Bitcoin versus Fiat

Located in El Salvador, about 43kms from its capital San Salvador, El Zonte is well known for its surfing.

But as of late, the small village has also become famous for something else: Bitcoin [BTC].

El Zonte is at the centre of the Bitcoin Beach project and about a year ago, it turned the town into a mini-bitcoin economy.

It was a remarkable experiment, one the whole country has now joined in on.

This week, El Salvador became the first country in the world to start accepting bitcoin as legal tender. El Salvador’s main currency is the US dollar, but people can now use bitcoin to pay taxes, buy clothes, or even buy McDonald’s.

The government has bought 550 bitcoins and created a trust fund with US$150 million dollars to allow for exchange between the two currencies.

El Salvador has also launched its own bitcoin wallet, ‘Chivo’ (meaning ‘cool’ in El Salvador), which offers transactions without fees and US$30 to anyone who downloads it. You can keep your money in the wallet or take it out from one of the 200 ATMs which, according to El Salvador’s President Nayib Bukele, also won’t charge fees.

I was very lucky to visit El Salvador in 2000-01, it’s a beautiful country with kind, friendly people and amazing food.

But what’s striking about El Salvador is that the country is very dependent on remittances. Millions of Salvadoreans work abroad in the US and then send that money back home to their families. Just to give you an idea, remittances in 2020 were US$5.92 billion, which was about 23% of its gross domestic product.

Around 70% of the population don’t have a bank account, so the majority of these remittances go through remittance companies like Western Union. It’s not only costly, but transactions can take a while.

Here’s where bitcoin comes in. Using Chivo, the transaction is not only done in minutes, it’s also free.

Bukele estimates that remittances cost the country around US$400 million in transfer fees a year. Others put that figure at close to US$1 billion. Whatever the case, this is money that could give a boost to the economy.

But it’s also giving the country an alternative to a currency that isn’t controlled by any government. In El Salvador, bitcoin is now in the same playing field as the US dollar.

Don’t get me wrong, I don’t think bitcoin will be replacing the US dollar. Bitcoin isn’t perfect. But the whole thing is incredible, when you consider that a little over a decade ago, bitcoin was barely on anyone’s radar.

I’ve been keeping an eye on bitcoin adoption in Latin America. In my view, it’s a prime place for cryptos to take off.

For one, there’s remittances, but also traditionally there’s been inflation problems. In Argentina, for example, where there’s been hyperinflation and devaluations, the US dollar is traditionally seen as a safe haven against inflation. It’s also very integrated into the economy. People save in US dollars, buy real estate in US dollars.

But with the Fed flooding the economy with dollars, it’ll be interesting to see if that unshakable belief in the US dollar is, well, somewhat shaken.

Particularly when you have inflation showing up as a concern. As I mentioned last week, shipping costs have been climbing. In a globalised economy, higher shipping costs will translate into higher prices.

We’ve seen an incredible amount of money flooding into the economy from central banks. This has translated into asset bubbles everywhere. There’s a global pandemic yet property prices, stocks, and cryptos are increasing.

By the way, Bill Bonner has recently written a book on how to not only defend yourself from this ‘everything bubble’, but also on avoiding groupthink. He gives you his best idea on how to protect yourself in this topsy-turvy, upside-down world we are living in.

You can access Bill’s book here.

But back to El Salvador. It’s about lowering costs of remittances but also providing alternatives.

We’re in an imbalanced, broken system. And we know that imbalances always have a tendency to correct themselves.

Best,

Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion
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PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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