El Salvador's crypto experiment ends in failure
economist.com
economist.com
I might draw a very vague parallel with a gentleman who can't repay a mortgage and through various machinations the bank forces him to sell his beanie baby collection. The beanie baby collection might have been a success or a failure for him personally. Probably was a failure. But that isn't really what we're learning in this story.
And pointing out that they lose money on the bitcoin reserve is a bit of a non-sequiter. They all do that. Gold has storage costs, the USD inflates like crazy and sometimes the US sanctions you. The analysis has to be a bit deeper than just noting that money was lost, it is a tricky question of relative options.
And it is even easy to argue that normal currency is value destructive, all the flows of money into crypto are implicit "I'd rather be burning energy than using USD" announcements.
Although in this case I am happy to agree it might be true despite being a weak argument, I can see a lot of good reasons why someone wouldn't want to use Bitcoin in practice. But the article didn't touch them when declaring a failure and the experiment wasn't run to a natural conclusion where the people involved decided it was not working.
Wait....
The currency was initially unpopular for anything except paying taxes, and was phased out. Within a few years, however, paper currency would return to Massachusetts. The Bank of England began issuing banknotes in 1695, also to pay for war against the French, and they became increasingly common throughout the 18th Century.I'm curious what makes you think so, and what the alternatives would be. My impression is actually that if shops weren't forced to accept USD, 100% would still do so.
1) If they're being forced to do something, that suggests someone doesn't believe they would do it voluntarily. Nobody more suspicious than the person who forces others to do things for their own good.
2) Businesses are invariably blamed for inflation. Every single time the subject comes up organically somebody pipes up to blame "greedy businesses"; it is basically a meme. Some business owners would start up a non-inflating currency just to escape that. They don't want to be political scapegoats.
3) You can spot a bunch of banking crisises coming a mile away, the financial system seems to be mathematically guaranteed to collapse from time to time as I understand it. If given the choice a bunch of people would rather sign up for alternative systems that only enter a crisis state unexpectedly. That includes small business owners.
Would they still accept USD? In the US, probably. But a bunch of alternatives would crop up and it is by no means guarenteed that the USD would be competitive. The US Fed manages the currency and they do a terrible job.
But wait. US retail shops are not forced to accept USD.
They can, if they choose, accept payment only in smiles. Or CAD, or good vibes.
(Taxes, however, must be paid in USD).
In practice, US retail wants USD, for obvious reasons. There are no viable widespread alternatives (but there are countless insignificant local currencies!).
Kind of like the crypto pump and dump scams that we see daily. Who wouldn't want to create their own currency? It would eventually take power away from the US government.
> The IMF was wary of lending to El Salvador while bitcoin was legal tender. Its volatile price posed a risk to financial and fiscal stability.
Government currencies don't have the price volatility of Bitcoin. You simply can't reliably manage an economy with that kind of volatility.
Prices change continuously. You can never be sure what the price of anything is going to be next week.
Nowhere near to the same extent.
Just over the past year BTC has gone between $54K and $104K.
Currencies are subject to inflation, but in a well managed economy that is generally a single digit yearly percentage and fluctuates slowly, and the currency changes value in a single direction only.
Normal government currencies don't gain or lose 10% of their value over a few days in purchasing power, as regularly happens with Bitcoin.
I fail to see how gold-pegged, gasselized (demurraged at constant rate until they vanish down to UBI limit, except from government/CB wallets, with other assets also demurraged when sold/bought via cap gains style taxes), constant supply cryptocurrency would not be in fact better than the dollar and the euro and the yen, and it would be both inflation & deflation resistant.
This isn’t some hypothetical situation we have plenty of real world data to work from.
If you don't see it then then you may wish to read more economic history, as the history of gold-pegged currencies shows that they caused anything but stability:
* https://archive.is/https://www.theatlantic.com/business/arch...
* https://archive.is/http://www.businessinsider.com/why-the-go...
* https://en.wikipedia.org/wiki/Long_Depression#Causes_of_the_...
And it was only after leaving the gold standard that countries started to recover from the Great Depression:
> In the end, recovery from the Great Depression does not begin until countries give up on the combination of the Bagehot Rule and of commitment to sound gold-standard finance. Those countries that have central banks willing to print up enough money so that people are willing to spend it--it is when you adopt such policies that your economy begins to recover. If you don’t, you become France, which sticks to the gold standard all the way up to 1937, and never gets a recovery. When World War II begins, Nazi Germany’s production--equal to France's in 1933--had doubled between 1933 and 1939. French production had fallen by 15%.
