In the recent monetary troubles in Zimbabwe, many crypto-fans declared that the Zimbabwean economy would be the first to mass-adopt Bitcoin.

And from what I could tell, the only obstacles that needed to be overcome were:

  1. Regulation (“If government would just stay out of it, then people would definitely want to use it! Besides, the internet is everywhere. They can’t stop us using it. They can only stop the local banking transactions that prevent the exchange of fiat for crypto.”);
  2. Education (“If people really understood the benefits of cryptocurrency, then they’d use it immediately.”); and
  3. Infrastructure (“People are used to paying with debit cards – so what we need are bitcoin-based debit cards, and apps that allow that kind of payment. The transaction speed is also an issue – but if the private sector steps in with companies that are willing to bridge that timing for a fee, then we’d be good to go.”).

Perhaps I’m being a bit reductive – but to me, those all sound like application problems.

That is: the economics of cryptocurrency was already assumed to be sound – and let’s just get on with it already.

The problem is that the economics of cryptocurrency has quite a few potential pitfalls. Blockchain technology may be a great idea – but the cryptocurrency use of that technology? I’m less sure about that.

And clearly, Zimbabwe’s economy is also unsure – because it has not mass-adopted Bitcoin yet.

Zimbabwe and Bitcoin: It Should Have Happened, In Theory

As things currently stand, there is some trading on the local Zimbabwe exchange – as I write this, there has been a total volume of 2.4823 BTC traded in the last 24 hours. But just over $32,000 worth of trading (in local Zim bank-dollar terms) in a day is barely a rounding error in the total amount of money that moves around Zimbabwe’s economy every 24 hours. It’s probably equivalent to the daily turnover of a single medium-sized supermarket in a not-especially-busy neighbourhood of Harare.

But if there was no adoption of Bitcoin, then the “why” is a particularly important question. Because if any economy should have been rushing to adopt Bitcoin, it was Zimbabwe:

  • Zimbabweans have already experienced the fullness of hyperinflation at the hands of a reckless centralised banking authority – which is exactly the type of economic tragedy that cryptocurrency is designed to prevent.
  • In 2017, it looked like Zimbabwe was headed straight back.
  • With the cash shortages, there was a widespread forced acceptance of new forms of payment: swipe cards and mobile money (Ecocash) had to replace cash in order for the system to continue functioning.
  • People were literally queuing for days in order to withdraw cash and preserve the value of their bank balances.
  • The stock market peaked – with certain dual-listed shares (like the Old Mutual share) trading at 500% premia on the ZSE relative to the JSE and the LSE. The actual premium between the electronic ‘zollar’ and the US dollar never really exceeded 90% – but there was a panic that it would, which drove up those share prices.
  • A local Bitcoin exchange was quickly established (in fact, I think that it already existed). And until late in 2017, the Reserve Bank of Zimbabwe barely even acknowledged that Bitcoin was a real thing – so there were no regulatory rules or suggestions around its use.

From where I sit, everything was primed for adoption. The motivation was there; a version of the required tech existed; the hype was certainly there (people were calling for it); and as for implementation, the status quo was already self-disrupting.

But despite all those conditions, it didn’t happen.

Maybe this was just a missed opportunity?

But I can’t help but wonder if the real reason for it is that cryptocurrency has an economic flaw in its ideology.

And ironically, Zimbabwe is a really good illustration of it.

Zimbabwe and the US dollar vs Zimbabwe and Bitcoin 

At its core, cryptocurrency is meant to remove the power to print money from a central banking authority. Instead, everything is outsourced to the network – and the economy must then adjust to the reality of a non-inflationary currency.

But from Zimbabwe’s perspective, those objectives were already technically fulfilled in the US dollar:

US Dollar Monetary Regime Crypto Monetary Regime
Money supply controlled by the central banking authority? No (controlled by the Federal Reserve in the USA) No (controlled by the Network)
Inflationary? No (because no control over money supply) No (because no control over money supply)

And to be clear: Zimbabwe’s Reserve Bank has about as much influence on the monetary policy of the Federal Reserve as it has on the Bitcoin network protocol.

And these crypto-esque conditions existed virtually intact between 2009 and 2013. After that, Zimbabwe’s authorities managed to find a way to circumvent them and engage in a local version of synthetic US dollar money creation.

But if you rolled back time, and had asked anyone in 2012 if it would be possible for a small central bank in Sub-Saharan Africa to inflate the US dollar within a confined political boundary right under the nose of the Federal Reserve?

That idea would have sounded as outlandish as someone creating counterfeit Bitcoins.

The side-point that I’m making here is that people tend to find a way to circumvent stuff that they don’t like. No matter how foolproof the system initially appears.

But what is the main point?

A non-inflationary currency has not been good for the Zimbabwean Economy

Let’s take a step back, and look at the recent history of the US dollar and how it has impacted the Zimbabwean economy.

In 2013, Ben Bernanke announced that the Federal Reserve would start tapering its QE program. All that cheap money from QE that had been sitting in emerging markets began to flow back to the United States. And the emerging market currencies started to collapse. Including, importantly, the South Africa Rand.

