The Bitcoin market, currently priced at around $ 35,000, already down 40% since April 2021 ATH (All Time High), has been encouraged recently following a law proposal and approval by El Salvador Government, a small South American nation, to adopt it as a parallel legal tender which is the first recognition of the cryptocurrency by an official government agency. Yet, contrary to many crypto investors' beliefs and hopes, this move not only it doesn't actually add value to Bitcoin but also reduces its value, especially from the narrative that wants cryptocurrencies to 'break' the global banking system and become the bearers of a New Blockchain Monetary Era.
First the positive news. The president of the country, Naib Bukele, is quite young at 40 years old, centrist and open minded in new innovative technologies such as crypto currencies. He is the first president in the last 30 years to be elected outside the traditional party formations. So apparently, Bukele isn't a politician who uses the presidential authority as a vehicle to make an ideological statement against capitalism, but a politician trying to give a realistic boost to the economy of his country.
But somewhere there the good news stop. The financial problems of el Salvador are too many. With a population of 6 million, El Salvador produces $ 27 billion a year in GDP, commensurate with the economic size of Cyprus of 600,000 people. Destroyed by a twelve-year civil war (1979-1992), El Salvador and its economy depends heavily on trade with the United States and even worse it doesn't have its own currency for the past twenty years and relies on the US dollar for its domestic and foreign trade. Bonds are traded with very high volatility, for example, in April 2021, the yield on the 8-year bond was at 4.7% whereas in June 2021 the yield was at 9%!
Still, El Salvador is mainly a cash economy, where roughly 70% of people do not have bank accounts or credit cards. According to the Human Rights Foundation CSO, remittances, or the money sent home by the 2 million Salvadorian migrants abroad, account for more than 20% of El Salvador’s gross domestic product. Incumbent services can charge from 10% to 50% in fees for those international transfers, which can sometimes take days to arrive and that sometimes require a physical pick-up. According to Reuters, cross-border remittances via mobile money rose by 65% in 2020 to $12 billion!
This is the problem, Bukele is trying to resolve in the economy of his country.
Adam Back, CEO of BlockStream, who is considered to be the real Satoshi Nakamoto congratulated Boukele stating that he plans to contribute technologies like Liquid and satellite infrastructure to make El Salvador a model for the world:
“It was an inevitability, but here already: the first country on track to make bitcoin legal tender. We’re pleased to help El Salvador on its journey towards adoption of the Bitcoin Standard,”
Jack Mallers, founder of the Lightning Network payments platform Strike, said this will go down as the
“shot heard ’round the world for bitcoin. “What’s transformative here is that bitcoin is both the greatest reserve asset ever created and a superior monetary network. Holding bitcoin provides a way to protect developing economies from potential shocks of fiat currency inflation.”
Athena Bitcoin plans to invest over $1 million to install cryptocurrency ATMs in El Salvador, especially where residents receive remittances from abroad. The firm expects to gradually install some 1,500 ATMs, hire staff and open an office to carry out operations in El Salvador. A year ago Athena installed its first cryptocurrency ATM in El Salvador's El Zonte beach, some 49 km (30 mi) southwest of capital San Salvador, as part of an experiment called Bitcoin Beach aimed at making the town one of the world's first bitcoin economies.
Even if El Salvador will be successful in adopting Bitcoin as a parallel legal tender, it will have to solve some major problems. With 77% per annum volatility, five times that of stocks, eleven times that of bonds and eleven times that of currencies, Bitcoin does not meet at least two of the three pre-requisites of being proper "money": The storage of value and the reliability as a unit of measurement. A Salvadoran with a small amount of Bitcoin on his Salvadorian official wallet, today can buy two packets of rice, and tomorrow maybe three, but maybe only one. With such a low standard of living already, one cannot risk one. So he will prefer to be paid in Dollars, for exactly the same reason he has discarded one of his own currencies: Dollars are stable.
Although it sparked enthusiasm among the faithful supporters and enthusiasts blockchain currencies sich as bitcoin or Ethereum, it is more likely that El Salvador's move has actually damaged Bitcoin. In fact, it forced two major global organizations that had not officially spoken out against cryptocurrencies, for fear of discouraging the narrative of state 'digital currencies' and CBDC (Central Banks Digital Currency) efforts, to publicly reject Bitcoin as a currency. In fact, the arguments they provided to support their statement (the environment and the lack of transparency) are problems that the upcoming CBDCs - state digital currencies will also require to solve.
Specifically, The World Bank stated it cannot assist El Salvador's bitcoin implementation given environmental and transparency drawbacks, and the International Monetary Fund has said it saw "macroeconomic, financial and legal issues" with the country's adoption of the cryptocurrency.
In short, The Salvadorian Revolution of Bitcoin, is an 'early' revolution that, like many of its kind, it is destined to be drowned in its inception, demonstrating the problems of Bitcoin as a legal tender. After all, how could such a small and troubled economy become a reliable flag bearer of a new era? Eventually, Bitcoin's path to international acceptance is becoming even more difficult.
References
- https://www.bbc.co.uk/news/world-latin-america-57398274
- https://www.valuewalk.com/el-salvadors-bitcoin-law-benefits-criticisms/
- https://www.reuters.com/business/remittance-firms-slow-add-bitcoin-despite-el-salvador-move-2021-06-11/
- https://www.cnn.gr/focus/apopseis/story/270660/h-salvadoriani-epanastasi-toy-bitcoin
- https://www.cnbc.com/2021/06/05/el-salvador-becomes-the-first-country-to-adopt-bitcoin-as-legal-tender-.html
- https://www.reuters.com/technology/bitcoin-become-legal-tender-el-salvador-sept-7-2021-06-25/
- https://www.reuters.com/technology/athena-says-will-install-1500-cryptocurrency-atms-el-salvador-2021-06-25/
- http://blog.gdi.manchester.ac.uk/chronic-transient-poverty-el-salvador-determinants-better-fight-poverty/
- https://www.forbes.com/sites/rogerhuang/2021/06/27/an-economic-history-of-el-salvadors-adoption-of-bitcoin/
- https://www.explica.co/cryptocurrency-president-of-el-salvador-nayib-bukele-expressed-that-bitcoin-will-become-a-currency-for-legal-use-in-the-country.html
- https://emisorasunidas.com/2020/02/09/tension-entre-bukele-y-congreso-de-el-salvador-por-aprobacion-de-prestamo-para-seguridad/
Disclaimer: All information found on this article is for informational purposes only. I do not provide any personal investment advice so please make your own research before proceeding to any investment/trading action.
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