* https://delong.typepad.com/delong_long_form/2013/10/the-grea...
If the price of an apple at t_0 is $2 and (using arbitrary symbol for the other currency) §2, and at t_1 $20=§2, then at t_1 citiziens in the nation using § as currency would pay §0.2 for an apple, et cetera.
The other currency would have to use scientific notation, for cash.
(if deflation wasn't the the cause of that crisis, this is not an answer).
I apologize for the typo.
I don't know the best rule to use for the process, since there seems to be many potential combinations of rules for it, but the idea of forced-gesselization is that if you buy a house with the bad money from foreign gray markets dealer, when you try to sell the house, you are taxed as if house and the bad money you bought it (this type of situation would be gray area, as such requiring intervention and appraisal of actual value by government body, which is not to be desired; but such practice also would not have to be commonplace) with had been in the demurraged currency, e.g. for the duration of the ownership.
Normally we can think of sales value to mean value - tax, where tax = g(ownership_duration), where g is gesselization function, which would preferably remain same over time but doesn't have to be linear or simply value or function of time as long as it is simply enough high schooler can solve for it without a computer.
Between Sep 2012 and Jul 2013 gold went from $1780 to $1210 (-32%).
Between Feb 2024 and today gold went from $2040 to $2950 (+45%).
That's a crazy amount of volatility you would never want as a currency. Can you imagine signing multi-year contracts denominated in that? Even monthly contracts! It would be madness.
But you can see that inflation (and worse deflation) had volatility when the us was on the gold standard: https://www.investopedia.com/inflation-rate-by-year-7253832
If you dig into the 1800s the volatility was even worse.
So you have to compare them to other things, which is what inflation (or deflation) measures. And gold pegged usd has volatility to other items in the economy greater than modern fiat usd.
---
Edit:
You're near-certainly right that pegging in dollars would means some rate, let's for simplicity presume a constant ratio, between dollars and what it's begged to.
I think crux is what happens if we model two different currencies, one of which is begged, and the price of te commodity in each.
If after the conversion rate you can get cheap gold, that keeps golds value low and pegged currency's value high, I would guess.
Again I think restricting impots in the commodity is necessary to maintain supply.
> You can never be sure what the price of anything is going to be next week.
I do know what prices will be next week, within a sufficiently narrow range that I don't care. I think that applies to almost all consumers in advanced economies.
With a decent central bank you can, as the rate of inflation is fairly predictable:
* https://en.wikipedia.org/wiki/Inflation_targeting
We've recorded some of the most stable prices in the last few decades with that policy:
* https://en.wikipedia.org/wiki/Great_Moderation
as compared to when the gold standard was around:
* http://archive.is/https://www.theatlantic.com/business/archi...
And gold isn't as stable as most people think:
* https://www.macrotrends.net/1333/historical-gold-prices-100-...
even in the modern age:
> The idea behind a gold standard is that a currency becomes tied to a commodity with a stable value. The great problem with this is that gold does not have a stable value. Like any other commodity, its relative value goes up and down. For instance, in September 2022, US dollar milk prices were rising over 16%. In gold terms milk prices were rising over 23%—dangerously high inflation.
* https://www.ubs.com/it/en/wealthmanagement/insights/article-...
The depeging occurred in 1971:
* https://en.wikipedia.org/wiki/Nixon_shock
the CPI didn't start going crazy until the mid- to late-1970s:
* https://en.wikipedia.org/wiki/1973_oil_crisis
* https://en.wikipedia.org/wiki/1979_oil_crisis
* https://en.wikipedia.org/wiki/Supply_shock
though there was a rising amount before any of those events:
* https://www.federalreservehistory.org/essays/great-inflation
You'll find that real wages in the US were fairly steady for most of the 1970s, falling mostly at the end, and really dropping during the 1980s:
* https://www.factcheck.org/2019/06/are-wages-rising-or-flat/
kinda like how despite all of the inflation the average person only saw a 3% increase in actual take homes while the hyperwealthy saw 300% (of much, much larger numbers).
it ain't gold, it's greed
Look at the cost of the japanese yen relative to the dollar.
I have seen prices double and then half due to international politics.
Living here in Japan though, prices seem mostly stable despite the volatile yen. I am not sure how this works.
And that's what you're observing -- prices are mostly stable.
Currency exchange fluctuations only affect imports and exports, and they vary as well between each pair of countries.
> Just over the past year BTC has gone between $54K and $104K.
