Or will it create this kind of crypto
paradise if you're quick enough to join them?
See, El Salvador became the first
country to make Bitcoin legal tender.
But this is only the beginning of their plans
that include a Bitcoin city and Bitcoin volcano.
Yet this is an economy on the brink of room with
a credit rating that's worse than my weird uncle Paul.
Sorry, Paul.
Before we discuss how this could impact you, we need
to understand how El Salvador ended up in this situation.
Like a few other latin countries, they use the US Dollar
as their national currency.
But they made a major switch in 2021,
turning Bitcoin into legal tender as well.
This meant that it could be used freely in
the country without tax, and stores must accept it.
They're required to accept Bitcoin.
But why make this move?
To understand this, we need to
jump back to an unlikely story.
Mike Peterson, this guy from California, he went
surfing in El Salvador almost 20 years ago.
The dude liked it so much that he
stuck around to do his typical surfing stuff,
hanging Ten, Tombstone and receiving a multimillion dollar
donation from a mysterious source that turned a
tiny remote village into a Bitcoin paradise.
The anonymous donor was an early Bitcoin adopter who said
that the money had to must remain in Bitcoin.
So Mike helped get the Bitcoin
beach wallet developed in 2019.
The aim here was to improve the lives
of locals and create employment along the coast.
And the results so far suggest
it could actually be working.
This set El Salvador down
the path towards Bitcoin freedom.
Then an unlikely crypto enthusiast, Nayib Bukele,
became the country's present through an anti-corruption slogan.
Skip forward to 2021 and El Salvador
adopted Bitcoin as a currency.
This was a controversial decision.
Of course, crypto lovers loved it.
Others hated it.
See, the government's overwhelming power meant there
was no real political debate whether to
make this happen or not.
And there's countless conspiracies as to why.
I'll explain those in a minute.
El Salvador spent about $200 million
buying Bitcoin at $52,000.
24 hours later, the price already fell to $43,000.
President Bukele has since bought the dip, purchasing 500 more
Bitcoin at an average price of just over $30,000.
They're in deep and down about 30%.
This is big money in El Salvador.
The IMF has told the country to
stop using Bitcoin because they can't get
conventional loans if they use this system.
Fitch has reduced their credit
rating to a disastrous CCC.
Their current sovereign bonds are plummeting in
value, as many fear bankruptcy and then
add on massive arrests and gang warfare,
and you have this crazy uphill battle.
And Bukele is turning to the solution that
he knows best, more Bitcoin and more bonds.
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How has El Salvador's crypto rollout been for locals?
You know, the people that this
whole thing is supposed to benefit.
A quarter of Salvadorans live in poverty,
and up to 70% are unbanked.
In theory, this could help them manage
their money and join the digital revolution.
Everyone in the country has got
a digital wallet right away.
This is known as Chivo, and I looked it up, and
it either means goat or cool, depending on the dictionary you
use, and I'm not sure which one is better.
Chivo hasn't been the greatest success.
This is despite the fact that every cool goat wallet had
a free $30 sitting in it for every citizen, which is
a great idea to get people to start using it.
But that didn't solve everything.
José Bonilla was one of the
first people to get the app.
After working through some technical issues, losing $25 in
a sale at his shoe shop and finding out
that the nearest Bitcoin ATM was way too far
away, he decided to never use the app again.
Then there's Cynthia, who waited over a
month to open her Chivo wallet.
Well, she was too late because someone had already beaten her
to it and used her ID number to grab her $30.
This was very common at launch, and those are the
type of people that need to be convinced to try
this again for the system to work whatsoever.
Now, what about Bitcoin beach?
How is that doing?
Well, El Zonte has a population of 3000, and the
fact that businesses have to accept Bitcoin has made
it kind of a hit with travelers.
Foreign visitors love it, and
that's helping to boost tourism.
Numbers are actually up 30% across
the country, which is great.
The project has even expanded to other villages.
Good news so far.
It feels like it might be the start of something big,
but it hasn't yet truly changed the lives of
the locals, as far as I can tell.
Vendors in El Zonte complain about the ATM being too
far away and system bugs, making them lose sales
for a country bigger than New Jersey.
El Salvador has only 200 Bitcoin ATMs,
but the biggest problem is volatility.
These vendors aren't rich investors who
can afford to dabble in cryptos.
When they sell a tasty Papusa or tripe soup,
they can't afford to see a percentage
of their money just disappear due to volatility.
Now, the government has done some things
to help in this issue, like allowing
instant conversions from Bitcoin to US Dollars for citizens.
They don't have
to worry so much about volatility.
And in the future, we may see stablecoins
used rather than actual dollars for this conversion.
But like many of the deals of
this scheme, the details aren't very clear.
Bukele isn't the sort of president who backs down.
He's called himself the world's coolest dictator,
which I think he's being ironic about,
but I'm not totally sure.
Either way, he's doubled down on crypto and
unveiled some grand plans for the future.
They announced Bitcoin city.
