El Salvador will, in ten days, adopt Bitcoin as an official currency. It’s making massive investments in projects to develop end-user products to hold and spend bitcoin. The opportunities of this venture are enormous, though some warn there are risks.
El Salvadorians Will Soon Find Imports Attractive
Because Bitcoin is a deflationary cryptocurrency, and the oldest blockchain with the most of its limited currency already mined, and especially given the history of the BTC price since its inception in 2009, it’s easy to see a future for El Salvador of suddenly increasing purchasing power against other countries’ currencies.
That’s especially so given the rate at which most central banks are devaluing their currency, while Bitcoin’s supply is not only limited, but new coins are mined at a decreasing rate as well. El Salvadorians will find their currency suddenly buys them more when they ship from overseas, and they will realize they’re suddenly a very affluent, consumer good importation economy like the United States.
In addition to their increased purchasing power on the world stage bringing in imports in record volumes for the nation, foreign investment and capital inflows will increase as well, with cryptocurrency concerns setting up shop in Bitcoin-friendly El Salvador. And the population will enjoy using the latest, most reliable, and useful financial services products with all the innovation in this industry. They might also get a volcano-powered bitcoin mining facility.
The Risks of Embracing Bitcoin as National Currency
Writers at the Wall Street Journal warned Thursday the move puts El Salvador’s entire economy at risk. They cite an El Salvadorian economist who points out bitcoin’s price is volatile:
“‘Adopting bitcoin as legal tender puts us on a roller coaster,’ says Carlos Acevedo, an economist who served as governor of El Salvador’s central bank from 2009 to 2013.”
Yeah, a roller coaster that’s been going up for ten years. And the government is setting up services for instant convertibility to dollars. And El Salvador President Nayib Bukele has assured no one will be required to accept bitcoin. The writers also say a crashing bitcoin price would cause a liquidity crisis for the country’s central bank:
“The foray into bitcoin risks wrecking El Salvador’s $26 billion economy. The indebted nation’s central bank could be forced to spend hard-currency reserves to buy bitcoin if the value of the crypto asset craters and consumers rush to the safety of the dollar.”
It sounds like the U.S. Congress buying securitized mortgages to bail out banks when those things crashed and burned. Is Bitcoin a riskier investment than the U.S. real estate market in 2006? That depends on your definition of risk.
But the mortgage-backed derivatives were mass investments in expecting people to make payments who had a credit history that indicated they were not dependable to make those payments.
Why Bitcoin Is A Strong Move for El Salvador
Bitcoin is a mass investment in expecting the blockchain to place another block every ten minutes and secure it on an immutable, worldwide, distributed ledger.
It has a history of doing so since 2009, every ten minutes like clockwork, with exponentially increasing hash power behind the network to secure it all the while.
The Journal writers continue:
“The government can’t print its own money—El Salvador ditched the colón in favor of the greenback two decades ago—and is struggling to earn dollars.”
*doesn’t. The government is showing more flexibility and willingness to experiment with its monetary system than any other. What would stop it in a pinch from passing a bill and monetizing it like the Federal Reserve does people’s fevered NASDAQ stock buys?
But that is not what I’m worried about. I’m worried where all the El Salvadorian people are going to fit all the Lambos. Seriously though, how will the life of El Salvador’s people change after its government officially embraces bitcoin, while others view it with timidity and trepidation? Think small, natural resource wealthy, Middle Eastern or European country with a very affluent population and median salaries in the top percentile.