What this reversal in the international flows of the US dollar meant:

  1. The weakening of the South African Rand in the wake of QE tapering dramatically changed the way that Zimbabwe did business. The US dollar cost of South African wages, salaries and overheads effectively halved between 2013 and 2015, as did the cost of all South African imports.
  2. But because the cost of doing business in Zimbabwe stayed constant (having been denominated in US dollar terms), Zimbabwean industries went from being somewhat competitive to being unbelievably uncompetitive.
  3. At the same time, Zimbabwe was dependent on remittances from its diaspora.
  4. This turned QE tapering into a double hit – because it also halved the value of any rand-based remittances.
The cost of South Africa’s competitiveness

Let me use a really simplistic example of a South African miner, who earns R10,000 per month:

  • When the USD:ZAR exchange rate was R7.00 to $1 in 2012, his salary in “real” terms was $1,430.
  • Today, the USD:ZAR exchange rate is R12 to $1, making his salary in “real” terms $833.

Then let’s assume that a Zimbabwean miner started off in the same place – only his salary was set in US dollars.

When we compare them:

2012 Monthly Salary 2018 Month Salary
South African Miner USD 1,430 USD 833
Zimbabwean Miner USD 1,430 USD 1,430

Not to overstate it: but this is devastating.

The implications:

  1. Local productive industries (like manufacturing and farming) would suddenly find themselves unable to compete with the flood of cheap imports out of its closest trading partner.
  2. The mining industries may find that their high cost of extraction render their mining shafts unprofitable.
  3. Foreign investment would shift to where the inputs costs are cheaper.

You could have the best government in the world, with the most independent central bank, and this fundamental lack of competitiveness caused by a non-inflationary currency would still have driven the economy into depression.

This is a primary reason for having a sovereign currency. The shifting exchange rates act as a buffer between local industry and foreign competition.

That is: if Zimbabwe had had its own inflationary currency, then it too would have weakened alongside the rand. And there would not have been the same degree of difference between two regionally similar economies.

And I should point out that the South African economy didn’t collapse because the bottom fell out of its exchange rate. Yes, there were negative impacts – but these were mostly in the importing industries. The rest of the economy managed to survive the higher costs for anything with an import exposure, while the exporting industries received a boost.

The main point is: with an inflationary domestic currency, the only way for an economy to internally devalue itself, and remain competitive, is to slash wages and input costs. And while that may work in theory, it does not work so well in practice.

So where does bitcoin come in?

Well having a cryptocurrency as the primary version of money in a country like Zimbabwe is effectively the same as having the US dollar. The value of the US dollar is determined by global forces that are far beyond the control of Zimbabwe’s Reserve Bank. The value of Bitcoin would be no different.

In fact, given the volatility of Bitcoin’s price, it could have been worse.

In December 2012, a bitcoin would have set you back about $13. Today, the bitcoin price floats around the $11,000 mark.

Let me redo that miner example in bitcoin, taking into account:

2012 Monthly Salary 2017 Month Salary
South African Miner BTC 119.00 BTC     0.08
Zimbabwean Miner BTC 119.00 BTC 119.00

If Zimbabwe had done something like this, Zimbabwean miners wouldn’t be earning double what a South African earns in real terms. They’d be earning about 1,500 times as much.

The trade-off between decentralised cryptocurrencies and domestic competitiveness

The trade-off:

  • The use of an international cryptocurrency means that there is a diminished risk of inflation, but a substantial weakening of trade competitiveness;
  • The use of a domestic inflationary currency means that there is trade competitiveness at the risk of inflation.

The prisoner’s dilemma:

Country 2 Uses Cryptocurrency Country 2 Uses Local Fiat Money
Country 1 Uses Cryptocurrency No-one risks local inflation Country 2 floods Country 1 with cheap exports; local industry in Country 1 collapses.
Country 1 Uses Local Fiat Money Country 1 floods Country 2 with cheap exports; local industry in Country 2 collapses. Both risk local inflation – but everyone gets to keep their local industries.

And the solution here, barring some divine intervention, is that everyone ends up using local fiat money.

By popular demand.

Because if you said to people: “Would you rather have jobs or have a powerless central bank?” 

I think the general response is: “But why can’t we just have a halfway-mediocre central bank governor though? But I think I’d rather have my job.”

Some conclusions

I’m not saying that there is no place for cryptocurrencies in the world.

But perhaps we need to start considering whether the absolutist idea of outright ‘replacing’ the existing monetary systems with crypto is misguided.

Because my feeling is that we’re headed toward a world of monetary pluralism. One where the functions of money will be specialised. For some types of transactions, we’ll rely on currencies that are mainly media of exchange; for others, we’ll use currencies that are better stores of value. And in some cases, we may even need some currencies that are mainly good units of account.

And that’s what Zimbabwe has:

  • Unit of Account: RTGS money;
  • Medium of Exchange: Ecocash, bond notes, RTGS money (electronic money);
  • Store of Value: US dollar bank notes and electronic money in foreign bank accounts.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at Also, check out the RA podcast on iTunes: The Story of Money.