On Monday, I (Chris Lowe) wrote to you about an historic moment.
The 39-year-old president of El Salvador, Nayib Bukele, had just announced plans to adopt bitcoin (BTC) as an official currency alongside the U.S. dollar.
The country has been using the dollar since it ditched its own currency, the colón, in 2001, after a period of instability.
On Wednesday, Salvadoran lawmakers passed his bill into law with 62 out of 84 votes.
El Salvador may be a poor country wracked with violence. But it’s made history by becoming the first country to officially adopt bitcoin as legal tender.
Salvadorans will now be able to buy stuff in bitcoin… get paid wages in bitcoin… and even pay their taxes in the cyrptocurrency.
It’s also the first time a country has adopted a supranational currency – one not issued by any government – since the end of the Gold Standard era.
That’s the currency standard that dominated the world in the late 19th and early 20th centuries. It required governments to back paper money with gold.
And it’s more than that. What Bukele has planted the seed for in El Salvador has the potential to be even better than the old Gold Standard.
I’ll explain why below. We’ll also take a close look at what it means for the big idea from colleague Nick Giambruno that I introduced you to on Monday – The Bitcoin Supremacy.
It’s not something you’re going to read about in the mainstream media. And central bankers and financial elites are going to hate it…
But Nick believes bitcoin is on its way to becoming the world’s dominant currency – just like gold was in its heyday.
And this isn’t just some theoretical point. If Nick is right, it means an explosion in new adoption… and soaring bitcoin prices.
Regular readers will know this already. But for readers who are just joining the conversation, it’s important.
Gold is physical. Bitcoin is digital. That’s caused a lot of folks to think about them in separate categories.
But that’s a mistake. Take it from our cofounder Bill Bonner, a deep thinker on the nature of money. Here’s how he explained it, in October 2017, to readers of his Diary e-letter…
Gold has proven useful as money. It has traditionally been used as money because it works as money and nothing else. Gold is durable, fungible, divisible, and portable. And it’s in short supply. Those properties make it a very good money.
For instance, you can grow a crop of tomatoes. They’ll be gone in two weeks. But you can sell them while they are still fresh… get paid in gold for them… and enjoy the fruits of those tomatoes 50… 100… or even 1,000 years later. That’s the beauty of gold.
I see that… theoretically, at least… bitcoin does the same thing. Like gold, it’s also divisible, fungible, durable, portable, and limited in supply. But it also has one thing gold doesn’t – you don’t have to put it in a vault and hire a guard to watch it because it’s secured on the blockchain.
This led Bill to conclude…
In a purely theoretical sense, from what I understand, bitcoin could be an even better form of money than gold.
Don’t get me wrong… Bill still prefers gold over bitcoin, largely due to its longer track record as a store of wealth and medium of exchange. He’s also a self-confessed “fuddy-duddy” when it comes to new technologies.
But his insight shows why it’s not a crazy idea that the world may one day end up on some sort of bitcoin standard.
El Salvador isn’t backing its currency with bitcoin. It’s making bitcoin itself legal tender.
From the bill that just passed into law…
The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.
To Nick, this makes the proposed system more attractive even than the Gold Standard.
It’s something I talked with him about for the upcoming issue of our Legacy Inner Circle advisory, which hits subscribers’ inboxes tomorrow.
Here’s how he explained it to me…
Under the Gold Standard you still had paper money – U.S. dollars or British pounds or whatever. This represented a government’s promise to swap it for a fixed quantity of gold. I don’t trust governments. So I’m not a huge fan of that, to be honest.
What El Salvador is doing is more like a gold coin standard. With bitcoin you hold your digital coins in a software wallet. And you transact with others by transferring them to other folks’ software wallets. It’s like owning gold coins in a physical purse… and handing them over personally as payment.
It’s an important distinction, because this gives sovereignty to the individual, not the state.
That doesn’t mean it’s going to be plain sailing for El Salvador’s bitcoin ambitions. As I said up top, there are caveats to keep in mind.
Here’s a list of all drawdowns (peak-to-trough falls) for bitcoin since it started trading in 2010.
| Bitcoin (BTC) Max Drawdowns | |||
|
Year |
BTC |
||
|
2010 |
-94% |
||
|
2011 |
-94% |
||
|
2012 |
-85% |
||
|
2013 |
-83% |
||
|
2014 |
-71% |
||
|
2015 |
-78% |
||
|
2016 |
-30% |
||
|
2017 |
-40% |
||
|
2018 |
-72% |
||
|
2019 |
-43% |
||
|
2020 |
-61% |
||
|
2021 YTD |
-53% |
||
As you can see, bitcoin has had two drawdowns of 90% or more over that time. It’s also had seven drops of 70% or more.
And we saw a 53% drop between April 14 and May 19.
So it remains to be seen how useful it will be as a day-to-day currency.
Bukele also wants Salvadorans to send home remittances in bitcoin. But that poses issues.
You could convert your hard-earned dollars into bitcoin to send home… get lucky… and see their dollar value shoot up. But you could get unlucky, too, and see your savings cut in half.
Bukele said on Twitter that his government would guarantee the convertibility of bitcoin to the exact value in dollars at the moment of the transaction via a government-funded trust.
But it’s unclear how that would work. And it would put the Salvadoran Treasury on the hook for future big drops in bitcoin’s exchange value.
There’s also a lot of technical infrastructure needed. One in four inhabitants of El Salvador live in poverty. Not everyone owns smartphones or has access to the internet.
And even with these tools in place… there’s the need to bring people up to speed on how to use them.
A hard currency is hard to produce more of relative to its existing supply.
Governments can produce fiat currencies at will. They vote on a new budget. They then instruct their central banks to mark-up balances in bank accounts to fund the new spending. It’s not more complicated than that.
The only energy expended is keystrokes at a central banker’s computer terminal.
Bitcoin is different. As we’ve discussed at length in these pages, bitcoin’s money supply is governed by code. It runs on a pre-agreed schedule. And the overall supply is capped at 21 million bitcoins.
And it requires real world inputs in the form of energy and high-powered computing rigs to mint new coins.
That makes bitcoin immune to the kind of inflation that we’re seeing in the dollar and other fiat currencies.
Just today, for instance, we got news that U.S. dollar inflation surged 5% in May from a year ago. That’s the highest surge of inflation in nearly 13 years. And it means everyone holding dollars just got 5% poorer from where they were a year ago.
It’s why, no matter what comes next in El Salvador, Nick says the move is a game-changer…
El Salvador has lit the fuse on the Bitcoin Supremacy trend I’ve been pounding the table on. Expect more countries to follow soon. Lawmakers in Panama, Argentina, Paraguay, and Brazil are already looking to follow El Salvador’s lead in adopting bitcoin.
This is what the process of a new asset becoming money looks like – and it’s just getting started. Millions of people worldwide are voluntarily adopting bitcoin as money because of its superior monetary properties – one of which is that it’s totally resistant to inflation.
Soon, billions of people will adopt it. That will send prices skyrocketing. Right now, bitcoin has a market cap of $705 billion. If the bitcoin market becomes as valuable as the gold market, which is worth about $12 trillion, that implies a bitcoin price of $640,627.
That’s a 1,601% gain from here.
And if bitcoin adoption moves beyond El Salvador and becomes a dominant form of money worldwide – say, in the event of entrenched fiat currency inflation – that will only be the beginning of an even more powerful surge.
Regards,
Chris Lowe
June 10, 2021
Bray, Ireland