“Bitcoin scam”…

That’s how Wall Street Journal editorial board member Mary Anastasia O’Grady described El Salvador’s new monetary system in yesterday’s edition.

Since 2001, El Salvador’s official currency has been the U.S. dollar. But last Tuesday, it added bitcoin (BTC) as a second official currency.

Salvadorans are free to continue using dollars to buy stuff. But merchants there must also accept the world’s first cryptocurrency as payment.

And elites like O’Grady aren’t happy about it.

You may have read one of the many takedowns of El Salvador’s bitcoin experiment.

But bitcoin outclasses the U.S. dollar system in several ways. You just won’t hear about it much in the mainstream press.

So today, we’ll look at three key problems the new law solves for Salvadorans.

Then we’ll tackle one major concern – bitcoin’s notorious volatility.

Before we do that, a word about our mission here at the Cut

If you’ve been with us for some time, you’ll know it pays to have us at the top of your daily reading list. But if you’re new, I (Chris Lowe) want you to know what we’re all about.

The Daily Cut is the premium e-letter we created for all paid-up Legacy Research readers.

Legacy is the publisher of Teeka Tiwari, William Mikula, Greg Wilson, Nilus Mattive, Jason Bodner, Jeff Brown, Dave Forest, John Pangere, and Nick Giambruno.

It’s my job to make sure you never miss one of their big ideas about how to really move the needle on your wealth.

I first urged you to follow Teeka’s advice to buy bitcoin in the September 4, 2018, dispatch.

This was the month after we launched the Cut. It was one of the first recommendations I passed on. And at the time, bitcoin was trading at $7,361.

At writing, one bitcoin will set you back $44,750. So that’s a 508% gain for folks who took the plunge and added bitcoin to their portfolios when I first suggested it.

And Teeka says that’s just the start of gains. He sees bitcoin shooting past $500,000 as it continues to go mainstream.

So naturally, I’ve been paying close attention to the bitcoin rollout in El Salvador.

Countries’ adoption of bitcoin isn’t a core part of Teeka’s investment case for the crypto. He’s more focused on adoption by Wall Street and corporate America.

But El Salvador’s move is still a big deal. And despite what you may have heard, its new bitcoin law is better for Salvadorans than a purely U.S.-dollar-based system in (at least) three ways.

First, bitcoin is inflation-proof…

I won’t go into too much detail on this one. This is something I’ve covered at length in these pages already.

But briefly, bitcoin’s monetary policy is outside the control of governments and central banks.

They can’t inflate its value, as they do with the U.S. dollar and other government-issued currencies.

Bitcoin’s supply is also capped at 21 million coins. By contrast, Congress simply passes a new budget to boost the U.S. dollar supply.

This is particularly important for El Salvador. It uses the U.S dollar but has no say over how many new dollars are issued.

On the other hand, Salvadorans can take comfort in the fact that bitcoin’s supply is completely transparent and governed by code. No central bank or government can create more bitcoins. Nor can any bank.

Second, bitcoin helps end the remittances rip-off…

Remittances – money sent home by émigrés – make up about 23% of El Salvador’s GDP.

Last year, the total amount Salvadorans sent home from abroad was nearly $6 billion. And the average amount they sent was $195.

Incumbents such as Western Union (WU) and MoneyGram (MGI) can charge fees of 10%… or more.

For instance, an online payment of $100 via the Western Union app to someone living in El Salvador costs $12.50 – due to a 12.5% fee.

It’s an even worse deal for smaller amounts. A $10 transfer would incur a charge of $3.24 – a nearly 33% fee.

El Salvador’s president, Nayib Bukele, says the country’s bitcoin adoption will cost remittances companies $400 million in lost fees. I’ve seen some estimates that are more than double that amount.

Fat fees aren’t the only problem…

Salvadorans often have to travel long distances to get to a Western Union or MoneyGram office to pick up their remittance payments. This is especially true for folks living in rural areas.

They also have to brave the gangs that often hang around outside these offices looking for people to mug or rob.

El Salvador is one of the 100 poorest countries in the world. It ranks just above Guatemala, Bolivia, and Laos on a per capita GDP basis.

It’s also one of the most dangerous. So far in 2021, it has the world’s highest murder rate.

But now, a Salvadoran working abroad can send funds to his mother using the government’s Chivo bitcoin wallet app – for free.

Once she gets the funds, she can go to one of the 200 new Chivo ATMs the government has installed and withdraw U.S. dollars from her wallet.

Otherwise, she can just keep her funds on the wallet and spend them from there.

Third, bitcoin adoption means millions of “unbanked” Salvadorans can start to save…

World Bank figures reveal that fewer than 1 in 3 Salvadorans have a bank account.

This puts them at a huge disadvantage when it comes to saving.

They’ve had to rely on costly remittances services to receive cash from abroad.

And they haven’t been able to earn any interest on their savings.

But with bitcoin, they can enjoy the services of a bank without opening a bank account. They can also lend out their bitcoin in return for interest payments.

For instance, you can earn as much as 4.5% a year on your bitcoin at crypto lending platform BlockFi.

The big drawback right now is bitcoin’s volatility…

If you own bitcoin, you’ll know what I mean.

In April, for instance, the crypto hit an all-time high of $64,869.

From there, it plunged as much as 56% to hit a low for the year of $28,824 in about two months.

It’s since up 55% from this low.

That kind of volatility can be hard to stomach for us as bitcoin investors. Imagine what it’s like for Salvadorans earning and spending in bitcoin.

Imagine you’re a homebuilder. You use bitcoin to buy your materials. Then when you complete the house, you sell it for bitcoin.

If you’re unlucky, you could have bought your lumber, steel, bricks, and masonry when bitcoin was trading at $64,000.

But when you sell the house you’ve built, bitcoin could be worth half that in U.S. dollar terms.

That would wipe out your margins… and quickly put you out of business.

Surges in the bitcoin price could be a problem, too…

If it goes from about $45,000, where it is now, to $100,000… $200,000… and higher, Salvadorans won’t want to spend their bitcoin.

If the price is going through the roof like that, it makes sense to hoard bitcoin instead.

If everyone starts hoarding their bitcoin, that’ll cause deflation to set in. Spending will dry up. That could cause a recession.

But even if El Salvador’s project fails, it won’t be the end of bitcoin…

Bitcoin will still be a go-to for folks looking to protect their wealth from inflation.

It will still be a better alternative for folks sending money back home via remittances.

And it’ll still allow us to roll out basic financial services to the unbanked.

There are currently about 1.7 billion people around the world who don’t have a bank account.

That’s a huge untapped market for bitcoin… and yet another reason to be bullish on its price.

The Daily Cut mailbag was a bit light today…

So we’ll end with a question. Do you think El Salvador will make bitcoin work as legal tender? Or is it doomed to fail?

Write us at [email protected].

Regards,

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Chris Lowe
September 13, 2021
Dublin, Ireland