Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

My Thoughts

Argentina Shows Just How Disruptive Bitcoin Could Be

The future of currency, payment and economics could be on display in Argentina. The popular cryptocurrency is enabling a small minority of Argentines to get around their government’s strict banking controls and participate in the global economy despite a worthless currency.

In a fascinating New York Times piece, writer Nathaniel Popper describes an underground of independent money lenders in Argentina that allow that country’s residents to exchange bitcoin for U.S. dollars—the currency Argentines trust most. The exchange is disruptive because it enables Argentines to exchange money at the real rate rather than the artificial one mandated by the government and because it provides a viable alternative to Argentina’s worthless currency the peso.

One reason why Argentines are willing to take a risk on Bitcoin is their inflation rate which hit 40% in 2014. A Galaxy Note 3 Android smartphone currently costs 15,119 Argentine pesos, BuzzFeed’s Conz Preti noted. The same phone sells for between $296.99 and $439.99 in the United States.

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The advertisements pictured above shows us what average Argentines have to live with. The price of a smartphone in Argentina today is comparable to the price of a new economy car – a Volkswagen hatchback in 2001. It is easy to see why residents of that country are willing to use any alternative to their official currency.

Why Argentines Love Bitcoin

The moneylenders trade bitcoin for pesos at a rate that is 30% higher than the official exchange rate set by the government, Popper discovered. That means an Argentine with access to bitcoin can have 30% more buying power than his or her neighbors that lack it.

It also means that an Argentine computer programmer that writes software for a company in Germany can now get payment directly in Euros. This has always been possible, but before bitcoin, the Argentine programmer would have had to accept payment through a bank at the government’s artificial exchange rate. Today he or she can collect payment directly in bitcoin then exchange the cryptocurrency directly for dollars on the black market.


Bitcoin has become so popular in Argentina that many businesses, including hotels and stores, are starting to accept it, Popper discovered. It looks as if Argentina is fast becoming the first place where bitcoin could make the leap from the virtual to the real world with some truly revolutionary results.

What Argentina Can Teach Us about Bitcoin

There are a few important lessons we can learn about the Argentine bitcoin experiment, including:

  • Bitcoin could make income inequality worse because only a few people will take advantage of it, at least at first. The computer literate, speculators, foreign tourists and others will be able to use bitcoin at the expense of others. An Argentine game designer or stock speculator that gets paid in bitcoin might be able to live like a king while a bureaucrat that gets paid in government currency could see his or her buying power collapse during times of hyperinflation. That sounds like a surefire recipe for political and social unrest to me.


  • Cryptocurrencies like bitcoin will be most popular in nations where people do not trust the money. Argentines have a strong distrust in their currency because of their history of hyperinflation. Many of the people Popper interviewed cited memories of hyperinflation when they explained their use of bitcoin. That means cryptocurrencies could become most popular in the developing world and in nations like Russia. A likely scenario is that cryptocurrency is most likely to be widely adopted in nations like Argentina and Russia long before it becomes commonplace in nations like the United States, where few people distrust the dollar.


  • Traditional means of regulating the money supply, which is one of the foundations of modern economics, could be easily undermined by bitcoin. One classic tool for manipulating the economy is to devalue the currency, but that can only work when everybody is forced to use the same money. If a large percentage of the population can access another more valuable currency, it will not work. Worse, those with access to the more valuable currency will have far more buying power enabling them to dominate the economy.


  • Cryptocurrencies threaten the power and legitimacy of the state because they limit its ability to issue money. Much of modern governments’ power rests on their ability to issue money; if currencies that government cannot control are readily available, people can simply ignore the government, as is happening in Argentina. For example, governments can control prices by limiting or increasing the money supply. If large amounts of money can flow into or out of the country without government control, that power disappears.


  • Cryptocurrency will drive globalization because it will be easier for people to do business with those in other countries. For example, a Russian software designer could make a good living selling his products to U.S. companies. He might even have a better lifestyle in Russia because access to bitcoin would give him more buying power than his neighbors.


  • Cryptocurrency will undermine many of the world’s weaker currencies like the Russian Ruble and the Argentine Peso and possibly destroy them. One scenario is that the middle and upper classes in some nations will switch to bitcoin, leaving only the poor at the mercy of government currency. That could lead to a scenario in which the black market becomes the economy. Another problem is that government will be unable to levy taxes because most transactions are in cryptocurrency.


  • Cryptocurrency could increase the value of stronger currencies like the U.S. dollar and British pound by making it easier for people in other nations to access them. An Argentine that gets paid in bitcoin can now simply buy all the dollars she wants on the street and ignore the peso. Popper discovered that one Argentine factory owner was able to move $20,000 to the United States using bitcoin.

My prediction is that at some point Argentine authorities may try to ban bitcoin and punish those who use it, perhaps by branding them as unpatriotic. I also predict that effort will fail and bitcoin will become more popular than ever.

It looks as if bitcoin could have a future in the real world, and that could be the most disruptive development yet. We may need to completely rethink our concept of money and our ideas of economics because of it.


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