy to announce that for the first time I'm being paid to blog. The folks at BullionStar will be hosting blog posts from me over the next few months. Expect the posts to be on some of the same topics I blog about here; monetary policy, gold, bitcoin, and more. My first effort gives a quick overview on the Zimbabwean monetary situation. I am always looking for more opportunities for paid blogging in my general area of expertise; contact me if you have any leads.