September 7th El Salvador passed a law making Bitcoin legal tender. Previously they were a dollarized country and subject to the monetary policy enacted by the U.S. without the benefits of PPP and stimulus checks. El Salvador added Bitcoin, a money also not in their control, but one that is very transparent and predictable.
We will go through a couple things that have transpired since this decision to adopt Bitcoin.
Bitcoin allows the citizens of El Salvador to receive remittance payments directly rather than going through middlemen like WesternUnion and MoneyGram. Their President said this alone will save its citizens upwards of $400 million per year! This money will stay in El Salvador rather than being siphoned off by rent seeking middlemen. Boosting the economy tremendously!
Since introducing Bitcoin as legal tender the country has faced some pressure from the IMF (International Monetary Fund) essentially the central bank of central banks. Rightfully so, this is stripping power away from the people who have all the power. This is defunding the current system. The IMF hates it but Nayib Bukele, El Salvador’s president, wants better for his people rather than leaving them trapped as a 3rd world country with no way out. His country has been buying Bitcoin and even trolling the IMF in the process.
El Salvador currently holds 1,120 Bitcoin.
El Salvador previously funded its country via a dollar denominated public fund. They used a portion of these public funds to buy their Bitcoin and since they’ve enjoyed the appreciation of the asset it has allowed them to use some of the remaining dollars within the fund to build the countries first vet hospital as well as 20 new schools!
Now for the crazy parts! El Salvador is a country rich in geothermal energy via volcanos. This is a big portion of the energy generation for the country. This energy is also now being used to mine Bitcoin! Since the energy is naturally produced they don’t have to pay any electrical costs to mine the Bitcoin which makes them profitable at any Bitcoin price! Sure they have the overhead costs for setup and maintenance but that goes for any Bitcoin mine and is pennies in comparison for what can be achieved.
Just announced Saturday night. El Salvador will be issuing a $1 billion Bitcoin bond backed by their renewable energy. $500 million to buy more Bitcoin and $500 million to build out more mining infrastructure. There is a 5 year lock up period on this bond, meaning $500 million of Bitcoin will be off the market for at least 5 years. The bond dividend or yield will be payed out annually by selling a small portion of existing Bitcoin holdings. If the dividend is paid out on an annual basis, starting next year, I expect the amount of Bitcoin being sold to be minuscule as we continue to see large price increases.
Their other option for raising money is a loan through the IMF… Bitcoin offers an opt out option.
This was back in June
Next up… El Salvador is playing the with tax incentives which I believe is going to become a massive part of the game going forward. Currently it doesn’t make any sense to spend your Bitcoin for one because the expected price increases but also because in the US that creates a taxable event. Countries as well as states are going to attempt to provide attractive tax incentives which will incentivize people/businesses to move there. Why would you stay in one place charging absurd taxes when you can live/operate in another place charging minimal to no taxes?
Conclusion
More El Salvadorians have a Bitcoin wallet than a bank account.
How does a city/state/country pay for things if it doesn’t have taxes? Simple - by mining Bitcoin at little to no cost off of natural resources like a volcano! Use these proceeds to provide for your locality. We will see this play out in all energy rich areas in ways we can’t even imagine right now. Currently a big player in the space are the oil and gas producers. Drilling for oil produces the byproduct natural gas. There are strict regulation on letting this natural gas go into the atmosphere so producers send it to market via massive pipelines or “flare” it which is burning it. Well now they are starting to hook up these pipelines to a generator and power Bitcoin miners. The flaring is inefficient and mining Bitcoin with otherwise wasted natural gas is extremely profitable. Humans follow incentives and Bitcoin provides the best incentives the world has ever seen! El Salvador is a first mover and will benefit greatly. It will pave the way for other countries to follow suit which slowly then suddenly defunds the state which is projecting this government controlled easily debased fiat money onto its citizens. Bitcoin adoption is inevitable.