From tiny acorns..

This week is El Salvador poised to be the first domino to fall in nations adopting bitcoin or will it be a dead canary we pull up from the (volcano) mine? Cyber-hornet queen, Michael Saylor of MicroStrategy, gets us all abuzz and China’s stance on crypto actually becomes a factor for the first time.

El Salvador adopts bitcoin as legal tender

The biggest headline of the week is the Latin American nation, El Salvador has made bitcoin a form of legal tender by a vote of 64 to 82 in the Salvadoran Congress on Wednesday (09/06/2021) morning and has promised a suite of incentives for crypto-entrepreneurs to set up in El Salvador. Becoming an official currency of a small country that has a lack of banking infrastructure seems like an inevitable path for cryptocurrencies to take — one of the use cases that were touted from the early days — financial services and liberation for the unbanked.

The initial announcement was followed up the positive reaction from the crypto community with several tweets from the President of El Salvador, Nayib Bukele, outlining plans to encourage innovation and investment in the country including using their geothermal plants to provide clean, renewable energy for bitcoin mining operations — sending an odd part of twitter into complete meltdown about volcano mining. 3 bitcoin will land you a lifetime residency, presumably to help load up their own bitcoin reserves initially, and there will be tax incentives for crypto-companies to move out there as well as no tax on bitcoin for residences. Sounds like it’s hitting a lot of the sweet spots for crypto-enthusiasts.

Finding the nuance in this is tricky and there are a few ways to look at it, at least from this London-centric crypto-enterprise point-of-view. A lot of the speculation and facts about the place is on the other side of the world, while a few of us have been to South America, in a similar vein I wouldn’t call myself an expert on the individual plight of Germans having been to Poland. Moreso, a lot of this speculation and hype is coming from CryptoTwitter, which in itself can be a bit of a cesspit — a place where President Bukele is all too happy to jump into — laser eyes and all for the added PR value.

First and foremost, adoption is great. Being able to use bitcoin for remittance back to El Salvador from abroad without having the added hassle of capital gains tax and/or converting to dollars is a fine and good use case, especially as the country’s population is (apparently) reliant on money coming from overseas. For context, the country adopted the dollar as its currency in 2001, so the monetary policy is in the hands of the U.S. Federal Reserve Bank. One wonders what they make of this move.

The government will provide an instant exchange at the point of sale for businesses that do not want the risk of holding bitcoin as a currency, a $150 million trust at the Development Bank of El Salvador is being set up in order to facilitate this. The use of bitcoin is not mandatory and USD will still be used as it currently is.

El Salvador is no stranger to bitcoin, the community project, Bitcoin Beach, has been creating a circular bitcoin economy in the country since 2019, which has been making use of the Lightning network, the layer 2 software for bitcoin that can drastically increase the number of transactions to the point where real-time streaming payments and micropayments are possible. Payment and lightning software provider, Strike, has been heavily involved in the push by El Salvador to make bitcoin a legal tender as part of Bitcoin Beach and in this recent push, with CEO Jack Mallers taking to the stage at Bitcoin Miami to outline the decision and announce the company’s imminent move to the country as part of a new innovation hub along with other notable bitcoin heavy-hitters, Blockstream, will provide satellite-based bitcoin transactions and monitoring for areas with no/limited internet.

From our experience using lightning, there is no reason to doubt its ability to provide the infrastructure required to process the payments at scale. Once past the initial set-up of a node and general messing about with raspberry pis, hard drives, ethernet cables and funding some channels, actually using the network is very straightforward and easy. For non-enthusiasts, there are now quite a few Lightning-enabled wallets available on desktop and, more importantly, across mobile OS’s that don’t require the hardware setup or management and look and act as any other bitcoin wallet. It could provide the ultimate testing ground for lightning’s capabilities outside of interested hobbyists, techies and above and beyond the current scope of Bitcoin Beach.

This is hugely promising and if it can be considered a success it will be monumental for bitcoin — and don’t think lightning-enabled payments won’t start popping up across London’s cafes and squeezed hospitality services in the near(ish) future.

Yet, all this excitement with the backdrop of the El Salvadoran government accused of being corrupt and, potentially, guilty of coup attempts and authoritarian regime changes — again we’re sitting in London and have no true idea of on the ground reality — but it will make for easy cannon-fodder for the anti-bitcoin brigades.

Overall, the announcement seemed a bit odd. Impulsive, lacking coordination and actual information, but quickly picked up steam over Twitter. Then again as we’ve discussed here at length during day-trading lulls, bitcoin is and always was poised to take the path of least resistance during its growth and adoption. I guess I just wasn’t ready or didn’t expect that to take place over Twitter with people who make memes. But again, it was inevitable given the last 6 months of crypto.

