El Salvador and its future bitcoin | Central American country to officially use cryptocurrency

September 7, 2021 El Salvador to become the first country in the world to use bitcoin as legal tender thanks to a law passed on June 8 almost no debate. The president of this country, the young Here to watch, frequent user of social networks and supporter of bitcoin, explained in a vast national chain each article of the new law to reflect the benefits of the implementation and to remove the doubts of the population fired, according to him, by the opposition . The president is betting his high popular support on a project with resistance from 90% of the population. The most controversial article of law is the one that forces all citizens to accept bitcoins in addition to dollars, the official currency of El Salvador since 2001. On the national channel Bukele explained with a didactic and patient tone that, thanks to an official application, everyone could accept bitcoins and automatically transform them into dollars at the same time if they searched.

Is Bukele’s proposal a leap into the future or into the void? To understand it, you need to know bitcoin a little better.

Block chain

Bitcoin is a technology that was introduced to a crypto mailing list in 2008 by a participant who signed up as “Satoshi Nakamoto” and whose true identity is still a mystery. In the early years, only a few hackers joined the network to break into the new technology. They were drawn to the possibility of generating decentralized, crypto-protected currency, which also seemed to doom it to a specialist niche. To further complicate matters, cryptocurrency plays with the fetishism of money which in the social imagination is still paper, but which is increasingly digital and intangible. Through an age-old process, it has naturalized that “it” has value and, as we all believe, we keep the glamor alive at least for practical purposes. Bitcoin would go a step further.

The protocol used by Bitcoin and which has produced a whole series of phenomena (such as NFTs) is the blockchain or the blockchain. In the particular case of bitcoin, blockchains are distributed among many compute nodes that record transactions. When an amount of movement is set up, the nodes compete to validate them mathematically, an activity known as “mining.” The first to get the solution to the cryptographic problem forwards it to the other nodes who verify it and, if approved, saves the new block, mathematically linking it to the previous ones. If someone tried to edit a previous block, the whole chain would lose consistency, exposing the trap. The prize is only for those who solve the math problem first and that is why they will earn new bitcoins that the system gives them automatically. The losers will have wasted their time and energy, but they will be ready to compete next time around.

In this way, the type of competition that bitcoin uses attracts financial capital that sees this cryptocurrency, which is not regulated by any institution, an ideal space for financial speculation. And when a lot of money goes into the queue, as usually happens, some interesting and marginal phenomenon can get out of hand. The increase in the price of bitcoin in recent years has prompted competition to use increasingly powerful and energy-consuming machines, comparable to that of entire countries like Argentina. This is one of the reasons, among others, why China has decided to ban mining in its territory.

Behind the smoke

As this currency is very disconnected from the real economy and its price depends almost exclusively on the consensus on its value, translated into supply and demand, some of Elon Musk’s tweets manage to either raise its price skyward or do so. sink into the abyss. It is precisely in these highs and lows that you can make the difference by buying or selling at the right time. It should be noted that over the past three years, its price has gone from $ 8,000 to $ 38,000 now, with peaks of over 60,000. To this adrenaline is added the media attention which, intentionally or not, dazzles with irresistible fortune tales made in a few hours. This is how the news of specific cases such as the sale of an apartment in Buenos Aires in two bitcoins is viralized. The enthusiastic seller closed the deal in April, when the coin was trading close to $ 60,000. It would be nice to know what he has done with his bitcoins which at the time of this writing are trading at 38,000. If you hadn’t withdrawn on time, in just three months you could have lost 44 $ 000. Or can you bet that the price will increase further?

Seen like this, bitcoin is a kind of Ponzi scheme that works as long as there are those who believe in its value but explode when the party is over. As many argue, what happens with bitcoin is not that different from what happens with money, but in this case, there isn’t even an institution that gives it some stability.

On the other hand, since the transactions are also very difficult to control, it is useful to avoid regulations and commissions on the entry of currencies. For the same reason, it is also an excellent way to launder money or make illegal purchases: this is why currency controls are increasing, especially in China and the United States. Indeed, the officialization of bitcoin in El Salvador can automatically add it to a list of countries dangerous for financial criteria and generate sanctions.

For the moment the motto goes up and down in front of each news, but does not give up.

Salvador?

The list of things that can go wrong in El Salvador is long. One is that the sudden addition of daily transactions of millions of people would put even more requests on the network. A JPMorgan study indicates that daily transactions total around $ 40 billion to $ 50 billion and that 90% of bitcoins remain “silent” for at least a year. What if Salvadorans started buying the vegetables of the day in bitcoin?

What does Bukele hope to get in return? You probably dream of freeing up a few dollars to offset the deficit in your trade balance, in addition to reducing the commissions on remittances that emigrants transfer to their families from abroad. In 2020, these shipments totaled nearly $ 6 billion, or 22% of the country’s GDP. Saving on commissions is an incentive for Salvadorians to install the virtual wallet. Another stimulus is that the official wallets will be loaded once with $ 30 in bitcoin.

The stakes are high and the signs are not good, but Bukele continues with the goal of having everything ready by September 7th. Will it start to grow massively or will its use be irrelevant? What economic consequences will the implementation produce? Will El Salvador become an international financial pariah or a pioneer? Place your bets.