I'm pretty open to the idea that their crypto experiment ended in failure because bitcoin must be a truly terrible reserve asset, but being assassinated by the IMF isn't really evidence of that. El Salvador doesn't seem to have independently changed their minds about the merits of their policy.
I might draw a very vague parallel with a gentleman who can't repay a mortgage and through various machinations the bank forces him to sell his beanie baby collection. The beanie baby collection might have been a success or a failure for him personally. Probably was a failure. But that isn't really what we're learning in this story.
And pointing out that they lose money on the bitcoin reserve is a bit of a non-sequiter. They all do that. Gold has storage costs, the USD inflates like crazy and sometimes the US sanctions you. The analysis has to be a bit deeper than just noting that money was lost, it is a tricky question of relative options.
The article makes a case on the merits for the failure of the project, in terms of its uptake, the direct value generated, and the costs of its rollout.
Those arguments could be levelled against any currency. Typically uptake is only 100% because the government has a "thou shalt accept this" policy. If it was practically voluntary then a bunch of businesses would operate on a barter system or private scrip. Even with the insistence of the tax office it takes regular crackdowns to stop alternatives springing up.
And it is even easy to argue that normal currency is value destructive, all the flows of money into crypto are implicit "I'd rather be burning energy than using USD" announcements.
Just over the past year BTC has gone between $54K and $104K.
Currencies are subject to inflation, but in a well managed economy that is generally a single digit yearly percentage and fluctuates slowly, and the currency changes value in a single direction only.
Normal government currencies don't gain or lose 10% of their value over a few days in purchasing power, as regularly happens with Bitcoin.
The distinction between government and crypto currencies is wrong one to make.
I fail to see how gold-pegged, gasselized (demurraged at constant rate until they vanish down to UBI limit, except from government/CB wallets, with other assets also demurraged when sold/bought via cap gains style taxes), constant supply cryptocurrency would not be in fact better than the dollar and the euro and the yen, and it would be both inflation & deflation resistant.
Between Sep 2012 and Jul 2013 gold went from $1780 to $1210 (-32%).
Between Feb 2024 and today gold went from $2040 to $2950 (+45%).
That's a crazy amount of volatility you would never want as a currency. Can you imagine signing multi-year contracts denominated in that? Even monthly contracts! It would be madness.
It's a bidirectional relationship. The value of gold actually remained stable when the U.S. dollar was pegged to it. I view that as evidence for pegging stabilizing the value of the commodity it is pegged to. However is an simplification, because share of the dollar relative to other currencies policies has changed. I also only believe the system I depicted would work, if the exports of the commodity were restricted so that no one or only the central bank could sell it abroad.
Saying something is “pegged” is saying that the price is fixed. There doesn’t exist any volatility between pegged instruments because that’s what a peg means.
So you have to compare them to other things, which is what inflation (or deflation) measures. And gold pegged usd has volatility to other items in the economy greater than modern fiat usd.
You're near-certainly right that pegging in dollars would means some rate, let's for simplicity presume a constant ratio, between dollars and what it's begged to.
I think crux is what happens if we model two different currencies, one of which is begged, and the price of te commodity in each.
If after the conversion rate you can get cheap gold, that keeps golds value low and pegged currency's value high, I would guess.
Again I think restricting impots in the commodity is necessary to maintain supply.
> I fail to see how gold-pegged, gasselized […] constant supply cryptocurrency would not be in fact better than the dollar and the euro and the yen, and it would be both inflation & deflation resistant.
If you don't see it then then you may wish to read more economic history, as the history of gold-pegged currencies shows that they caused anything but stability:
And it was only after leaving the gold standard that countries started to recover from the Great Depression:
> In the end, recovery from the Great Depression does not begin until countries give up on the combination of the Bagehot Rule and of commitment to sound gold-standard finance. Those countries that have central banks willing to print up enough money so that people are willing to spend it--it is when you adopt such policies that your economy begins to recover. If you don’t, you become France, which sticks to the gold standard all the way up to 1937, and never gets a recovery. When World War II begins, Nazi Germany’s production--equal to France's in 1933--had doubled between 1933 and 1939. French production had fallen by 15%.
If you can always move to smaller denominations, deflation would not be an issue:
If the price of an apple at t_0 is $2 and (using arbitrary symbol for the other currency) §2, and at t_1 $20=§2, then at t_1 citiziens in the nation using § as currency would pay §0.2 for an apple, et cetera.
The other currency would have to use scientific notation, for cash.
(if deflation wasn't the the cause of that crisis, this is not an answer).
