Banned from buying dollars and confronted by the fastest inflation in the Western Hemisphere, some Argentine savers are seeking refuge in bitcoin as a store of value even after the virtual currency’s collapse.
TradeHill Inc., the San Francisco-based bitcoin exchange, plans to open its first Latin American office in Argentina after demand surged the most in the region, founder Jered Kenna said in an interview on April 12. Rodolfo Andragnes, an agent for bitcoin buyers and sellers who organizes bi-monthly meetings for enthusiasts in Buenos Aires, says while local trading of the unregulated currency still equals less than 0.1 percent of the almost $1 billion of the nation’s foreign-exchange transactions on a weekly basis, it has more than doubled since February.
Argentines are trying to preserve their savings in everything from bitcoins to cars to skirt President Cristina Fernandez de Kirchner’s restrictions on buying dollars, with the peso forecast to weaken the most of any currency in the world this year and local-currency bonds suffering the worst returns in Latin America. While the price of bitcoins plunged to $79 from a high of $234 in the past week and caused Mt. Gox exchange to halt trading on April 11, the sixfold increase this year is enticing Argentines whose savings have been decimated by inflation rising at 25 percent annually.
“Some Argentines are willing to take very risky investments and bet on this thing which feels almost like a Ponzi scheme because they feel their options locally are even more dangerous,” Claudio Loser, a former director at the International Monetary Fund, who now heads the Centennial Group Latin America research company, said in a telephone interview from Washington. “They don’t see an easier way to save money.”
Bitcoin is a virtual currency created four years ago by a person or group using the name Satoshi Nakamoto that doesn’t have a central authority in charge of money supply, a central clearing house or financial institutions involved in the transactions because users perform all these tasks themselves.
Its supply grows as they’re “mined” by computers that solve difficult cryptographic problems to verify transactions. As more bitcoins are created, the problems’ difficulty increases.
There are a little more than 11 million Bitcoins in existence. The software that governs the network will allow no more than 21 million coins to be created.
In an attempt to curb capital flight, Fernandez in July banned Argentines from buying dollars except for travel and the country’s tax agency must approve any foreign exchange purchase. On March 18, the government raised the tax on credit and debit card purchases abroad to 20 percent.
Press officials at the Economy Ministry didn’t respond to a telephone call seeking comment on the use of bitcoins to skirt currency controls.
The government also limited trading in foreign-company depositary receipts and investment in assets abroad by restricting the amount mutual funds can hold and making them value the assets with the official exchange rate, instead of the higher parallel rate.
Bitcoins are more attractive for Argentines than peers in the region as they offer a way of transferring money outside of the country and obtaining foreign currency abroad, according to TradeHill’s Kenna.
“Argentina possibly has the most demand I’ve seen out of Latin America for Bitcoins,” he said in a telephone interview from San Francisco. “It provides a way to move money out of the country and avoid capital controls.”
Kenna is seeking to partner with a local bank to open an exchange in the country.
Most investment options in Argentina don’t compensate for inflation. The rate banks pay for 30-day deposits of more than 1 million pesos was at 15.44 percent on April 12.
The country’s benchmark peso bonds due 2018 yield 8.7 percent and yields for dollar bonds traded locally in pesos are negative as investors are willing to lose money to get dollars by holding the notes to maturity.
Argentine local-currency bonds, which are linked to the official inflation rate of 10.6 percent, lost 2.2 percent this year, compared with average gains of 2.8 percent for similar notes in Latin America, according to Barclays Plc. indexes.
The extra yield investors demand to own Argentine bonds instead of Treasuries narrowed three basis points, or 0.03 percentage point, to 1,156 basis points at 3:23 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.
Julian Garrone, founder of bitcoin forum litebitcoin.com.ar, said he mined bitcoins two years ago until the program exceeded his computer’s capacity and is now seeking to buy more of the virtual currency.
“I don’t believe it’s a bubble, I think it’s here to stay,” Garrone, 28, said in a telephone interview from Mar del Plata, Argentina. “It doesn’t depend on any government or bank and that’s very valuable.”
Bitcoins can be used to buy and sell goods from refrigerators to property in Argentina through MercadoLibre.com, a Latin American online-auction site partly owned by EBay Inc. Online exchanges offer a market for bitcoins to be traded for dollars, euros, yen and other currencies.
The peso price of the virtual currency is calculated by using the dollar rate on Tokyo-based exchange Mt. Gox, adding a commission of about 5 percent, and multiplying it by the black market rate, which was 8.4 per dollar yesterday, said Andragnes, who also runs an education company called Cesyt that accepts bitcoins as payment.
“People could just go and buy dollars in the black market but there’s an additional interest for bitcoins,” he said in a telephone interview from Buenos Aires. “Argentines distrust banks after their accounts were frozen for the 2001 crisis and a lot of them think that could happen again.”
In 2001, Argentina restricted access to bank accounts, a measure dubbed the “corralito,” as the country defaulted on $95 billion of debt. Early the next year, it ended the peso’s decade-long one-to-one peg with the U.S. currency and converted dollar savings into pesos.
Buying or selling dollars in the black market has been considered an act of terrorism since December 2011 and carries prison sentence of as long as eight years. The parallel rate is at a record 63 percent higher than the official rate.
The official peso fell 0.1 percent to 5.1570 per dollar. The currency is forecast to weaken 11 percent to 5.8 by year end, according to 16 economists surveyed by Bloomberg, the biggest drop in the world.
The value of Bitcoins soared from $27 to $82 in March, when European finance officials approved an unprecedented tax on bank deposits in Cyprus. While the plan didn’t go through, it led to speculation that other bank deposits might be taxed. The rising price drew increased media attention, which sparked further price gains, according to Andragnes.
The growing market for bitcoins, called “gold for nerds” by Nicholas Colas, chief market strategist at ConvergEx Group, follows a surge in demand for the precious metal in Argentina, as investors also view it as a way to hedge against inflation.
Banco de la Ciudad de Buenos Aires, Argentina’s only gold trader, is talking with mining companies to buy the metal directly as demand exhausts its supply.
Trading was halted on Mt. Gox for 12 hours on April 11 to let the market “cool down” after a plunge in price, the company said in a statement, citing an increase in trading volume. Other exchanges, including TradeHill, remained open.
The record $50,000 of bitcoins traded last week in Argentina is still equal to less than 0.1 percent of the $964 million in foreign exchange traded in the country’s Open Electronic Market, or Mae, in that period.
“This is attractive in Argentina because it’s a currency that escapes the government’s radar,” Loser said. “But in the end, it’s a risky experiment that few people are trying out. The solution needs to come from government policies to seriously address inflation.”