That's crazy volatility. That is not the same as local currencies.
And with Bitcoin there's no such thing as local purchasing power.
All volatility is not equal. The degree to which Bitcoin is volatile is unmatched by any government currency I'm aware of.
You WHAT.
Latest example: https://en.wikipedia.org/wiki/Turkish_lira
But inflation isn't the same as volatility. Even when it's high, it's still gradual, predictable within a range, and goes in one direction only.
Bitcoin volatility is sudden, completely unpredictable, and goes in both directions. It's far worse in every possible way.
All in all, El Salvador has been doing pretty well economically. It's human rights that have been the worrying point.
Just because I agree with the IMF doesn't make either of us correct. It was El Salvador's experiment and the IMF's motivations are highly suspect. They are globalist political actors, they aren't motivated by any particular love of the economies they intervene in or the people in them.
The other aspects like remittances and Bitcoin-based retail payments were always terrible ideas. Not surprisingly that's where their losses come from.
> Despite these profits, crypto has brought El Salvador more costs than benefits. The free publicity has been welcome, yet crypto-investment and crypto-tourism have been small beer. Gains in financial inclusion and from more efficient payments are meagre at best: the currency never really caught on. In 2022, when the hype was at its peak, a survey by CID-Gallup found that only a fifth of firms accepted bitcoin and just 5% of tax payments were in crypto.
> Moreover, the policy cost $375m in all—from the Chivo rollout, subsidised transaction fees, bitcoin ATMs and more—according to Moody’s, a rating agency. That far exceeds the profits on bitcoin holdings, which could still evaporate. By delaying an IMF deal, the crypto experiment kept El Salvador’s risk premium high.
It was just bad, showboaty policy from a showboaty strongman leader. Why would you give him the benefit of the doubt even now?
I think people are going to start realizing that there's a lot more invested in crypto than it's worth. Trump putting the federal government behind a crypto reserve didn't intice new investors/investment. Not sure where the bottom is, but we might find out sooner than later.
The people who want crypto have it. The people who recognize it's not worth the lack of fraud regulation/protection and instability aren't going to suddenly start buying.
I said this back in 2012, and I've been waiting ever since... That's why I decided to join the crypto company but left after seeing it from the inside of the actual space.
BTC isn’t perfect but often enough it’s better than centralized alternatives.
https://www.princeton.edu/events/2024/book-talk-resistance-m...
Tail emission, economically speaking, means that the ~0.5%/year or whatever coins that get lost each year go to miners rather than get evenly spread across everyone holding Bitcoin. That's economically equivalent to imposing a ~0.5%/year tax to pay for security.
You can do essentially the same thing - economically speaking - without touching the 21 million cap with a soft-fork implementing a security tax directly when coins are spent.
Neither solution means Bitcoin is screwed. Even 0.5%/year compounded over 50 years - a lifetime of savings - is just 28%. And of course, 0.5% means nothing compared to the ups and downs of any currency. Bitcoin already has about 0.5% monetary supply growth per year right now; it's only in the long run that the subsidy goes away.
A lot of "Bitcoin Maxi's" are of course horrified by all this. But a lot can change in the 8-12 years before any of this really matters. And who knows, maybe fees will be sufficient? IMO it's stupid to take the risk when a solution is cheap and doable. But that doesn't mean the game theory problem will actually happen in real life. Other coins survive with much bigger game theory problems, like straight up centralization.
https://mattlakeman.org/2024/03/30/notes-on-el-salvador/
Specifically on Bitcoin:
> This guide also told me that he immediately spent his $30 Bitcoin gift from the government on beer and hasn’t possessed a single Satoshi since.
> I saw maybe four or five Bitcoin ATMs in El Salvador, including two Athena Bitcoin machines. I didn’t see anyone using them.
> The guide, who I consider an articulate and strong supporter of Bukele, seemed to consider the president’s Bitcoin ambitions to be a weird, misguided, but ultimately trivial effort.
I've visited El Salvador quite a few times and traveled a decent % of the country, including non-touristy areas. I've seen plenty of Bitcoin ATMs in El Salvador. In some areas they aren't busy. But in other areas they have consistent line-ups of _locals_ using them. And yes, I said locals, not tourists. I'm not sure why the locals use them so much. But remittances is one possibility.
If all Bitcoin managed to do was force the likes of Western Union to keep their fees low via competition, it'd be a success for El Salvador. As of 2023, about 24% of El Salvador's entire GDP is remittances.
