El Salvador became the first country globally to make Bitcoin a national currency, but the crypto market flash crashed soon after.
On September 7th, 2021, El Salvador made history by officially legalizing Bitcoin as a national currency. Unfortunately, some mishaps occurred during the enactment of the grand Digi-token, causing its price to sink, and so did the entire crypto market.
Bitcoin dropped nearly 12% from $52,000 to $46,300, erasing $130 billion from its market cap. Ethereum tanked from $3,900 to $3,450, and Cardano from $2.87 to $2.48.
Why did El Salvador buy Bitcoin?
Elsa- El Salvador, Elsies- El Salvador Citizens (El Salvadorans).
The El Salvador Congress approved of the Bitcoin Law on June 9th, 2021, making Bitcoin legal tender for the following reasons:
For cheaper and faster payments on their remittances,
For nationwide economic development,
To encourage foreign investments, and;
To spare her economy from the inflationary effects of the US Fed Reserve. After all, El Salvador still uses the US Dollar as its national currency.
Elsa bought 550 Bitcoins in two phases; 400 on Monday evening and 150 more on Tuesday- an instance when President Nayib Bukele tweeted that they 'bought the dip.'
El Salvador plans on building 200 Bitcoin ATMs and 50 kiosks nationwide for easy BTC-cash conversion, plus a few more in the US for their US residents. Concurrently, the government launched the Chivo app for El Salvadorans to do their Bitcoin transactions. Unfortunately, Chivo malfunctioned momentarily after its debut due to sudden excessive demand, so the government temporarily de-installed it to add more servers onto the platform.
The funny yet excellent thing, though, is that the government incentivized everyone who opened a Chivo account with $30 worth of Bitcoin.
*Chivo, to El Salvador, means "cool." In the real sense, it means " a Billy Goat," but they thought the app was cool. **Remitting- sending money abroad.
Why do some El Salvadorans dislike Bitcoin?
The Bitcoin Law got a mixed reception on its D-Day, with the El Salvadorans split on it. Many Elsies dislike the government's approach to the digital asset as much as the coin itself, and their arguments are pretty legit.
They argue that:
Bitcoin doesn't cater to the working class' needs.
The volatility in the space could affect their pensions, remunerations, and salaries.
They don't want a currency 'used in money-laundering and financing illegal activities.'
Bitcoin transactions, to them, are a way of avoiding capital gains tax, which, when you note its unregulated aspect, makes it a valid point.
Less than 50% of El Salvadorans have internet access, implying that Bitcoin is only accessible to those with the internet.
70% of Elsa's people have no bank accounts, so the fact that they can't own a piece of the digital asset is scary enough.
In 2001, the Elsa Congress replaced the Salvador Colon with the US Dollar as Elsa's national currency without the citizens' consultation. Elsa doesn't want history to repeat.
Both the IMF and the World Bank are wary of Elsa's buying of Bitcoin; they disapprove of it, citing environmental and transparency reasons. They also fear the rise of financial problems like money laundering and illegal economic activities to Elsa's fragile economy.
Any Counterargument?
Both Elsies in and out of the country will benefit from the Bitcoin Law. Elsies outside El Salvador can send more money through Chivo with no transaction fees. Meanwhile, Elsies in the country can now receive more- they get the total amount which initially had transaction fees subtracted from the paid amount. Everybody wins.
El Salvador has two national currencies to choose from; if not Bitcoin, use the Dollar. Unless otherwise, neither is mandatory.
Remittances into Elsa contribute to 16% on average of her annual GDP, with 2020 being 23%; this number should spike after her Bitcoin acceptance.
The Dollar is currently diminishing in value because of the rapid inflation in the United States. At this point, it makes no sense for El Salvador to solely depend on the Dollar whose stimulus checks they aren't receiving, but instead, their inflation.
Pros and Cons
Pros
Saves on remittance fees. With Bitcoin decentralized, there is no transaction intermediary; it should cost you nothing to send a Bitcoin to someone else. From this, Western Union and co. will lose $400 million per year in remittance commissions. After all, they weren't kidding when they said that blockchain is revolutionizing the entire fiscal industry.