I don't know the best rule to use for the process, since there seems to be many potential combinations of rules for it, but the idea of forced-gesselization is that if you buy a house with the bad money from foreign gray markets dealer, when you try to sell the house, you are taxed as if house and the bad money you bought it (this type of situation would be gray area, as such requiring intervention and appraisal of actual value by government body, which is not to be desired; but such practice also would not have to be commonplace) with had been in the demurraged currency, e.g. for the duration of the ownership.
Normally we can think of sales value to mean value - tax, where tax = g(ownership_duration), where g is gesselization function, which would preferably remain same over time but doesn't have to be linear or simply value or function of time as long as it is simply enough high schooler can solve for it without a computer.
> The idea behind a gold standard is that a currency becomes tied to a commodity with a stable value. The great problem with this is that gold does not have a stable value. Like any other commodity, its relative value goes up and down. For instance, in September 2022, US dollar milk prices were rising over 16%. In gold terms milk prices were rising over 23%—dangerously high inflation.
The "stability in CPI" after the gold depeg in the 70s is also when wages stopped growing in real terms. Most "wealth creation" since that date is on paper.
most wealth creation being on paper is because labor stopped getting paid and capital saw all the growth
kinda like how despite all of the inflation the average person only saw a 3% increase in actual take homes while the hyperwealthy saw 300% (of much, much larger numbers).
Are they as volatile as Bitcoin? Also, what can a government do to control Bitcoin's value, money supply, etc.?
> You can never be sure what the price of anything is going to be next week.
I do know what prices will be next week, within a sufficiently narrow range that I don't care. I think that applies to almost all consumers in advanced economies.
Price volatility might be bad for trade because seller and buyer don’t know what they should do at any point. So it slows trade down, which is bad for economy. It makes buying furniture seem like day trading. This happened in Turkey couple years ago
Volatility is a measurable thing, though. In 1985, 1 USD was worth 260 JPY. In 2011, 1 USD was worth 76 JPY. In that 40 year history, those are the extreme high/low ends. That's a ~70% swing over the span of 26 years. By comparison, Bitcoin had a 95% swing between September 2024 and December 2024.
All volatility is not equal. The degree to which Bitcoin is volatile is unmatched by any government currency I'm aware of.
Yes. Using any particular currency generally isn't voluntary. If El Salvador had mandated everyone use only bitcoin then it everyone would have been using it. If using USD was voluntary in the US a lot less people would use it. It isn't a particularly strong argument to say that everybody uses one thing that they are legally required to use, then compare it to a new alternative that didn't gain total dominance in a few years.
Although in this case I am happy to agree it might be true despite being a weak argument, I can see a lot of good reasons why someone wouldn't want to use Bitcoin in practice. But the article didn't touch them when declaring a failure and the experiment wasn't run to a natural conclusion where the people involved decided it was not working.
Paper money was first used in the West in Massachusetts Bay Colony in 1690, was used in limited fashion, became unpopular and then phased out. And that was the end -- paper money was a failure.
Wait....
The currency was initially unpopular for anything except paying taxes, and was phased out. Within a few years, however, paper currency would return to Massachusetts. The Bank of England began issuing banknotes in 1695, also to pay for war against the French, and they became increasingly common throughout the 18th Century.
> If using USD was voluntary in the US a lot less people would use it.
I'm curious what makes you think so, and what the alternatives would be. My impression is actually that if shops weren't forced to accept USD, 100% would still do so.
Obviously we can't be truly certain without running an experiment or few, but...
1) If they're being forced to do something, that suggests someone doesn't believe they would do it voluntarily. Nobody more suspicious than the person who forces others to do things for their own good.
2) Businesses are invariably blamed for inflation. Every single time the subject comes up organically somebody pipes up to blame "greedy businesses"; it is basically a meme. Some business owners would start up a non-inflating currency just to escape that. They don't want to be political scapegoats.
3) You can spot a bunch of banking crisises coming a mile away, the financial system seems to be mathematically guaranteed to collapse from time to time as I understand it. If given the choice a bunch of people would rather sign up for alternative systems that only enter a crisis state unexpectedly. That includes small business owners.
Would they still accept USD? In the US, probably. But a bunch of alternatives would crop up and it is by no means guarenteed that the USD would be competitive. The US Fed manages the currency and they do a terrible job.
> If they're being forced to do something, that suggests someone doesn't believe they would do it voluntarily
But wait. US retail shops are not forced to accept USD.
They can, if they choose, accept payment only in smiles. Or CAD, or good vibes.
