El Salvador makes bitcoin legal tender

[Hygro]

Is this like an “if you can’t beat em, join em” response to their international drug gang problem?

 

[Samson]

That's just El Salvador's bitcoin reserve as of now since they are implementing the Lighting-Network-based Chivo Wallet

I cannot get my head around this Lighting-Network thing. Does it actually work in the absence of trust, or do you need to trust someone who trusts someone .... who trusts someone who is willing to make an on-chain transaction (and pay the transaction fee)?

US dollar will still be legal tender in El Salvador as well (and theoretically speaking the Salvadoran Colón is legal tender as well, even though I don't think anybody uses it anymore) so we might see things like Gresham's law largely affecting bitcoin's circulation in the country, specially in the beginning.

Which do you think will be the strong currency, bitcoin or USD?

 

[EnglishEdward]

Chinese whatever.

 

[Moriarte]

You certainly can't take a look at their current 400 BTC reserve and conclude that that is all and that El Salvador is just a drop of water in the bitcoin ocean. You've got to take a look at the bigger picture first.

It's a tiny nation of 6.8 mil people. It will always be a drop of water. Again, bitcoin daily trading volume today is 65 billion dollars. That is more than twice Republic of El Salvador annual GDP traded every day. That allows me to reasonably conclude about it being insignificant influence on the most traded crypto in the world.

I wonder why they chose bitcoin though.. The oldest, thus the most architecturally unsound crypto, with insane tx cost and faint prospect of competing with more modern variants, which provide everything faster and cheaper, especially in retail use, as is the case under discussion. I guess the president of Salvador just did what that Californian bank told him to.

 

[Snowygerry]

https://www.bbc.com/news/business-58459098

Angry protests, technological glitches and a plummet in value marked the first day of El Salvador adopting Bitcoin as legal tender.

The price of Bitcoin on Tuesday crashed to its lowest in nearly a month, falling from $52,000 (£37,730) to under $43,000 at one point.

An opposition politician said the fall caused one of Latin America's poorest countries to lose $3m.

 

[Hygro]

It's a tiny nation of 6.8 mil people. It will always be a drop of water. Again, bitcoin daily trading volume today is 65 billion dollars. That is more than twice Republic of El Salvador annual GDP traded every day. That allows me to reasonably conclude about it being insignificant influence on the most traded crypto in the world.

I wonder why they chose bitcoin though.. The oldest, thus the most architecturally unsound crypto, with insane tx cost and faint prospect of competing with more modern variants, which provide everything faster and cheaper, especially in retail use, as is the case under discussion. I guess the president of Salvador just did what that Californian bank told him to.

I wasn't kidding about wondering the connection to the cocaine trade and the ability to sneak money around but...
it really does seem to be a misplaced techno exuberance. You would think they'd at least pick ethereum.

 

[warpus]

I wonder why they chose bitcoin though..

Over 2,000 crypto currencies have crashed and burned since Bitcoin was born.. It's a risk assessment type exercise for any country looking for an asset class that can be used as a currency. Out of all the cryptocurrencies bitcoin is the least riskiest option at this time. So that's probably what the politicians were told by their economic advisors.

Bitcoin is also deflationary; there will only ever be a certain amount in existence. Something like that also makes economists wet

 

[uppi]

I cannot get my head around this Lighting-Network thing. Does it actually work in the absence of trust, or do you need to trust someone who trusts someone .... who trusts someone who is willing to make an on-chain transaction (and pay the transaction fee)?

Stripping away all the technical details, it works like this: You open an account with a payment processor and both sides pay bitcoins into it (for a blockchain transaction fee). Using the available funds in this account, both sides can agree on any number of payments, updating the balance on this account (who owns which part of it). This agreement usually includes a payment fee and the next hop in the network where to send the payment to. At any point in time, either side can close the account by distributing the bitcoins in the account according to the latest balance (for a blockchain transaction fee).

