Weird, 32 central banks and 12 financial authorities from 44 countries flew to El Salvador this week to learn about this “failed” bitcoin experiment. They must do something terribly wrong to raise that much interest.
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Even if all 44 of those countries decided El Salvador experiment was a success (unlikely as country is facing default) would it drive adoption in the developed west?
“ Set to attend the event are officials from countries such as Paraguay, Angola, Ghana, Namibia, Uganda, Guinea, Madagascar, Haiti, Burundi, Eswatini (Swaziland), Jordan, Gambia, the Honduras, Maldives, Rwanda, Nepal, Kenya, Pakistan, Costa Rica, Ecuador, Egypt, Nigeria, Senegal, Dominica, Mauritania, Congo, Armenia, and Bangladesh.”
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It’s a marketing success for the President of El Salvador.
However, the success is relative for the majority of the people living in the country.
Paper cited in the article:
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Disclaimer: I hold BTC myself.
@Barto already replied with my first thought. You should check which countries flew to El Salvador. Most of those countries are also struggling economically, so they are searching for alternative options. I would have to check those countries in more detail, but I’m pretty sure most of them are struggling to pay debt denominated in US dollars. Also, attending a conference doesn’t mean you are going to implement BTC as an official payment method.
What’s happening in El Salvador: Bukele is making a big bet on Bitcoin. His country has a lot of debt and it’s on the brink of declaring default. By buying BTC, he’s hoping that BTC will gain value in the near-/mid-term future. Unfortunately, he doesn’t have too much time left for BTC to rise again (see the 800 million USD pay back in 01/2023). Which might work out or not. Regardless, it’s interesting that you refer to a conference while completely ignoring all the facts in the article linked above. I understand that you are a big supporter of BTC, but it’s obvious that the El Salvador case is complex (to say the least). Personally, I wouldn’t want to live in El Salvador, at least from what I read in different sources. I also know that this a biased view, because I was never there.
In general, I find it very risky when countries are declaring BTC as an official payment method. Yes, the price of BTC might rise over the next years, but it’s still a gigantic bet (greater fool theory). A bet about scarcity and demand. I also know that financial institutions are getting more and more involved, but most of them get involved because there’s money to be made. The global cryptomarket has a total market cap of 1.3 trillion USD. Banks and hedgefunds would be stupid to not get involved in this market.
After the previous ATH in 2017, cryptocurrencies only started to gain momentum again in July/August 2020. Which, most probably, is correlated to quantitive easing. In the last 1,5 year, BTC and the cryptomarket has been highly correlated to traditional stock markets. If S&P500 or NASDAQ go down 5%, BTC will go down 10% (that’s just an example…) What we are seeing right now with quantitive tightening is: BTC price is also going down more. The correlation of BTC and money supply is very strong - contrary to the original idea of Satoshi Nakamoto. Unless there’s a change in FED policy regarding QT/QE again, I doubt that we will see a big rise in BTC price again. But I also don’t have a crystal ball and I might be wrong.
On a side-note: 0.01% of bitcoin holders hold 27% of all Bitcoin - that’s much worse than in most FIAT currencies. Plus it gives a lot of opportunities for manipulation. You can find some more information here
So… From my point of view, BTC is a gamble. High risk / high reward. Still, I count the money I invested in cryptocurrencies as lost. Unless you take profits into FIAT, it’s just a nice gain on paper. Also, you need to have a plan ready for the mid- and long-term. From my point of view, it’s important to have certain targets for BTC/cryptos and then sell some of it when your portfolio reaches a certain threshold. The main question is: where do you set those targets? In theory, you can believe that BTC just keeps increasing. Which means you shouldn’t sell it. But then again you only have a nice number on paper, but nothing to show for in real life. As of right now, most countries still use FIAT money. And even if some countries are introducing BTC as a legal payment method: why should you pay in BTC if it’s deflationary? It still makes more sense to pay in FIAT.
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My understanding was that the BTC bet of El Salvador rested in (big) part on the hope that the Bitcoin community would provide help and support in order to help the experiment prove successful, much like taking economic measures to balance the country’s budget can drive the IMF support (or rather the other way around but in both cases, the purpose is to drive outside support into the country). I guess Bukele didn’t want to deal with the IMF.
We’ll see if that support proves to be actually available in a form worth the risk. As a recent example, the potential hopes of Do Kwon to strongarm the Bitcoin community into supporting the UST peg through the BTC reserves of the Luna Fundation Guard didn’t prove successful as of today.
On a side note, I’m not convinced that Bitcoin, as a deflationary currency, would be a good bet for a country’s economy. A slightly inflationary currency tends to encourage its circulation and drive more investments (rather than simply holding it, hoping for its appreciation).
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So you guys would prefer that these poor countries continue with the IMF and World Bank? Debt servitude is not cool.
I went to check what this drop-out dictator was doing in El Salvador and I found
+10% GDP in 2021
+13% export YoY
+30% tourism YoY
No homicide for the past week (a record apparently)
Not too bad, I am wondering why this German newspaper is not talking about these results as well.
If:
a) a country’s economy is in difficulty, and
b) BTC is really a deflationary currency and not a mean of speculation,
Then it is absolutely stupid for the said country to issue a bond denominated in BTC. The whole playbook of governments is that when they issue bonds in an inflationary currency, over time the various reimbursements are worth less and less because of inflation (your currency is worth less).