(Taxes, however, must be paid in USD).
In practice, US retail wants USD, for obvious reasons. There are no viable widespread alternatives (but there are countless insignificant local currencies!).
It's funny that you mention it, because quite a few digital storefronts accept crypto. Particularly, the ones that have been censured by the financial oligarchies (Visa, Mastercard et al)
"My impression is actually that if shops weren't forced to accept USD, 100% would still do so."
Kind of like the crypto pump and dump scams that we see daily. Who wouldn't want to create their own currency? It would eventually take power away from the US government.
The Salvadoran government did have a "thou shalt accept this" policy, in addition to exempting bitcoin holdings from capital gains tax. It worked to drive initial interest, with a quarter of Salvadorans using Bitcoin for at least some transactions in 2021, but adoption fell sharply over time. I haven't studied it in depth, but my vague understanding is that many businesses couldn't actually figure out how to practically accept Bitcoin despite being theoretically required to.
And we can see the IMF got on that lickity split before anyone figured it out how to make the system convenient. 4 years to detect and act on this sort of international action is commendably speedy. I'd expect that the experiment would fail. The IMF probably expected it would fail. But we can also observe that the IMF moved with the speed of bankers worried that it might succeed.
Which isn't surprising. Bitcoin is unfortunately not well suited for petty transactions, even though it shines as a truly neutral platform for larger transactions. They should have tried to implement something like Lightning nationwide; some of Lightning's flaws could be overcome with government investment/buy-in.
I don't know, they say that they're up $250M but the total cost of the program was $375M. I presume the bulk of that $375 went into the $30 incentive balance. That amounts to quite an economic stimulus for cheap.
All in all, El Salvador has been doing pretty well economically. It's human rights that have been the worrying point.
The legal tender experiment failed, the crypto experiment is ongoing. An entrepreneurial audience like this would be more charitable in interpretation if this was a company in the middle of a pivot.
I can certainly see why you would believe I am always right about everything, but the truth is stranger than fiction - sometimes even I am confidently wrong!
Just because I agree with the IMF doesn't make either of us correct. It was El Salvador's experiment and the IMF's motivations are highly suspect. They are globalist political actors, they aren't motivated by any particular love of the economies they intervene in or the people in them.
Conspiracy theorists have been predicting the IMF getting involved in El Salvador since the day they got involved in Bitcoin. Those who read the conspiracy theory posts years ago are now rolling their eyes reading such articles.
It doesn't matter what El Salvador thinks of Bitcoin. For it to succeed it needs to be accepted by institutions such as the IMF. That's great that it sounds good in theory but if a currency isn't widely accepted it's a failure.
> Despite these profits, crypto has brought El Salvador more costs than benefits. The free publicity has been welcome, yet crypto-investment and crypto-tourism have been small beer. Gains in financial inclusion and from more efficient payments are meagre at best: the currency never really caught on. In 2022, when the hype was at its peak, a survey by CID-Gallup found that only a fifth of firms accepted bitcoin and just 5% of tax payments were in crypto.
> Moreover, the policy cost $375m in all—from the Chivo rollout, subsidised transaction fees, bitcoin ATMs and more—according to Moody’s, a rating agency. That far exceeds the profits on bitcoin holdings, which could still evaporate. By delaying an IMF deal, the crypto experiment kept El Salvador’s risk premium high.
375 minus like 287 in unrealized gains. My next question is are they still behind once you consider the market value of the ATM and other investments. I doubt it's a total write off.
I don't trust El Salvador. I also don't trust the people indicting their policy. I hope to God they have more than 400 ATM to show for 375M. Surely there is more to it.
I don't want to give him the benefit but I also question how even a strongman can justify over $1M per ATM. My alarm bells are ringing that I'm missing something.
I worked at a crypto company and left after I realized that 99% of crypto are scams. Either people get rugpulled or they get their wallets emptied by scammers, and I don't think Apple would have survived if the iPhone was a hotbed of scams. There's a tiny sliver of activity which isn't purely scams, like BTC or ETH but even then there's almost no real use case except the Greater Fool Theory, and I just don't think that's sustainable. I think at some point the entire industry is going to get rugpulled because there's still no inherent demand except selling it to someone else for more money.
BTC in its current form is probably the biggest scam in existence right now. BTC does not work long term, as block rewards increasingly get cut in half and the transaction fees aren’t enough to incentivize the miners. It’s been well known outside the Bitcoin community, and slowly talked about within Bitcoin, with some core devs like Peter Todd talking about tail emission, but that would break the 21 million cap. Bitcoin is screwed.