Moreover given the dollarisation of the Salvadoran economy and its complete dependence on the US, it shouldn’t be a huge surprise. Bitcoin represents a very good chance for the nation to reduce its dependency on the USD, which would be nigh on impossible to do if they were to issue their own currency again — no one would want to take it! Bitcoin here is providing the infrastructure and encoded discipline that any currency requires, which would take considerable time of economic, political and (relative) social stability to create by itself, while not completely breaking dependency from USD — for the time being.

The IMF does not view this move without concern and predicts legal and economic issues. A potential $1 billion program the country has been in discussions with the IMF is still in discussion and it’s hard to imagine the IMF won’t pressure a change of course. The yield on the country’s debt increased as the risk of holding that debt has been seen to have risen.

It may be a good time to be reminded of the USA’s interference in Latin America, including El Salvador itself, in the past. Surely they’ll see nothing wrong with the US Dollar having some competition, or does El Salvador now have some new negotiation power against the IMF?

Having said ALL that, this announcement most likely didn’t have much overall impact on the price action since the announcement other than very short-term up-tick — no matter what crypto-twitter bleats. Besides, no matter what our take or thoughts on this move is, it should ultimately benefit the people of El Salvador through economic empowerment, and isn’t that what it’s all about?

Chad Saylor

Bull-run poster boy, Michael Saylor, has offered $500million of senior secured notes due 2028, or junk bonds, with an annual interest rate of 6.125%, having originally sought $400 million. Apparently, it was oversubscribed to the tasty tune of $1.6 billion. At current market prices that will push Microstrategy’s bitcoin holdings well over 100,000 coins. Well, it will and won’t, as their current 92,079 bitcoins are now held in a newly formed subsidiary, MacroStrategy LLC while any new purchases will be owned by MicroStrategy.

The likes of the FT and Bloomberg are predictably looking down their noses at this move at a time where Microstrategy’s balance sheet has taken a bitcoin sell-off styled hit. Nothing we haven’t all experienced before then in terms of both bitcoin deciding to fling itself off a cliff and the reaction of finance media to such silly ideas.

What is interesting about this bond sale is the timeframe and yield. When used to purchase bitcoin, Microstrategy can sit on the coins for 7 years before paying back any of the principal on the notes. With the cost of debt at an all-time low and the money-printers in full brrr, Saylor has plenty of time and ability to potentially ride out a lengthy bear market, especially if the 4-year cycles continue to hold true. What’s the average return on a 7-year HODL these days? Will bitcoin outperform 6.125% pa?

CHINA BANS BITCOIN, BITCOIN….kinda cares

Xinjiang (and later Qinghai) officials have been busy issuing notes and documents to other officials to officially end bitcoin mining in the province.

We’ve heard this before, what happened across previous years, was a group of officials would declare a date when mining must end, arrange a visit around that day and make sure the rules were being followed. The municipality officials would show the regional officials around a warehouse full of turned-off miners who could report back success to the national officials. A few minutes after leaving the area, the mining operation would be fired back up again. Bitcoin mining was a huge economic boost to remote regions that was being given a blind-eye when other aspects of cryptocurrency faced crackdowns in the past.

This time it does seem a little bit more real as there has been a notable drop in the hashrate and mining inventory is starting to appear in the market at discount — however, whether this is the cause of, or because of, the price action could be argued both ways and cannot be linked solely to the announcements out of China — like many price moves it was more a combination of effects that started acting upon one another. A number of mining companies have indicated they will relocate to areas of North America and Central Asia.

A follow-up crackdown on retail trading occurred swiftly in CCP fashion, with cryptocurrency influencer accounts and exchange accounts banned or blocked on Weibo and an uptick in the rhetoric around criminality in bitcoin and a suite of arrests on crypto-related crime.. The sentiment the BBC here in Blighty is also keen on reminding us as in the last few weeks we now know using illegally tapped electricity for growing weed is preferable to mining and bitcoin is funding the terrorists. In other non-news, the Bank of England has stated stablecoins should be regulated.

Final Thoughts

Bitcoin has already had a serious deleveraging and cleansing of fast (greedy) money built up since Q4 2020, we could be setting up for an incredible divergence if public markets get pummeled and bitcoin holds steady (but when has bitcoin ever been steady?). In all aspects, bar the actual price, bitcoin has had an incredible week. A nation-state has adopted bitcoin, a public company was offered x3 the amount being made available for bitcoin purchases, and those dirty coal miners in China are moving on to greener pastures. All very good news, but as ever, elevator down, staircase up.