This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

El Salvador Just Adopted Bitcoin as Legal Tender. Here’s Why Other Countries May Follow Suit

By:

CEO and Chief Investment Officer

El Salvador is the smallest country in Central America, smaller than the Commonwealth of Massachusetts, and yet it just did something very big. This week it became the world’s first country to adopt Bitcoin as legal tender, marking a huge turning point for the cryptocurrency.

It could also potentially be a turning point for El Salvador and its citizens, 70% of which are unbanked. Anyone with a cell phone can be his or her own bank when you add Bitcoin, and fortunately for El Salvador, mobile penetration is unusually high for such a low-income country.

Under the new law—which was proposed by President Nayib Bukele Saturday evening, near the end of the Bitcoin 2021 conference in Miami—the U.S. dollar will continue to be El Salvador’s currency, but all businesses will now have to accept payment in Bitcoin unless they lack the technology to do so.

A common refrain at Bitcoin 2021 was that Bitcoin “fixes everything.” Although no one had El Salvador in mind, they may as well have.

Cash Is Trash

Besides acting as a store of value—a type of digital gold, as some have called it—Bitcoin exists entirely outside the traditional banking system. El Salvador’s central bank cannot “print” more Bitcoin; nor can its government stop a transaction from happening.

It’s easy to see why, then, some authoritarian governments have moved to ban or severely restrict Bitcoin, China chief among them.

It’s also easy to see why people in poorly managed countries have had little choice but to use Bitcoin to get by. Venezuela, for instance, has one of the highest Bitcoin adoption rates in the world because hyperinflation has destroyed its currency, the bolivar.

At Bitcoin 2021, someone hauled in a literal dumpster full of thousands of 50-bolivar notes, many of which ended up being scattered across the conference grounds like so much litter. It was jarring to see attendees completely ignore the paper money right under their feet as they walked from one panel to the next.

The point was well made: Cash is trash. If a substantial chunk of your household wealth is sitting in the bank, you’re taking on a huge risk.

An Unprecedented Global Experiment

You may think that hyperinflation and currency debasement are things that happen only in third-world countries, but there’s no reason why it couldn’t happen here in the U.S., however unlikely.

Since 1971, when President Richard Nixon officially killed the gold standard, the U.S. dollar has been an entirely free-floating fiat currency, backed by nothing. There’s no limit to how much money can be created. The same goes for nearly every other currency in the world.

I don’t think enough people appreciate the fact that this is a global monetary experiment never before seen in history. Every other attempt at using paper money in the past has ended in disaster.

Take a look at the chart below. Close to $5 trillion have been pumped into the U.S. economy since January 2020 in response to the pandemic. This represents nearly 25% of all U.S. dollars in circulation. In as little as a year and a half, the greenback has essentially lost a quarter of its value.

USD in circulation

Money has also been created—and diluted—through central banks’ runaway bond purchase programs. As of the end of May, the four largest central banks held a staggering $29.3 trillion on their balance sheets.

central banks total assets

To borrow the line from above, Bitcoin fixes this. Supply is capped at 21 million coins. Once the last Bitcoin is mined, in 2140, there can never be any more. No central banker or finance minister can flip a switch and dilute the supply by creating additional Bitcoins. Like any asset, Bitcoin has its own risks, but poor monetary policy is not among them.

I hope financial liberty for El Salvador’s 6.5 million residents was top of mind when President Bukele chose to pursue Bitcoin adoption. His administration has a history of corruption, and some Salvadorans allegedly wonder if the cryptocurrency will be used as just another tool for political gain and self-enrichment.  

So What’s Next?

El Salvador may be the first to adopt Bitcoin, but I don’t believe for a second that it will be the last. Politicians in other Latin American countries, including Paraguay, Panama and Brazil, have already expressed support for making the crypto legal tender.

As for now, El Salvador is on a path to start mining its own Bitcoin. On Wednesday, President Bukele said he instructed the president of LaGeo, the country’s geothermal electrical company, to “put up a plan to offer facilities for Bitcoin mining with very cheap, 100% clean, 100% renewable, 0 emissions energy from our volcanos.”

How cool is that? Volcano-powered Bitcoin. Click here to see tweet.

It goes without saying that all eyes will be on El Salvador going forward. Many Bitcoiners no doubt hope to see some price appreciation as a result of President Bukele’s decision, but I’m more curious to see what Bitcoin can do for El Salvador’s economy.  

Originally Posted on June 10, 2021 – El Salvador Just Adopted Bitcoin as Legal Tender. Here’s Why Other Countries May Follow Suit

Please note: The Frank Talk articles listed contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content. Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole.

M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.

Disclosure: US Global Investors

All opinions expressed and data provided are subject to change without notice. Holdings may change daily.

Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

About U.S. Global Investors, Inc. – U.S. Global Investors, Inc. is an investment adviser registered with the Securities and Exchange Commission (“SEC”). This does not mean that we are sponsored, recommended, or approved by the SEC, or that our abilities or qualifications in any respect have been passed upon by the SEC or any officer of the SEC.

This commentary should not be considered a solicitation or offering of any investment product.

Certain materials in this commentary may contain dated information. The information provided was current at the time of publication.

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by clicking here or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from US Global Investors and is being posted with permission from US Global Investors. The views expressed in this material are solely those of the author and/or US Global Investors and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Disclosure: Digital Assets

Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.

trading top