> with some core devs like Peter Todd talking about tail emission, but that would break the 21 million cap. Bitcoin is screwed.
Tail emission, economically speaking, means that the ~0.5%/year or whatever coins that get lost each year go to miners rather than get evenly spread across everyone holding Bitcoin. That's economically equivalent to imposing a ~0.5%/year tax to pay for security.
You can do essentially the same thing - economically speaking - without touching the 21 million cap with a soft-fork implementing a security tax directly when coins are spent.
Neither solution means Bitcoin is screwed. Even 0.5%/year compounded over 50 years - a lifetime of savings - is just 28%. And of course, 0.5% means nothing compared to the ups and downs of any currency. Bitcoin already has about 0.5% monetary supply growth per year right now; it's only in the long run that the subsidy goes away.
A lot of "Bitcoin Maxi's" are of course horrified by all this. But a lot can change in the 8-12 years before any of this really matters. And who knows, maybe fees will be sufficient? IMO it's stupid to take the risk when a solution is cheap and doable. But that doesn't mean the game theory problem will actually happen in real life. Other coins survive with much bigger game theory problems, like straight up centralization.
I said this back in 2012, and I've been waiting ever since... That's why I decided to join the crypto company but left after seeing it from the inside of the actual space.
I think people are going to start realizing that there's a lot more invested in crypto than it's worth. Trump putting the federal government behind a crypto reserve didn't intice new investors/investment. Not sure where the bottom is, but we might find out sooner than later.
The people who want crypto have it. The people who recognize it's not worth the lack of fraud regulation/protection and instability aren't going to suddenly start buying.
I also used to work in crypto professionally and quit over the clown show, but personally I saw lots of stuff that wasn't scams. There were a lot of scams though, very low ethical and professional standards across the board, just tons of stupidity and nativité... But even then there's tons of stuff possible that at least on philosophical principle I'm still really bullish on, and tons of interesting cryptographic tech is still coming out of there that will find a good home eventually.
> This guide also told me that he immediately spent his $30 Bitcoin gift from the government on beer and hasn’t possessed a single Satoshi since.
> I saw maybe four or five Bitcoin ATMs in El Salvador, including two Athena Bitcoin machines. I didn’t see anyone using them.
> The guide, who I consider an articulate and strong supporter of Bukele, seemed to consider the president’s Bitcoin ambitions to be a weird, misguided, but ultimately trivial effort.
> I saw maybe four or five Bitcoin ATMs in El Salvador, including two Athena Bitcoin machines. I didn’t see anyone using them.
I've visited El Salvador quite a few times and traveled a decent % of the country, including non-touristy areas. I've seen plenty of Bitcoin ATMs in El Salvador. In some areas they aren't busy. But in other areas they have consistent line-ups of _locals_ using them. And yes, I said locals, not tourists. I'm not sure why the locals use them so much. But remittances is one possibility.
If all Bitcoin managed to do was force the likes of Western Union to keep their fees low via competition, it'd be a success for El Salvador. As of 2023, about 24% of El Salvador's entire GDP is remittances.
> The guide, who I consider an articulate and strong supporter of Bukele, seemed to consider the president’s Bitcoin ambitions to be a weird, misguided, but ultimately trivial effort.
Of course, let's put all this Bitcoin stuff in perspective: Bukele's legacy will most likely be ending gang violence. I consider the Bitcoin stuff a mild success; ending gang violence has radically transformed the country for the better.
Which is ironic, considering how Bitcoin security budget will very likely decrease as time goes on with Bitcoin halvenings and low transaction fees going to miners
1.4bn seems cheap, and its a loan that presumably will be guaranteed. So for 1.4bn dollars the IMF gets to call the shots for an entire country's economy.
Im surprised we dont see more private indvs playing the role of WB.
yeah as an economy - you don't want to ever receive IMF money. Lots of African and Caribbean countries will attest to that. IMF money is like having the mafia control your money - the structural adjustments will kill the natural course of your economy and never recover.
That's why Chinese loans have been welcome for a lot of countries. they don't come with a lot of stipulations, such as removing subsidies for your farmers.
Im not even arguing against this type of lending, although it does seem predatory to a degree. Im surprised at how much leverage can be bought for 1.4bn $$, this is pocket change for most large banks/countries, im surprised the IMF doesn't have more competitors, especially if natural resources are on the table, and they always are.
El Salvador invested approximately $269.74 million to acquire 5,900 bitcoins ($595 million) and secure $1.4 billion in IMF loans.
