By Kris Sayce, editor, Casey Daily Dispatch
Here’s a recent conversation your editor had with a colleague…
Colleague: “Find El Salvador on a map. No peeking.”
Kris: “I think it’s next to Honduras.”
Colleague: “I’ll be darned.”
Kris: “The only reason I know that is one or both of them were in the 1982 soccer World Cup… and one of them lost 10-1 to another team.”
Why the sudden interest in El Salvador?
Well, in just a few minutes last weekend, it went from tinpot obscurity to the center of the financial and investing world – thanks to bitcoin.
The question now is whether it will stay there…
Allow us to welcome you to the Dispatch. And if you’re a regular reader, welcome back.
We have two main goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Nick Giambruno, Dave Forest, and the founder of our business, Doug Casey.
An Underrated Characteristic
We would say today’s biggest investing theme is bitcoin… and thanks to El Salvador’s president, things have just gotten even more interesting…
The truth is that El Salvador has never been as famous as it is now. And that’s fine. Anonymity, obscurity, and irrelevance are underrated characteristics in nation-states.
As far as we can gather, El Salvador has never invaded a foreign land. It has never threatened to spread democracy to the world – whether they want it or not. And it doesn’t appear to be a state sponsor of terror or a home for cybercriminals.
It tends to keep to itself (although El Salvador was the only country at the UN in 1950 to support Tibet after China’s invasion and occupation). That said, its record of treating its own people appears to be less humane.
But we digress…
The subject here is that El Salvador could be within days or weeks of a world first. Its president, Nayib Bukele, told the Bitcoin 2021 Conference in Miami that, “Next week I will send to congress a bill that will make bitcoin a legal tender.”
And today, El Salvador’s Congress voted in favor of a law that will make it the first country to establish Bitcoin as legal tender alongside the U.S. dollar.
According to Casey Research bitcoin expert Nick Giambruno, El Salvador’s move “is basically the start of the fulfillment of The Bitcoin Supremacy trend I have been pounding the table on for many months.”
Let’s look at this in detail.
In most cases, legal tender applies to the repayment of debts – whether public or private, or the payment of taxes.
However, the way the bill has been written in El Salvador, it would extend that to cover the payment for goods or services… although businesses that aren’t capable of processing bitcoin transactions would be exempt.
But let’s look at this from the government angle…
Will This Experiment Live… Or Die?
With this new law, a citizen would be able to pay a tax debt to the government in bitcoin.
A government would be able to pay its debts in bitcoin.
And that would likely mean the government would issue debts (bonds) in bitcoin. Rather than a bond having a face value of $100,000… the bond could have a face value of, say, three bitcoin.
When the El Salvador government issues its bonds, the investor will pay the government with bitcoin. The government will then fund its programs with bitcoin (payments to suppliers, welfare payments to the people, and so on).
During the lifetime of the bond, the government will pay interest – in bitcoin – to the investor.
And when the bond matures, the government will return the face value amount of the bond – again, in bitcoin – to the investor.
Now, perhaps the terms of the bond will state that the investor can pay the government with U.S. dollars or euros, rather than bitcoin. But that would defeat the purpose.
Besides, the repayment of debts is only part of the legal tender equation…
We mentioned taxes. If bitcoin is a legal tender, people can choose to pay their taxes in bitcoin.
In fact, if the government has to repay, or chooses to repay its debts in bitcoin, it would likely prefer tax receipts to be in bitcoin.
In which case, aside from making bitcoin a legal tender, could it at some point remove the U.S. dollar (El Salvador’s current currency) as legal tender?
That would make bitcoin the only option. Citizens would have to pay taxes in bitcoin… which would mean they would demand wages in bitcoin.
That would make sense. Here’s why…
This Is The Bitcoin Supremacy
Economies usually can’t sustain a two-currency system. One will always dominate the other. It’s why you see high or hyperinflation when there are competing currencies. One of them rapidly loses value.
Think German goldmarks versus German papiermarks during the 1920s. U.S. dollars versus Zimbabwe dollars in the 1990s. Or U.S. dollars versus Argentine pesos… at almost any time of the past 30 years!
But those were either domestic competing currencies (one weak, one strong), or a weak domestic currency competing with a strong foreign currency.
If El Salvador keeps the U.S. dollar as legal tender, it would mean a strong cryptocurrency against the (arguably) strongest of the fiat currencies.
How would that play out?
If Nick Giambruno is right, it would mean a win for bitcoin – as part of his “Bitcoin Supremacy” trend. That makes sense. And there are good reasons to trust Nick’s take on it.
He has been on the ball with this from the start. From his early interest in bitcoin, to his belief that corporations would add bitcoin to their balance sheets, to how he picked up on the rapid growth in bitcoin mining stocks.
You can check out all Nick’s research here.
Bottom line, this move by El Salvador is big news. And if Nick is right, bitcoin is another step closer to mainstream adoption. And we can only guess what that will mean for the bitcoin price.
At the very least, it’s a story investors should follow with a keen interest.
Editor, Casey Daily Dispatch