With a deflationary currency, over time the coupon payments and maturity redemption are worth more and more and take a bigger toll on the already fragile economy. I don’t see any upside for a government to do that. The only reason why they would still try is that BTC lenders would act as lender-of-last-resort, i.e the country is so distressed that nobody else wanted to lend regular money…
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You forgot that they are going to mine bitcoin with geothermal energy, that’s the whole point of this “volcano” bond.
They can mine Bitcoin all they want, they’d still be better off borrowing in USD.
Example:
Let’s say that at T0, the government wants to borrow 100 BTC to buy mining equipement with geothermal energy.
- For ease of calculation, let’s assume that 1BTC = 10’000 USD. BTC being a deflationary currency, its worth will increase 10% per year against USD.
- The mining equipment will generate 10 BTC per year.
- The bond will have a coupon of 5%. The government can either borrow in BTC (in this case, 100 BTC), or in USD (that’d be $1’000’000)
If they borrow in USD, they receive $1 million at T0, with which they buy the mining equipment. After one year, the mining operations generated 10 BTC, and they need to pay back the 5% coupon, that is $50’000. At this stage BTC has increased 10% against the dollar, so 1 BTC = 11’000 USD.
Their holdings is:
- 10 BTC, worth a total of 110’000 USD
- minus 50’000 USD coupon, or 4.54 BTC
They have a net total of 5.45 BTC (or 60’000 USD).
If they do borrow in BTC, they receive 100 BTC at t0, buy the mining equipment, it still generates 10 BTC per year. After one year, 1 BTC = 11’000 USD. But they need to pay the 5% coupon, that is 5 BTC.
So they are left with:
- 10 BTC mined (worth $110’000)
- minus 5 BTC for the coupon (worth 55’000 USD)
That is, a net total of 55’000 USD.
If they borrow in BTC, they will be worse off that if they had borrowed in USD.
The only way to escape this logic is if the coupon percentage would be lower in BTC than what they’d have with a USD Bond (i.e: in BTC, pay a 4% coupon/ in USD, pay a 5% coupon).
But somehow i doubt that’d be the case.
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You don’t need to make up numbers:
El Salvador’s Bitcoin Bond would be structured as a 10-year, $1 billion note carrying a 6.5% coupon. Half of the proceeds would be allocated to buying bitcoin and half used to build Bitcoin City infrastructure
So you will have their current btc + $500m worth of btc + whatever they manage to mine to pay back coupons, etc.
It is a usd denominated bond, so they should benefit from the usd inflation and btc deflation at the same time.
That’s of course only theory, but if it does work, all financial models would be broken.
Right now their 10-year bond rate is 13.5%, that’s already a massive improvement on its own.
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Nothing to do with BTC. Almost every country in the world achieved similar growth in 2021 after the world economy stopped for Covid in 2020
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It’s already well known that the volcano bonds didn’t make any sense financially (at least for the bond holders) vs buying bitcoin and the USD bond.
From Matt Levine:
Maybe the one trade I have ever suggested in this column (still not financial advice!) was:
- Don’t buy El Salvador’s “volcano bond,” a 6.5% 10-year dollar bond that also includes a call option on Bitcoins.
- Instead, buy El Salvador’s regular 8.25% dollar bond due in 2032 at like 75 cents on the dollar, and use the extra 25 cents to buy Bitcoin.
I mean, I’m not saying you should do the second trade either, really. I’m just saying that if you find the volcano bond tempting, buying something that is worth more in every scenario should be more tempting.
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@Oliv if you are convinced the Bitcoin experiment is working you ought to buy El Salvador January 2023 USD bonds which currently yield >50% p.a.
Separately Bukele announced the volcano bond has been postponed and that the country needs to focus on pension reforms instead
I was not referring to bitcoin, more about the drop-out dictator and the poor shape of the country, does not look that bad
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Not everyone can/want to buy bitcoin directly, a bond can be much easier especially for institutions.
Uh that would be very surprising that there are institution willing to buy bonds with those terms but wouldn’t be happy holding bitcoin…
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So what’s the future of bitcoin now? Is this crypto “winter” or crypto graveyard? HODLers still HODLing 
?
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Graveyard as adoption is growing (governements, entreprises, VC, employees leaving top web2 companies for web3 etc) and as all the markets are down?
Isn’t it the 203943854th announced death of btc?
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On El Salvador (and Central African Republic, don’t forget it), too early to say that it failed. Some places, including in Switzerland (Lugano) adopted bitcoin.
And a much bigger portion of govs are working on crypto through regulations or cbdc -
I’m am talking about entreprises as mean of payments or other kind of integrations (hyperledger etc).
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Some VC will die and lose all, but if it’s the only industry where they keep investing and building, it’s not because they are all stupid fools.
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I know some who are super excited about their work in web3 and say that it’s where the innovation is. I don’t think examples can be a valid point.
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How many time btc died?
Neither will this be the death of Bitcoin - nor are we witnessing substantial real-world adoption.
Developer buzzwords („web3.0“) aren’t an indicator either. I remember predictions we‘d all be living and interactting as digital avatars in virtual 3D worlds (e.g. „Second Life“) by the 2010s.
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