Testing the waters. Being a developing country, El Salvador has little to lose, so any tentative investment counts. From this, other governments in Latin America are watching how Elsa will capitalize on her crypto. Furthermore, President Nayib Bukele is a former businessman and a prominent investor; he knows a thing or two about where his money goes. Thank you, El Salvador, for taking one for the team. Let's see how your bet goes.
Dollar Dissociation. El Salvador can still use the Dollar, but it's only a matter of time until it diminishes in value from inflation. It's for this reason, and others, that Bitcoin is an excellent inflationary hedge against fiat.
Crypto Catalyst. El Salvador using Bitcoin is a colossal example of crypto going mainstream. More mass usage and acceptance of the currency will catalyze another bull run for the crypto market.
A rare resource. A rare asset appreciates in value from less supply and more demand, and if you invest in it, your net worth grows. In this sense, Bitcoin is approaching its fixed supply of 21 million coins, making it rarer than it is. This dynamic will skyrocket BTC's price and raise El Salvador's GDP. (There's a con to this below- HODLing.)
Cons
Subject to volatility. It's a no-brainer that Bitcoin is heavily volatile, one reason the Elsies refuse it.
High risk, high reward, or high loss. El Salvador will be a laughing stock if Bitcoin goes south like in 2018 when it plunged 70%, which I doubt will ever happen again.
Cost of international relations. El Salvador accepting Bitcoin has severed her ties with the World Bank and the IMF, both crypto antagonists. It'll be difficult for Elsa to request loans from these bodies moving forward due to her aggressive investment.
Government control. Since the El Salvador government owns Chivo, they can track people's transactions, automatically deduct payments, or freeze people's accounts in the worst-case scenario. The fear of privacy breaches exists here.
HODLing. Bitcoin is more of an investment than it is an exchange medium. Once it appreciates, Elsies will most likely HODL their stakings, reducing monetary circulation and costing the economy.
***HODL in crypto means "Hold On for Dear Life." It's an intentional misspelling of HOLD, but it still means the same.
My Recommendations
The government should expand the internet to all of El Salvador for Bitcoin access. While it's a reach to instantly develop a developing country's infrastructure, still, the more people who can access the internet, the more widespread Bitcoin becomes in El Salvador.
The government shouldn't YOLO its entire economy into Bitcoin. BTC is still speculative and has immense volatility, so the government should invest in it sparingly while holding sufficient cash in reserves.
Financial institutions in El Salvador should help create bank accounts for unsupported citizens. Currently, 70% of El Salvador citizens have no bank accounts; a set-up bank account would help them convert their monies into Bitcoin and vice versa.
Lastly, financial education is as vital as ever in a radically changing world. According to an institutional survey, 9 out of 10 El Salvadorans do not know what Bitcoin is. If they learn more about cryptocurrencies and how they operate, then they will have a more informed stance on the subject, whether or not they like it.
Closing Thoughts
A national government accepting Bitcoin is quite interesting, and it will continue being so for as long as it lasts. It will definitely save the country millions in remittance costs, but that's not enough to convince the innocent working class of El Salvador of its potential downsides.
I think El Salvador pulled a good move with the coin adoption, and I pray that their bet pulls off. It can insanely help El Salvador's economy in the long run and potentially create room for foreign investment. If anything, President Nayib still has his knack for investing, so he sure knows where he is putting his money.
To the rest of us, this was just a tiny dip along the way. Hopefully, we bought in.
See you on the other side.
~Carerra, 2k21.
What do you think? Do you think El Salvador did the right thing? Why or why not? Let me know in the comments below.
{THE ABOVE CONTENT IS STRICTLY FOR INFORMATIONAL PURPOSES ONLY AND NOT FINANCIAL ADVICE. INVESTORS SHOULD BE AWARE OF THE RISK ENGAGED IN TRADING SECURITIES AND ASSETS. PLEASE CONDUCT YOUR RESEARCH AND CONSULT YOUR FINANCIAL ADVISOR BEFORE MAKING ANY INVESTMENT DECISION.}
Kommentare