Crypto – Gone fishing

El-Salvador goes fishing for business.

• El Salvador’s move to grant Bitcoin legal tender status is not an endorsement of Bitcoin but a recognition that there is still a lot of capital swirling around in the sector and a move to attract some of that to El Salvador.
• With 62 out of 84 votes, Bitcoin has become legal tender in El Salvador meaning that “every economic agent must accept bitcoin as payment when it is offered” but the practicalities of this have yet to be worked out.
• Bitcoin is utterly unsuited to be a medium of exchange because of its extreme volatility and because it is still difficult and expensive to enter into a transaction using it.
• One only has to look at the awful terms and conditions that Tesla placed upon those wishing to buy their vehicles with bitcoin for evidence of this.
• It is also worth noting that Tesla no longer accepts bitcoin for these exact reasons despite Elon Musk’s dubious excuse that bitcoin is too environmentally unfriendly (see here).
• The Salvadorian government has promised to provide the “necessary training and mechanisms” for those that are unable to affect these transactions but this also will be fraught with problems.
• El Salvador has nothing to lose by making this move as it no longer has a currency of its own having switched to the US Dollar in 2000.
• Its old currency, the Colon, is still legal tender but it disappeared from circulation years ago meaning that bitcoin represents no threat to the ability to control its currency.
• I suspect this is exactly why China is clamping down on cryptocurrencies and running with the digital Yuan.
• Salvadorian residents and citizens will be able to pay their taxes in bitcoin which given the volatility of the exchange rate, will play merry hell with the nation’s finances.
• Deep down I think the Salvadorians know just how unsuitable bitcoin is to be used as a currency and do not expect to ever really be used in any meaningful measure.
• Instead, I think that they are looking to get in on the capital that is still flowing into the blockchain carried by the bitcoin mania.
• Salvador is also well suited to cryptocurrencies because it has no currency of its own and is also rich in geothermal energy which uses volcanic heat to generate carbon-free electricity.
• Bitcoin is very energy-intensive to mine which is why a significant portion of the activity is carried out using cheap but dirty coal which has been attracting a lot of negative press recently.
• Hence, I think that by creating a unique jurisdiction for bitcoin, El Salvador hopes to attract bitcoin miners & related businesses to come and invest in the country.
• I think that this is the main reason behind this move as opposed to a big vote of confidence in the value of bitcoin and its status as a currency.
• Bitcoin rallied strongly on this news which makes very little sense as El Salvador is a very small country with limited economic clout.
• This means that it has no chance of offsetting the very large and negative impact on cryptocurrencies that is coming from China’s increasingly aggressive efforts to stamp them out and replace them with the digital Yuan.
• Hence, I do not expect this to mark the bottom for bitcoin which continues to be nothing more than a speculative asset.
• I continue to prefer to look at the mechanism that runs bitcoin which is the blockchain which is becoming more widespread as different industries find good uses for it.
• The best use I can find is the disruption of the banking sector and I already have a small position in a fund (Dispersion Holdings PLC) that has been set up to do just this.