I hope they can recover from this failure.
The article doesn't get into the interesting part: Salvadorian government continued accumulating BTC. So far IMF didn't say anything specific, so the June review will be interesting to see if IMF continues with the loan or cancels the next trenches.
> Moreover, the policy cost $375m in all—from the Chivo rollout, subsidised transaction fees, bitcoin ATMs and more—according to Moody’s, a rating agency. That far exceeds the profits on bitcoin holdings, which could still evaporate. By delaying an IMF deal, the crypto experiment kept El Salvador's risk premium high.
One does not need an expert to predict a terrible failure of Bitcoin as a legal tender and for $30-worth of free BTC wallet.
But as a minority of reserve asset, Bitcoin might be a good idea, nobody bought bitcoin at any price whatsover and wasn't able to make a profit that beats US T-bonds for 4 consecutive years (please double check on this, it's not a financial advice), let only if they DCA their portfolio.
Of course such national reserve cannot make a large % of the total reserve as the risk is also high and wealth of the nation is not meant to be used in risky bets. 4 years is also not a very meaningful window for a 16 years old market.
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The infrastructure is not set up yet, but the multi-nationals have good facilities for it. It's just like any currency, up one day, down the next, which is why I say it's long time past we did away with the concept of money. Not only is the concept of money outdated, it's not a natural phenomenon, other wise trees would give receipts. Living a life in a money world is not unlike living in a cloud cuckoo land, it's just as illusory. There's fish in the sea, crops give up seeds from the ground and barnyard animals reproduce, not a penny passed hands. The world has the education, if the Egyptians could turn a desert in to paradise more than 15,000 years ago, why can't we?
And we in the US about to embark on a similar crypto adventure with the EO for the Strategic Bitcoin Reserve [0].
This is what happens when top leadership at A16Z like Marc Andressen [1], Ben Horowitz [1], Scott Kupor [2] (first VC at A16Z and now head of OPM - the agency that gives DOGE it's teeth), and Brian Quintenz [3] (head of policy (ie. Lobbying) at A16Z as Head of the CFTC) become major backers of the current administration.
A16Z has been lobbying for deregulating the Crypto industry and defanging the CFPB for half a decade now [4][5] as they have $4.5B dedicated in crypto investments alone [6], which were largely underwater [7]
People keep talking about the Dark Enlightenment Tech Bro schpeil, and while significant, is basically a bunch of blowhards. The primary reasons you saw significant VC support for the Trump administration are
1. the proposed tax on unrealized capital gains tax for those with a net worth above $100M (heavily hits VCs like A16Z, Founders Fund, and YC)
2. the SPAC crackdown (shut down a major venue to unlock capital from zombie investments)
Worth noting that adopting a currency as legal tender and keeping reserves of that currency are two different things. El Salvador has abandoned the former, your government wants to do the latter.
It's hard not to see the "crypto reserve" as a step towards "you can pay your taxes in crypto". Which isn't quite the same as legal tender but it's infinitesimally close.
It's de facto the former as Crypto-first payments are increasingly accepted in the US AND the admin is considering giving crypto tax-free status exempt from capital gains.
Crypto Regulation largely falls under the CFTC (now headed by A16Z's head of lobbying) and CFPB (now disbanded by Kupor's OPM).
SEC manages regulations such as SPACs, public listings, and publicly traded securities - another thing A16Z has been lobbying to deregulate, but not directly related to crypto.
It was FTX and Coinbase that paved the way, but it's A16Z that's taking full advantage.
Okay, but still, for the average person, the recent support for memecoins seems like a complete contradiction to the basic principles of consumer and investor protections.
Crypto is legally a commodity due to 2022-23 era lobbying, not a security. As such, it falls to the CFTC to regulate it, not the SEC.
The CFTC has been defanged in both administrations, but it was Sequoia and Dustin Moskovitz backing the last admin via FTX and A16Z backing the current admin.
Trump had no shot until the proposed tax changes in early 2023 and competition with Sequoia lead much of A16Z's leadership (and other VCs) to invest in Trump's campaign.
Before that, A16Z, other VCs, and tech leadership tended to donate equally to both parties.
As I've mentioned multiple times before, Dem leadership screwed the pooch by alienating tech leadership who coalesced around Obama while overinvesting in failed outreach to legacy unions like the UAW and ILU.
Musk has always been an unsavory character, but he only really flipped to Trump after the Biden admin alienated him to try and get UAW support [0] - and now the UAW who Biden and the Dems tried to poach are now fully behind Trump and the GOP [1]
