El Salvador is Spanish for “The Saviour”. The country in Central America with a smaller land mass than Meghalaya nearly became the savior for Bitcoin, one of the most popular cryptocurrencies. Officially, the country accepted Bitcoin as legal tender and joined the US Dollar as its official currency. It was unable to offset the sharp fall in prices triggered by Tesla’s announcement last month that it would no longer accept cryptocurrency payments due to environmental concerns.
This exposes the flaws in bitcoin armor.
El Salvador is home to 6.5 million people. In 2020, Tesla sold approximately 500,000 units. It is obvious that the adoption of the currency by a country is more important for Bitcoin’s future fortunes than any whims of an entrepreneur. The market seems to have ignored the embrace of an entire country, even though it is small.
It’s easy to see why. Bitcoin’s only value proposition as a currency is the possibility that it will one day be universally accepted. It will not replace the US Dollar and the Euro, but it hopes to be at least in the same league. The reason Bitcoin has experienced a massive price rise is because it is expected to become a universal currency. Since the total supply of Bitcoins can only be accessed by 21 million people, any price it trades at is considered an under-valuation.
The Bitcoin investment is a ‘all or none’ proposition. However, this does not mean that Bitcoin cannot exist as an asset class. It can just be like gold. It is just an asset, among many others, and there is no reason to expect a steep rise in its price. Bitcoin enthusiasts promise a 10-fold rise, if it is not more, over the highs of earlier this year.
Two other facts are important to remember before we move on. First, Bitcoin, the cryptocurrency, must be distinguished from other digital currencies, even those being experimented with or explored by countries like India and central banks. As we’ll see, the former will almost certainly reduce Bitcoin’s value proposition and relevance. The closest analogy is the way the Indian Cricket League (ICL), which was backed by the BCCI, had to fold after the Indian Premier League (IPL), took flight. Second, Bitcoin is not synonymous with “Blockchain-based tech”. Bitcoin is based on blockchain technology. However, most of the innovation in this space, such Non-Fungible Tokens, (NFTs) are not dependent on Bitcoin.
Tesla’s act of betrayal, if you can call it that, is more than just a wasted opportunity. Because countries were hostile to the rise and development of a new currency, Bitcoin’s greatest hope was that the most well-known brands around the world would embrace it, forcing governments to take action. There is no better name than Tesla. It was the symbol of everything futuristic in popular imagination.
End Of The Dream
There are many problems with cryptocurrency. The first is the negative press surrounding energy-intensive crypto-mining. This will not disappear anytime soon. Although it may seem absurd — after all, no one counts the energy used by the technology or banking industries, its current energy-intensiveness makes the technology work.
From the perspective of governments and the wider public, it is also being linked with crimes that directly affect people. The ransoms paid in Bitcoin were responsible for major disruptive events over the past few months. Although Bitcoins have been used in cyber-crimes for many years, the association has never been so strong.
It’s only a matter time before even the most friendly of economies will clamp down on cryptocurrency. Christopher Wray, the Director of America’s Federal Bureau of Investigation, recently stated that cryptocurrency use for cybercrime is a “significant problem” that will likely become a “bigger issue for law enforcement.”
Third, after years of vacillating, some countries are now seriously considering launching their own digital currency. These digital currencies, which are backed by sovereign governments, cannot be substituted for Bitcoin. Contrary to Bitcoin’s promise of anonymity, digital currencies that are central bank-backed or sovereign, such as CBDCs, might allow for complete transparency. The government may be able to keep track of every payment made using these currencies. Users will be safer using these currencies because they are not traceable and irreversible. This means that any lost or stolen Bitcoins can be lost forever to their owners, with very few recourses.
This is not surprising for those who have closely followed the rise of the crypto-movement. It began with the promise that it would be an alternative to government-backed currencies. It now appears that it is completely dependent on governments creating their own versions.