If the blockchain transaction fee is very small, there is no trust required (except for trust in the system). You can simply close your account with a payment processor, if you are unhappy with them at any point in time and open another account with a different payment processor. But the situation is very different if the transaction fee is large. Yes, you could move your funds to another payment processor, but doing so is going to cost you $ 45. Are you going to do that every time the payment processor slightly raises their payment fees?

The Lightning Network is only efficient if the funds committed to an account are much larger than a transaction fee. This means, it does not make sense to open many accounts and you need some trust in your payment processor that you can resolve any small scale disputes without having to resort to the blockchain.

However, anything that happens down the line is their business. You would only ever make bitcoin transactions with your direct partners, so no further trust would be required from yourself. Of course, the payment processors themselves would have to establish some trust with their partners as well, but the bigger the scale, the less trust is required.

 

[Colon]

Bitcoin is also deflationary; there will only ever be a certain amount in existence. Something like that also makes economists wet

Is this sarcasm?

If there are any academically trained economists in Bukele's staff they probably advised him against adopting any cryptocurrency as legal tender. My wild guess is that Bukele is getting a cut from the bitcoins drug criminals now get to launder more easily.

 

[EnglishEdward]

I have read Uppi's description.

I am sure it is technically correct, but I do not understand and I have no reason to believe that the ordinary El Salvador will understand it.

If the government is lucky, this decree will be simply ignored.

If not and they seriously try to enforce it, it may be pitchforks, and then rifles and hand grenades etc at the presidential palace.

 

[warpus]

Is this sarcasm?

If there are any academically trained economists in Bukele's staff they probably advised him against adopting any cryptocurrency as legal tender. My wild guess is that Bukele is getting a cut from the bitcoins drug criminals now get to launder more easily.

Not sarcasm; Bitcoin is deflationary. You can look this up.

The economists/advisors were likely told: "We are embracing a cryptocurrency. Which one should we go with? Or should we create our own?".

If the economic advisors looked around at all the possible cryptocurrencies to pick for this purpose.. or the prospect to create their own.. the least risk averse option is Bitcoin.

Alternatively, if they were asked "We need an asset class to use as currency. it can't be the dollar or any other existing currency. We want to be independent from central banks in other countries", they could have suggested what.. gold? silver? The only other asset class that is in place right now that works for this purpose happens to be blockchain tech. There is literally nothing else out there you could use for this purpose.

This is not to say that embracing bitcoin as a currency is necessarily a great idea. Those who can't read will assume that this is what I mean. The thing is that if you follow that set of questions and reasoning, you end up with bitcoin as your most obvious choice. And that's what the economic advisors would have told their politicians, and that's why they picked bitcoin as their currency.

 

[uppi]

I am sure it is technically correct, but I do not understand and I have no reason to believe that the ordinary El Salvador will understand it.

The discussion is a bit academic, anyway. Even those with the technical knowledge are hardly going to check the cryptography on every transaction, which would be required for zero trust.

In the end, any payment system needs to be usable and for this you need to trust in the software you are using (so it does not randomly send money to the president or something).

Another interesting point is that the way this is set up, the government could get all the records about every transaction made with their system.

 

[Colon]

@warpus

I was mostly reacting to your claim that deflation makes economists wet. I assure that's not true, notwithstanding your detailed understanding of Salvadorean politicians' thoughts and discussions with advisors. I actually made a post in the business thread not so long ago about why economists don't like deflation, so let me quote that:

The first and most straighforward reason why deflation is regarding to be bad is that it makes people put off expenditures. When you expect a couch or some appliance to be cheaper x time from now, you may be more inclined to delay buying it. This may suppress demand.

A second, nastier reason concerns wages. They're commonly observed to be 'sticky': they may stagnate, but they will rarely fall (in nominal terms), probably because workers are hostile to cuts. It's for this reason that unemployment rises during recessions: as there's only limited adjustment to the price of labour, firms instead use less of it. There is however some adjustment because of inflation: when wages are flat in nominal terms, but when there's inflation, real wages will stil fall. When there's deflation, labour becomes only becomes more expensive.

