The Real El Dorado: Bitcoin Adoption in Latin America

Once again, we find ourselves in confusing times and the media is not making it any better. 

Over the past few weeks, we’ve seen Bitcoin miners in China shutting down their mining rigs. According to an article in the Global Times, 90% of all miners in China have shut shop, bringing the hashrate down to a six-month low. At the same time, El Salvador is in the process of adopting Bitcoin as legal tender.

It might be difficult to understand why China is banning banks from facilitating conversions between fiat and crypto, what the motive could be behind shutting down miners or why it has hardened its stance, when only a few weeks ago, a high-ranking official from the People’s Bank of China stated that Bitcoin is an ‘investment alternative’. 

Speculation on the reasons behind these conflicting messages abound. CNBC’s Jim Cramer seems to believe that China’s actions – rather than what is happening in North and South America – are more relevant to his investment decision and he has said: “Sold almost all my Bitcoin. Don’t need it.” Few people in the Bitcoin space take him seriously. 

Perhaps the best way to understand what’s going on, is to focus our attention on what’s currently happening in Latin America. 

Bitcoin adoption in Latin America

El Salvador is adopting Bitcoin as legal tender. While we might be tempted to ascribe more importance to what a world power says about Bitcoin, rather than a “developing country” such as El Salvador, this would be a gross misunderstanding of what Bitcoin is about. 

Following El Salvador, now Paraguay, Brazil, Panama, Mexico and Argentina have expressed  intentions similar to that of El Salvador.

One of the reasons of course is that the US Federal Reserve has been printing an unprecedented amount of US dollars. In February 2020 the M2 money stock stood at $15.35 trillion. In May 2021, that number had risen by 32% to $20.26 trillion. Sure, the printing of money and handing out of stimulus checks was a way to keep society running while the economy was falling apart, but at the same time the purchasing power of all US-dollar holders continues to go down, and that is not good news – especially for countries such as El Salvador that use the US dollar as their official currency.

In addition, most people in El Salvador do not have bank accounts and many rely on remittances from the US. Adopting Bitcoin enables everyone that has access to the Internet to have a wallet that supports both Bitcoin and US dollars and with the Lightning Network, remittances are practically free. 

Why is Bitcoin adoption happening in Latin America? 

For a moment, let’s forget the hype and the million dollar promises. Instead, let’s boil it down.

Wealth preservation 

Anyone who has been in the Bitcoin space for a while, knows about Venezuela. Even the International Monetary Fund (IMF) in one of their papers mentioned how Bitcoin is less volatile than the Venezuelan Bolivar and how it enables people to sidetrack capital controls. This is not to deny Bitcoin’s volatility. Of course, as the technology sees adoption and has only penetrated about 2% of the world’s population, we should expect volatility. 

Nonetheless, with a finite supply of 21 million BTC, a very clear and fixed “printing” schedule and global accessibility, Bitcoin is an asymmetrical trade, meaning it is less like a zero-sum game (win or lose) and more like a zero-to-one game (win). Fiat currency does not have a limited supply (meaning it will always be diluting). There is no fixed schedule for printing new money. Not everyone has access. 

Over time, Bitcoin preserves wealth that would otherwise be lost in the fiat system. Traditionally, people would buy gold for this purpose, but in this digital age, Bitcoin arguably makes more sense. 

Financial inclusion

According to the World Bank, at least 50% of the Latin American population has no access to banking. This means that people might have to rely on farming, fishing or other labour to get cash in hand, or they might rely on remittances from overseas. In such a situation, it is difficult to build wealth, let alone preserve it. 

Similarly, only 113 million people have access to payment cards in the region. By comparison, Statistica reports that over 387 million people are connected to the Internet. Opening a bank account requires one to have some money to deposit, provide proof of address, passport and potentially have proof of income. Anyone who can think beyond their own privilege, can understand how Bitcoin offers hope and relief. 

Development 

When we talk about Bitcoin and how it can help a nation, remittances are often mentioned. Development, however, would be a more comprehensive way to look at things.

When remittances become cheaper, faster and easier to receive, this brings more sound money to households that will, over time, be able to save some of their money. Better yet, the Lightning Network makes remote working much more realistic, even for those living in impoverished nations. Artists, designers, writers, translators, language teachers, fresh graduates, etc: with the Bitcoin Lightning Network it is possible to find employment or freelance opportunities overseas and get paid in Bitcoin.

Learn more about lightning network wallets and what the lightning network is

Bitcoin mining must also be included in this section. Anyone can understand that if the Salvadoran government mined Bitcoin from a natural source, then this could be a very lucrative move for the country’s Treasury. Better yet, if local mining pools were to be created, we could see a significant uptick in community wealth.

Over time, there is a great incentive for young people to stay where they are instead seeking opportunities elsewhere. Bitcoin allows communities that have so far not been able to enjoy the fruits of the globalized economy to finally plug in and take part. 

Conclusion 

Latin America’s movement towards Bitcoin is arguably the best thing that has happened for the region in over 200 years. For a long time, this region was seen as the backyard of the US, a region people want to escape. The adoption of Bitcoin enables the region to speak up and speak out against the structural disadvantages of the global system, without having to turn to another World Power and ideology for protection.

Bitcoin enables countries such as El Salvador to have a chance at generating their own wealth as a nation and people. Wealth that cannot be diluted. It may take 20 years, but basic math and game theoretics reveal why Bitcoin offers a degree of certainty unheard of with basic fiat currency, including the US-dollar. 

How does this help our discussion on China? Maybe it doesn’t. Perhaps we should be looking at Latin America for the sake of Latin America. China’s current stance on Bitcoin is hard to gauge and it’s easy to speculate on what the underlying reasons may be. 

In the end, each individual, institution and each country needs to come to their own conclusion. 

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