El Salvador will make Bitcoin its official currency in ten days. It is investing heavily in attempts to produce end-user products for holding and spending bitcoin. The prospects for this venture are great, but there are pitfalls, as several have warned.
Imports Will Become More Appealing to Salvadorans Soon
Because Bitcoin is a deflationary cryptocurrency and the oldest blockchain, with the majority 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 El Salvador’s purchasing power suddenly increasing against the currencies of other countries.
This is especially true given the rate at which most central banks devalue their currencies, while Bitcoin’s supply is not just limited, but new coins are mined at a decreasing rate. El Salvadorians will discover that their currency suddenly buys more when they ship from abroad, and they will understand that they have become a very prosperous, consumer good importation economy similar to the United States.
Foreign investment and money inflows will expand as well, with cryptocurrency concerns opening up shop in Bitcoin-friendly El Salvador, in addition to their increasing purchasing power on the global stage bringing in record volumes of imports for the country. And, with all of the innovation in this area, the populace will appreciate using the most up-to-date, dependable, and useful financial services goods. They might also get a bitcoin mining plant fueled by a volcano.
The Dangers of Using Bitcoin as a National Currency
The Wall Street Journal warned on Thursday that the decision jeopardizes El Salvador’s whole economy. They reference an El Salvadorian economist who points out that the price of bitcoin is volatile:
“‘Adopting bitcoin as legal cash puts us on a roller coaster,’ says Carlos Acevedo, an economist who served as El Salvador’s central bank governor from 2009 to 2013.”
Yes, a roller coaster that has been in operation for ten years. In addition, the government is establishing services for quick conversion to dollars. El Salvador’s President, Nayib Bukele, has stated that no one will be forced to accept bitcoin. The authors also claim that a bitcoin price drop would result in a liquidity crisis for the country’s central bank.
“El Salvador’s $26 billion economy is at stake as a result of the country’s venture into bitcoin. If the value of the crypto asset plummets and consumers flock to the safety of the dollar, the indebted country’s central bank may be obliged to spend hard currency reserves to acquire bitcoin.”
It sounds like the United States Congress was buying securitized mortgages to bail out banks when those products went bust. Is Bitcoin a riskier investment than the real estate market in the United States in 2006? That depends on how you define risk.
However, mortgage-backed derivatives were mass investments in persons who had a credit history that showed they were untrustworthy to make such payments.
Why Bitcoin Is a Good Investment for El Salvador
Bitcoin is a massive investment in the blockchain, which is expected to place a new block every ten minutes and protect it on an immutable, global, distributed ledger.
Since 2009, it has done so every 10 minutes like clockwork, with exponentially expanding hash power behind the network to safeguard it all the time.
The Journal writers go on to say:
“Because the government is unable to issue its own money—El Salvador abandoned the colón in favor of the greenback two decades ago—the country is straining to earn dollars.”
*doesn’t. The government, more than any other, is demonstrating flexibility and willingness to experiment with its monetary system. What would prevent it from passing a bill and monetizing it in a pinch, as the Federal Reserve does with people’s feverish NASDAQ stock purchases?
But that is not what concerns me. I’m concerned about where all the El Salvadorians will park their Lamborghinis. But, seriously, how will the people of El Salvador’s lives alter now that the country’s government has officially embraced bitcoin, while others are wary of it? Consider a small, natural resource-rich Middle Eastern or European country with affluent citizens and median earnings in the top percentile.