The third reason, the one that truly dreads central bankers, involves interest rates. During recession it necessary to lower interest rates in order to stimulate demand and get output back up. Interest rates can only so far however (used to be zero, turns it can fall below that, but CBs aren't eager to find out how far), but much like inflation helps real wages fall, it also helps to push down real interest rates, even get them negative. When you've got deflation however, you can cut interest rates all the way to 0 and still have positive interest rates. Worse, you could have a situation where real interest rates are so high, they push down economic activity and prices even more, serving to yet further increase real interest rates. In the early 30s real interest had actually increased by almost 10% by 1932 compared to 1929 because of deflation (although nominal rates had fallen far too little as well, deflation well exceeded it). This is a deflation trap and seen to be single biggest cause of the Great Depression.

 

[warpus]

That particular comment was obviously written with a bit of tongue in cheek.

My point at the time however was that a deflationary asset can be a good thing, depending on what exactly you are going to be using it for. Gold is deflationary and as far as I know that was a mainly good thing (tm) (when the gold standard was in place), even if you can find negatives as well

 

[El_Machinae]

Gold as a currency can be deflationary. But it's very hard to say that an ephemeral asset is. This might be a 'not even wrong' kinda thing. It's true that bitcoin has a restricted supply, but 'deflationary' (in the sense you're using it) means that it will be able to buy an increasing amount of stuff over time. You might even mean that it causes the ability to increase purchasing power. There's no real reason it would, because that's a function of its price which will be set by demand. In the year 2222 CE, we might find out that we need 50 bitcoins to buy a tulip bulb.

 

[Samson]

@warpus

I was mostly reacting to your claim that deflation makes economists wet. I assure that's not true, notwithstanding your detailed understanding of Salvadorean politicians' thoughts and discussions with advisors. I actually made a post in the business thread not so long ago about why economists don't like deflation, so let me quote that:

I shall answer them in reverse order, as they get harder to answer that way. I shall start by proposing that deflation in simply a course economic descriptor. Historically it has occured at times when bad things happen, or when changes are badly managed. However it should be a target, indicating that we are producing enough of what we need that we need to spend less labour to get it. Food prices in have been deflationary over historic timescales, and that is good.

Spoiler Food price by hour of labour over time :

The third reason, the one that truly dreads central bankers, involves interest rates. During recession it necessary to lower interest rates in order to stimulate demand and get output back up. Interest rates can only so far however (used to be zero, turns it can fall below that, but CBs aren't eager to find out how far), but much like inflation helps real wages fall, it also helps to push down real interest rates, even get them negative. When you've got deflation however, you can cut interest rates all the way to 0 and still have positive interest rates. Worse, you could have a situation where real interest rates are so high, they push down economic activity and prices even more, serving to yet further increase real interest rates. In the early 30s real interest had actually increased by almost 10% by 1932 compared to 1929 because of deflation (although nominal rates had fallen far too little as well, deflation well exceeded it). This is a deflation trap and seen to be single biggest cause of the Great Depression.

In the first half you admitted that interest rates can go negative, then you seem to forget that and carry on like they cannot?

A second, nastier reason concerns wages. They're commonly observed to be 'sticky': they may stagnate, but they will rarely fall (in nominal terms), probably because workers are hostile to cuts. It's for this reason that unemployment rises during recessions: as there's only limited adjustment to the price of labour, firms instead use less of it. There is however some adjustment because of inflation: when wages are flat in nominal terms, but when there's inflation, real wages will stil fall. When there's deflation, labour becomes only becomes more expensive.

Our labour is more valuable. That is a good thing!

The first and most straighforward reason why deflation is regarding to be bad is that it makes people put off expenditures. When you expect a couch or some appliance to be cheaper x time from now, you may be more inclined to delay buying it. This may suppress demand.

If we have nothing to sit on then we shall spend the money whatever we expect to happen tomorrow. If we have something to sit on, the world would be better off if we make it last rather than getting a new one.

All the arguments for deflation being bad are either based on correlation rather than causation, or prioritising the wrong things.