> The guide, who I consider an articulate and strong supporter of Bukele, seemed to consider the president’s Bitcoin ambitions to be a weird, misguided, but ultimately trivial effort.
Of course, let's put all this Bitcoin stuff in perspective: Bukele's legacy will most likely be ending gang violence. I consider the Bitcoin stuff a mild success; ending gang violence has radically transformed the country for the better.
El Salvador abandons Bitcoin as legal tender - https://news.ycombinator.com/item?id=42925210 - Feb 2025 (858 comments)
There are other ways to avoid double-spends, too, like taking the party to court.
Mining does not need to be incentivizes nearly as much as it is right now for bitcoin to still function as p2p cash.
Im surprised we dont see more private indvs playing the role of WB.
Oh wait...
(Nobody remembers the long term success stories, just the short period pain)
That's why Chinese loans have been welcome for a lot of countries. they don't come with a lot of stipulations, such as removing subsidies for your farmers.
> Moreover, the policy cost $375m in all—from the Chivo rollout, subsidised transaction fees, bitcoin ATMs and more—according to Moody’s, a rating agency. That far exceeds the profits on bitcoin holdings, which could still evaporate. By delaying an IMF deal, the crypto experiment kept El Salvador's risk premium high.
But as a minority of reserve asset, Bitcoin might be a good idea, nobody bought bitcoin at any price whatsover and wasn't able to make a profit that beats US T-bonds for 4 consecutive years (please double check on this, it's not a financial advice), let only if they DCA their portfolio.
Of course such national reserve cannot make a large % of the total reserve as the risk is also high and wealth of the nation is not meant to be used in risky bets. 4 years is also not a very meaningful window for a 16 years old market.
For the average person not so much.
This is what happens when top leadership at A16Z like Marc Andressen [1], Ben Horowitz [1], Scott Kupor [2] (first VC at A16Z and now head of OPM - the agency that gives DOGE it's teeth), and Brian Quintenz [3] (head of policy (ie. Lobbying) at A16Z as Head of the CFTC) become major backers of the current administration.
A16Z has been lobbying for deregulating the Crypto industry and defanging the CFPB for half a decade now [4][5] as they have $4.5B dedicated in crypto investments alone [6], which were largely underwater [7]
People keep talking about the Dark Enlightenment Tech Bro schpeil, and while significant, is basically a bunch of blowhards. The primary reasons you saw significant VC support for the Trump administration are
1. the proposed tax on unrealized capital gains tax for those with a net worth above $100M (heavily hits VCs like A16Z, Founders Fund, and YC)
2. the SPAC crackdown (shut down a major venue to unlock capital from zombie investments)
3. Crypto deregulation (as explained above)
[0] - https://www.reuters.com/technology/trump-signs-order-establi...
[1] - https://techcrunch.com/2024/07/16/andreessen-horowitz-co-fou...
[2] - https://www.whitehouse.gov/presidential-actions/2025/01/sub-...
[3] - https://www.reuters.com/world/us/trump-plans-pick-brian-quin...
[4] - https://www.nytimes.com/2021/10/29/us/politics/andreessen-ho...
[5] - https://www.forbes.com/sites/davidjeans/2022/10/17/andreesse...
[6] - https://www.axios.com/2022/05/25/andreessen-horowitz-raises-...
[7] - https://www.wsj.com/articles/andreessen-horowitz-went-all-in...
Trump had no shot until the proposed tax changes in early 2023 and competition with Sequoia lead much of A16Z's leadership (and other VCs) to invest in Trump's campaign.
Before that, A16Z, other VCs, and tech leadership tended to donate equally to both parties.
As I've mentioned multiple times before, Dem leadership screwed the pooch by alienating tech leadership who coalesced around Obama while overinvesting in failed outreach to legacy unions like the UAW and ILU.
Musk has always been an unsavory character, but he only really flipped to Trump after the Biden admin alienated him to try and get UAW support [0] - and now the UAW who Biden and the Dems tried to poach are now fully behind Trump and the GOP [1]
[0] - https://www.wsj.com/politics/elections/how-elon-musk-broke-w...
[1] - https://www.axios.com/2025/03/04/uaw-trump-tariffs-united-au...
SEC manages regulations such as SPACs, public listings, and publicly traded securities - another thing A16Z has been lobbying to deregulate, but not directly related to crypto.
It was FTX and Coinbase that paved the way, but it's A16Z that's taking full advantage.
The CFTC has been defanged in both administrations, but it was Sequoia and Dustin Moskovitz backing the last admin via FTX and A16Z backing the current admin.