El Salvador, Bitcoin, and the Boundaries of Crypto Economics
When El Salvador President Nayib Bukele pushed through adoption og Bitcoin as legal tender a major test of crypto economics ensued.
By: Brady Dale •DeFi 2021
Big Story 2021: This article is part of our Year in Review series.
At the Bitcoin 2021 conference in Miami last summer, President Nayib Bukele of El Salvador, made crypto history when he declared Bitcoin would become legal tender in the Central American nation. The move made news around the world and inspired other Latin American leaders to eye similar allocations.
The world’s “coolest dictator” might not have been the crypto world’s first choice for a head-of-state advocate, but history doesn’t always let movements pick their champions. Keep in mind, in February 2020, Bukele ordered 40 soldiers to go stand in the legislative assembly as he sought approval for a massive loan from the United States.
Bitcoin might be the money of freedom, but Bukele is no standard-bearer for liberty.
Yet here we are: crypto works at McDonald’s in San Salvador, the nation’s capital. Plus the government distributed $30 of free bitcoin to residents. Universal Basic Income it’s not, but it does expand crypto adoption. Don’t get too excited. The centralized product the state built for locals to hold and spend BTC hasn’t exactly worked swimmingly, according to Decrypt.
Are the locals happy about it? It’s tough to say. On the one hand, Bukele reportedly enjoys approval ratings of 85%. On the other, anti-Bitcoin activism has reared up, including several thousand people coming out against Bukele in September in a public action that included anti-Bitcoin messages, according to Reuters.
Zooming out, El Salvador isn’t the first sovereign nation to adopt a currency it doesn’t control (the nation has been using the U.S. dollar for 20 years; so, too, does Ecuador). Yet this is the first time a nation has adopted a currency whose supply is out of anyone’s control. Bitcoin has a hard cap of 21M coins that can ever be mined. It’s theoretically possible that the Bitcoin network could revise the code, but it would be one Gordian Knot of a coordination problem to do so.
So was El Salvador’s announcement a watershed moment for the orange coin? The day before Bukele’s announcement a lot of the early 2021 shine had come off of BTC, and it was trading at around $35K. Afterward, there was a little rally to $40K, but it actually dropped back down below $30K by mid-July.
Still, at that point, it began an upward march, and then BTC became legal tender there on Sep. 7. Growth from that point was fairly steady, but it took until November for BTC to set its latest all time high of $68,789, according to CoinMarketCap. But that also came after the Bitcoin ETF won approval from U.S. regulators. It will probably take some time before the market has any idea of how much impact a nation of 6.8M with a per capita GDP of around $8,000 can really have on Bitcoin.
If El Salvador’s conviction doesn’t falter, there might be one way BTC builds real wealth there, for the state if not its people.
El Salvador is a nation of stranded energy: It has many volcanoes with valuable energy that’s tough to ship. But that power can be exported using Bitcoin. Volcanoes have a lot of heat, and electricity as we know it is just heat that has had a makeover.
So, El Salvador has gotten into the Bitcoin mining business using its geothermal power. According to the local officials that run it, they have only done this with increased supply (rather than decreasing supply to residents), saying that 1.5 megawatts of capacity has been added to support mining. Odds are, the power authority is also cycling miners on when human demand dips as well, because geothermal power is constant, but humans go to bed.
Who this will actually benefit remains to be seen, but a nation state is stacking sats. Unless doomsayers like Nouriel Roubini are right and Bitcoin goes belly up, one thing is certain: In 2021, El Salvador earned a permanent spot in financial history.