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Salvadoran President Nayib Bukele’s announcement last week that his country would adopt bitcoin as legal tender, made on a live broadcast at the 2021 Bitcoin conference in Miami, and subsequently approved four days later by the Parliament of the Central American country, sent the share price of cryptocurrencies up 5%.
In recent weeks, the value of Bitcoins had been affected by increasingly stringent controls over its use in China, as well as the seizure by the FBI of a 75 bitcoin ($ 4.4 million) ransom paid by Colonial Pipeline after being the victim of a cyber attack. . The FBI was able to trace some 85% of the 64 bitcoins ($ 2.3 million) transactions, undermining the reputation of cryptocurrencies as secure and anonymous: in fact, bitcoin is now easier to trace than cash .
El Salvador’s decision to adopt bitcoin as legal tender is a boost for cryptocurrency, and the interest shown by neighbors such as Argentina, Brazil, Nicaragua, Panama or Paraguay indicates a dimensional shift that could lead to mass adoption, despite the reluctance of governments in the most powerful economies. While the decentralized nature of cryptocurrency already made it nearly impossible for a country to prevent bitcoin adoption in the future, the possibility of trying to do so if the cryptocurrency is already widely used is all but disappearing.
What is driving El Salvador and a growing number of regional economies to take an interest in using bitcoin as legal tender, despite warnings from the IMF? Obviously, perceptions of cryptocurrency risk are not the same for strong economies as they are for those that have long been subject to fluctuations in monetary policy and hyperinflation. Is bitcoin risky? It is a cryptocurrency whose volatility is tied to the ups and downs of its adoption, and is part of something already anticipated in its design: the price discovery process. New bitcoins will be issued until we reach 21 million units, and although their use largely depends on what we read in the news and the unpredictable decisions of countries about it, the value of bitcoin oscillates naturally, and many take the opportunity to speculate. However, this completely natural price discovery process has nothing to do with the characteristics of the cryptocurrency, and rather reflects how its value is algorithmically determined by a mechanism that is not under anyone’s control. .
As I wrote, the bitcoin adoption process is unstoppable, basically because bitcoin’s long-term value proposition is a currency that has its own software-implemented rules, monetary policy, and consensus. and with independent value unaffected by the actions or decisions of a particular actor are clear, unambiguous and considered interesting by many.
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Indeed, President Bukele believes this value proposition to the point of making it the official currency of his country. Why? Perhaps because of the technology behind the cryptocurrency, as well as other factors related to political marketing. For many Latin American leaders, such a move could increase their popularity while earning a reputation as a trailblazer that would distract from the many other issues they face. Moreover, Bukele did not limit himself to adopting bitcoin: he also proposed his country as a center of bitcoin mining, linked to the exploitation of resources important for the sustainable production of electricity through the exploitation of geothermal energy from its volcanoes.
This is a decision that may make sense for several reasons: Firstly, despite its volatility, the evolution of bitcoins has been bullish, and there are those who predict much higher values, which, although a bet , from a national point of view is to adopt a currency with good prospects. Second, in the case of countries like El Salvador, many of whose problems relate to the irresponsible use of monetary policies that have often triggered hyperinflation. The case of El Salvador, which adopted the dollar as its official currency in January 2001, is clear: the relinquishment of control over its monetary policy has been positive. And third, we are talking about economies with low bank penetration and highly dependent on remittances from family members working overseas. Anyone with a simple smartphone can use bitcoin to send remittances and will be great news for people who depend on remittances and don’t have a bank account.
In the case of countries like El Salvador, bitcoin could be the solution. But the end result of this combination of factors will undoubtedly be a very strong push for bitcoin adoption, which implies, for these countries, a self-fulfilling prophecy: take a big risk by adopting a volatile cryptocurrency, but which, in its own decision to adopt it, reduces this risk in the hope that its pricing process will eventually produce significant capital gains for the country and its citizens. Perception of risk depends on many factors, and signs are showing that for Latin American economies, adopting bitcoin may be more of an opportunity than a danger.
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