Bitcoin and Venezuela's Unofficial Exchange Rate

Abstract

Using Bitcoin trading data in Venezuelan bolivars from the LocalBitcoins peer-to-peer market place and using the theory of Purchasing Power Parity (PPP), Bitcoin, as a single universal asset, is substituted for the ‘basket of goods’ normally used in the PPP, allowing the estimation of the relationship between the Venezuelan bolivar and the United States dollar. In this analysis Bitcoin is used as a tool to enable the calculation of the bolivars to dollars unofficial exchange rate and consequently the implied inflation rate. Using Bitcoin’s publicly available prices in this way enables a government’s economic mismanagement to be identified more quickly than the typical approach of measuring changes in the Consumer Price Index. Venezuela is currently in crisis, which this approach identifies as a problem as far back as 2014, as official and unofficial exchange rates diverge and inflation rates increase yearly reaching an unbelievable 70,000% in 2018 alone.