Why Bitcoin Matters for Africa

bitcoin-africa

From June through August of this past year I backpacked through southern Africa, and the poverty of Zimbabwe really struck me. It’s a country graced with incredible natural beauty, and cursed by decades of misrule. Zimbabwe suffered from the second worst hyperinflation on record; it reached an absurd 231,000,000% in the summer of 2008. To put it in real terms, that means that the price of goods doubled every 25 hours. To look at it another way, if you started with 100k today, tomorrow your purchasing power would be cut to 50k. A week later, you’d be down to 7k, and within a month, you would essentially be unable to buy anything.

Reading about an indeterminate number of zeros being added monthly to price tags in a country on another continent is one thing; listening to a woman tell you her child died because the local hospital couldn’t afford to stock simple antibiotics is another entirely. The emotional weight of her story was such that for the rest of the day, I wandered around the town feeling like I’d been hit by a truck. Surely there must be a way to prevent something like this from happening again?

The hyperinflation that crippled the Zimbabwean economy was not the product of some greater, unstoppable economic force. It was the direct result of currency manipulation and irresponsible printing of money. The Mugabe government did so to finance wars in the Congo, pay off debts, and inflate the salaries of high-ranking military and government officials.

Gideon Gono, governor of the Reserve Bank of Zimbabwe, increased the supply of money enormously against the advice of economists, but with full support from President (read: dictator) Robert Mugabe. As any basic textbook of economics posits, the Zimbabwean dollar fell in value and hyperinflation followed. The government tried to salvage the situation by slicing zeros off the end of the currency (at one point, they “reset” things so that what was formerly one trillion Zimbabwean dollars was now equal to one Zimbabwean dollar), but with little success. They eventually adopted the US dollar as their currency. The country is making a painfully slow recovery, but the economic situation remains dire as much of the population still struggles daily to survive.

Africa can be a central player in, and beneficiary of, the bitcoin network thanks to its incredibly young population. It is set for a demographic explosion, projected to reach over 4 billion people by 2100. These are numbers that can support a huge network built around bitcoin. Whether or not you believe that by 2017 most Africans will have smartphones, I can tell you we’re certainly headed in that direction. There is also a low switching cost to using bitcoin, as many people and businesses do not use traditional banking. As this paper from the Centre for the Study of African Economies outlines, “African enterprises and households are less likely to use financial services than their peers in other developing countries”. Mobile banking is widely used, especially in nations like Kenya and Somalia, where services like M-PESA have taken hold.

I use Zimbabwe as an example because it is one I am familiar with, but similar economic situations have unfolded across various continents. Peru, Brazil, Angola, Yugoslavia and a number others have all suffered from crippling hyperinflation, and in many cases this was caused by impulsive, foolish “human error” in the form of printing money without thought for the consequences.

Here is where Bitcoin comes into play. Since bitcoin is a decentralized currency that is controlled by algorithms rather than one or a small handful of individuals, there is no option to simply “print more money”. This precludes governments from instituting reckless monetary policies and subverting entire economies on little more than a whim.

With bitcoin, as with anything, the possibility of foul play remains. It is less likely to come from a government than from a mining pool, but some degree of risk exists. Mining superpools which take control of 51% + of the hashing power do have the ability to manipulate the bitcoin network. Ghash.io, which is currently the largest mining pool in existence, reached overall hashing power of over 40%, and subsequently released a statement about it expressing that they have no intention of executing a 51% attack.

For the sake of argument, let’s assume they are lying. If they were to execute a 51% attack, they would cause the bitcoin network to fundamentally lose trust in the currency, leading to a tremendous drop in price. I estimate this would be far more crushing than something like the recent Mt. Gox fiasco. Although not impossible, it would be extremely challenging for bitcoin to recover. As one of the largest “shareholders” in the bitcoin economy, it would be highly irrational for Ghash.io (or any other large mining pool) to voluntarily tank the system. They would be doing themselves much more harm than good, sacrificing the entire system’s integrity and potential for huge, ongoing profits for a much smaller immediate gain. Government leaders do not always share the same disincentives to collapsing their own economies; despite destroying his country’s currency, Mugabe is still in power, and still a billionaire.

Is bitcoin the perfect solution? Probably not. But since our current system has already allowed for catastrophic failures, bitcoin does hold the potential for tremendous improvement.

About Arianna Simpson

As a Bitcoin enthusiast and investor, Arianna is particularly passionate about helping women get involved in the Bitcoin community. She currently works at Facebook New York, where she organize the Bitcoin meetup group. On those rare occasions when she's not thinking about cryptocurrencies, Arianna enjoys riding her motorcycle and traveling as much as possible.

7 thoughts on “Why Bitcoin Matters for Africa

  1. Hi Arianna – Interesting article, and like yourself I do believe Bitcoin has a tremendous future in Africa, where probably the majority of the Worlds Un-Banked reside.

    However your assertion that a 51% attack could come as a deliberate action from a dominate pool to break Bitcoin, seems to miss the point that the “actors” within such an existing 51% pool ( ie like Ghash.io could have become ) are not “one person, with one mind” but a large group of individuals who have come together to share processing power to mine bitcoin and increase their own personal wealth. So, why would the majority of those individuals ever want to crash bitcoin and destroy all the money they have in it ?

    This only leaves us with an attack from a pool of ‘secretly shared malevolent intent ” – ie formed deliberately to break bitcoin – like maybe a government agency or a Central Bank. However, the cost now in hardware requirements to achieve the processing power necessary to enable an individual, small group or Government agency to effect a 51% attack makes that impossible. ( the cost in computer hardware, electricity, operator time etc would need the development of a resource that would be over ten times the entire power of the US Gov. – including all the NSA computer power )

    So, I hope this helps finally ‘knocks on the head’ any vulnerability by a ‘51% problem’ for bitcoin. However, many thanks for your article and I fully support your comments on the need to get more women involved in the Bitcoin Community

    We’re getting there !! and 2014 is going to be a big year for bitcoin.

    1. Hi Defendingbitcoin,

      Thanks for your comment! Your assertions above are absolutely correct, and I made that point about the 51% attack not because I actually believe that this would happen, but more as a, “let’s assume the absolute worst case scenario” to preempt any skeptics from saying I am naïve in assuming that manipulation is impossible. Fully agree that this is extremely, extremely unlikely :)

  2. Thanks for the thoughtful article. I couldn’t agree more: Bitcoin has tremendous potential to make the world a better place.

  3. Bitcoin is inherently deflationary and would be especially so if its use propagated in Africa. The Bitcoin model can easily be replicated- I’m sure you’ve heard of Dogcoin. Working in Silicon Valley, I remember the dot-com 90’s when great ideas eventually fell hard because their fundamental flaws were ignored by rationalized enthusiasm. Mt. Gox is the beginning of the end for Bitcoin and many will look back with a chuckle.

    1. Going by that analogy, Facebook can easily be replicated. Twitter can easily be replicated. It’s still hard to gain critical mass and Bitcoin is leading the pack http://www.coinmarketcap.com. The deflationary argument is also pretty much debunked: https://en.bitcoin.it/wiki/Deflationary_spiral.

      And let’s not forget the winners of the Dotcom boom: Ebay and Amazon. MtGox is Webvan, whereas Bitcoin / crypto currencies are the Internet. There will be winners and losers.

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