The goal to be this futuristic, zero
emission, virtually tax free Bitcoin paradise.
Sounds perfect, right?
Basically just a bunch of bros standing
around showing each other NFTs, discussing the
intrinsic value of their girlfriends.
But I do have one question.
How could the suffering Salvadoran economy
fund such an ambitious project?
One word - Volcanoes.
You forgot about those volcanoes, didn't you?
Also bonds.
Many more bonds.
Now, I know that their current bonds have
crashed in value, but these aren't normal bonds.
They're Bitcoin volcano bonds.
And their potential return is
linked to the crypto market.
Bukele wants to raise a billion dollars by
selling these bonds based on this exciting, somewhat
questionable vision of a brilliant crypto future.
Half of the money will be used to
build Bitcoin city next to a volcano that
will, of course, power its Bitcoin mining.
The other half will be used to buy more Bitcoin.
At this point, I started to get the
impression that these plans were sort of getting
made up as they went along.
I even read that the president promised to give
permanent residency for anyone who paid them three Bitcoin.
This then changed to $100,000.
Now, why volcanoes?
Well, El Salvador has them, 23 of them, and
they actually provide about 20% of the country's energy.
Recently, they ran a trial where 300 computers were set
up near volcano to mine Bitcoin, and it worked.
They mined about $269 with it.
But also, of course, it worked.
They were using electricity to run these
computers, and that's pretty well proven at this point.
The real key is the cost of this energy.
Using cheap, renewable volcanic energy to
mine Bitcoin could be really clever.
However, I did some digging, and it isn't exactly
clear how much cheaper this would make mining.
Currently, El Salvador produces energy at $0.13 to $0.15
per kilowatt hour, which is about three times the
average cost of Bitcoin mining.
And that's not their only problem.
Investors just don't seem to be interested
in volcano bonds for some reason, and
the program has been delayed several times.
So what does the future hold?
Let's start with the positive.
Imagine this all comes to fruition.
The volcano bond sell and utopia is built.
Bitcoin is trading at a million dollars.
El Salvador is one of the
richest countries in the world.
Maybe we'd all want to live there.
Kind of sounds like a place I'd consider living.
The thing is, the average resident
doesn't hold a lot of Bitcoin.
In fact, it seems like they try
to convert to cash whenever possible.
This means that while the government gets rich, there
won't be a direct line to residents' wealth.
But of course, over time, this would
ideally trickle down to the people through
government spending, new business, and tourism.
But if that were to happen, the next big
step would be for the government to diversify out
of Bitcoin as to not be too reliant.
I'm reminded of Venezuela in picturing
this utopia and their oil riches.
They struck black gold in Venezuela and were
one of the richest countries in the world.
However, they became too reliant on oil.
Combine that with a questionable government,
and the economy fell apart.
So if this bet plays out, El Salvador must diversify.
If this bet plays out, all of
our crypto holdings will flourish, thanks to
the credibility that this will give.
Now, what about the absolute worst that could happen?
Okay, what's the second worst thing that could happen?
A Bitcoin crash.
A big enough crash means El Salvador's default on
its current bonds, and the odds of anyone buying
a volcano bond essentially goes to zero. Bitcoin city?
Forget it.
Crypto prices across the board would be affected.
The negative publicity generated from a
country crashing and burning due to
Bitcoin investments would be massive.
Skeptics would seize on the chance to criticize crypto.
This would be even worse for the citizens of El Salvador
who were influenced to use crypto in the first place.
The country would be forced to go back to
dollars, and now they'd be in short supply.
So this would be bad, very bad for the country.
There are countless conspiracy theories online attempting
to explain why El salvador would make
such radical moves in the first place.
Some suggest that it's some kind of Tether scheme.
See, about a quarter of all Salvadorans live in the US.
And they send billions back home every year.
The theory goes that El Salvador is incentivizing
citizens to use Tether stablecoins instead of
US Dollars to send this money.
Others whisper about money laundering even more point
to the mysterious team of Venezuelan consultants who
are said to be behind this entire plan.
Based on the evidence, it seems unlikely to me
that Bitcoin city ever sees the lights of day.
As much as I'd love to see this happen, I
mean, I love a bold experiment as much as the
next guy, but I just don't hold out that much
hope for this or the project changing the lives of
ordinary Salvadorans, at least not anytime soon.
Some people will make money from this, but they'll
be the big investors, politicians, large businesses, and those
who deal with a lot of tourists.
The thing is, part of this bet is banking on
other countries to get on board the Bitcoin train.
And while others certainly will, these will
be countries that are generally struggling and
don't have their own currencies.
See, the problem is,
thriving governments have no incentive to accept Bitcoin
as an official currency because governments can
just print more of their own currencies,
but they can't print more Bitcoin.
So why would they adopt something
that they have less control over?
It just doesn't make sense.
Now, if you've watched this and you're wondering how money
even works in the first place, I got you covered.
Check out this video on screen.
It's absolutely illuminating.