 

[warpus]

Gold as a currency can be deflationary. But it's very hard to say that an ephemeral asset is. This might be a 'not even wrong' kinda thing. It's true that bitcoin has a restricted supply, but 'deflationary' (in the sense you're using it) means that it will be able to buy an increasing amount of stuff over time. You might even mean that it causes the ability to increase purchasing power. There's no real reason it would, because that's a function of its price which will be set by demand. In the year 2222 CE, we might find out that we need 50 bitcoins to buy a tulip bulb.

Everywhere I've looked up says that bitcoin is deflationary because it has a finite supply. I am not sure, but maybe this word (i.e. deflationary) means different things in different contexts?

The sources I've got this from contrast bitcoins deflationary nature with fiat currencies (i.e. the dollar) and other cryptocurrencies which are inflationary. i.e. currencies that do not have a finite supply and can and/or do increase in supply over time.

Looking into this further, I've now found a source that calls bitcoin disinflationary. I am not sure if that helps clear any of this up.

The main thing I was really trying to say initially is that bitcoin has a finite supply (i.e. like gold). If there's another word that I could have used to describe the implications of this, then let's assume I went with that.

 

[Colon]

@Samson

As I already told you in that thread: you asked in that thread why deflation is regarded as a bad thing, my post told you why. What I said there mostly came from the handbook Macroeconomics (by Blanchard, former chief economist of the IMF), so what I said isn't just some opinion I'm having, it reflects common views amongst economists. Which, again, seemed to be what you were asking. Now, if there are things that are unclear to you, then I'd be happy to explain further but then you're going to have to drop that antagonistic attitude of yours. I wasn't looking to have a sparring match about the merits of deflation with you, I was trying to help you with your question.

 

[El_Machinae]

There is no doubt that its limited supply is one of its known perks. I don't mean 'perk' as in 'an obviously good thing to have in a currency', rather 'perk' as in 'if you want to buy something transferable that has a limited supply, Bitcoin offers that'. It's WYSIWYG, and I like that, even if I don't agree with its case for value.

Unlike the majority of good fiat currencies, there's nothing backing its demand, so I just wouldn't use any words involving 'inflation'. It's just the wrong word. "Inflation" is affected by the total supply of currency in regards to a basket of goods, but it also mainly to how much currency is needed to buy the basket. Bitcoin definitely affects the first aspect, but offers nothing in the 2nd category.

All the arguments for deflation being bad are either based on correlation rather than causation, or prioritising the wrong things.

You're mistaking one type of deflation for another, which is the confusion. A drop in the costs of individual goods is a good thing, because it means we have more stuff. This will be a low roil of bankruptcies in the economy, and they'd be a good thing if creditors took a haircut. Most inflation indexes allow for the 'basket' getting better over time while also noticing if it gets more expensive overall.

A drop in the amount of money that people spend is going to be a bad thing, because it creates a vicious circle that drops the costs of stuff so fast that we actually have less stuff. The wealth flows upwards really quickly, because labour's purchasing power falls faster than their ability to buy the things they need.

One type of deflation is caused by increasing supply and the other type is caused by decreased ability to spend. They're both going to result in the dropping price of desired goods.

 

[Colon]

@warpus

First, deflation is a general fall of prices (or conversely, a general appreciation of the value of money in terms of goods and services). Whether there is deflation or inflation and their size depend amongst others on the quantity of money relative to the level of economic activity (the output of goods and services). When the quantity of money rises more quickly than output there are inflationary pressures, when it rises more slowly deflationary pressures. The quantity of bitcoin is unconnected to the level of economic activity and from I know of it it gets harder to make them and as there are more of them. Hence, should it be adopted as currency, it's probable that the quantity of money would not keep up with the size of a growing economy (this was also a big problem with gold in the 19th century). Hence it could be deflationary.

It's not so much an asset that's deflationary, it's that if it's used as money and the supply doesn't keep up with economic activity that it could be deflationary.

All of which is very academic, because the much bigger practical problem with bitcoin is that its value seesaws like crazy.