Opinion: El Salvador’s Bitcoin Experiment a Year Later – How Crypto Adoption and Surf Tourism Are Faring

Today, Mattive, an author and investor, shares his insights on cryptocurrencies, El Salvador and the financial industry’s use of crypto.

MarketWatch: Tell us about your experience in the investment industry.

Nilus: I have been an investment analyst and financial writer for almost 25 years now. This means that I have seen an incredible number of different trends come and go, and I have experienced many different market environments as well.

MarketWatch: How were you introduced to crypto?

Nilus: I knew about bitcoin very early from other friends and colleagues in the investment world and I loved the philosophy behind it. But I never thought it would gain mainstream appeal, so I largely ignored it – and the rapidly evolving crypto space – for a very long time.

My expertise was always conservative strategies – dividend stocks, other income investments, put options and things like that.

Then, a few years ago, I started working with Teeka Tiwari and his widely recognized team of cryptanalysts. That experience really challenged me to finally dig deeper and understand what was happening on a much deeper level.

MarketWatch: What is your view on crypto and bitcoin as a store of value, and what were your thoughts when you first heard that the president of El Salvador decided to dive headfirst into the world’s first bitcoin experiment?

Nilus: I’ve always had a very practical point of view – people collectively decide the value of anything. This is why we have used everything from shells to pieces of paper to easily exchange goods and services.

Bitcoin is no different. If an increasing number of people recognize it as a store of value – and this is what we have seen with rising adoption rates – then bitcoin is become a store of value.

Obviously, we’re still in the relatively early stages – about 10% to 15% of Americans have had some involvement with crypto… and a global percentage is much lower.

But what we’ve seen very consistently is that when a major innovation gets into that 10% to 15% adoption range, the rate increases rapidly until you reach a point of 85% adoption or more. This has been true for everything from washing machines and microwave ovens to the internet. And if anything, newer technologies have been adopted more quickly.

In other words, we could be right on the cusp of a major boom in bitcoin adoption.

So, could the entire crypto space still end up imploding? Yes.

But it is far more likely that bitcoin is here to stay and will only become more valuable due to an inherently limited supply.

This is also why I was not surprised to hear that a country like El Salvador would diversify its balance to some bitcoin.

Bukele bets on everything I have just outlined.

It’s really not that much different than putting some of a country’s reserves into gold or other assets. And it makes even more sense for El Salvador because the country was already pegged to the US dollar and so many Salvadorans work here and send money to their families back home.

MarketWatch: How did you end up in El Salvador?

Nilus: The country has excellent waves and I had actually taken my family there on a surfing holiday twice before, in 2016 and 2018.

This time – at the end of May – my daughter was going with the US Surf Team to represent our country at the International Surfing Association’s World Juniors, which is the equivalent of the Junior Olympics.

My wife and I obviously wanted to look at it. But I also knew it would be the perfect opportunity to get a closer look at the country’s bitcoin experiment right there on the ground, especially since El Zonte – also known as “Bitcoin Beach” – was just a town away from where the event was held.

Actually, it’s interesting because Bukule has really prioritized crypto adoption and surf tourism as two of his most important government initiatives, and they kind of collide right there in that area.

MarketWatch: Did El Salvador suddenly become a crypto mecca, or was it something else entirely? Were you surprised?

Nilus: I fully expected to see crypto everywhere, at least in the beach towns. But that wasn’t really the case.

El Zonte had many “Bitcoin Beach” signs on the way into town, but very little visible crypto trading takes place. I saw a large hotel that proudly accepted bitcoin and one or two other restaurants with small signs, but that was it.

Meanwhile, El Tunco, where I stayed, is the more developed tourist town. I saw a wider range of businesses there advertising acceptance of bitcoin payments through the Strike app – including a tattoo parlor. In fact, several restaurants gave big discounts if you paid with crypto.

But when I tried to download the Strike app to pay with bitcoin and get the discount, I hit a big snag: Since I had a US-based phone and mobile number, there was no way to connect to my US bank account while I was in a foreign country. Strike’s customer service team was very responsive but said the only solution was to activate the app back in the US or create a Salvadoran account using a local phone number.

I think that sums up the practicality of using crypto payments to buy dinner in El Salvador. The truth is that credit cards are far more convenient and widely accepted. And cash seems to be the most common and most valued form of payment.

In fact, while getting my morning coffee at a very hip shop, I asked the barista how many people used the Strike app to pay. Her answer? “Pocas” or few.

Does that mean it won’t happen in the future? Of course not.

I’m very encouraged by some of the things I see happening – everything from the development of the Lightning Network to companies like PayPal PYPL,
+0.13%
makes it easier to trade crypto.

MarketWatch: Do you see any country profiting from such an experiment as El Salvador did with bitcoin? Was the IMF right to punish the country?

Nilus: As I mentioned a moment ago, there is no doubt that Bukule is taking a calculated risk. In my eyes, that makes a lot of sense.

First, the country’s bitcoin holdings represent a small portion of the country’s total reserves.

How is this much different than a country that has gold in reserves? And before anyone brings up volatility, let’s not forget that gold prices have experienced many wild swings.

If bitcoin prices rise in the long term, Bukule will look like a genius. If they don’t, it will cause some economic damage to the country, but nothing catastrophic in itself.

It’s no different than an allocation model I might recommend to an individual investor – most of your money in traditional assets and a small percentage in something with more risk and more potential upside. This is how I now manage my own portfolio, actually!

Meanwhile, Bukule is getting tons of publicity and attention for his country. It certainly makes El Salvador seem cool and forward-thinking to younger, more tech-savvy travelers. That alone is worth something.

And as for the IMF, I think there are two layers to their criticism.

Sure, they may be genuinely concerned about the potential financial damage a bad bitcoin bet could do to the country, especially since they end up on the hook for bailouts and such.

But that said, the current risk seems relatively low given how much money El Salvador has allocated to bitcoin. And again, would they make the same criticism if Bukule invested in gold or a strategic petroleum reserve? After all, we know how volatile oil has been lately!

Also, let’s not forget how many massive financial disasters we’ve seen in economies based on fiat currencies, let alone how many of these may actually have been caused by bad central bank decisions.

So I think it’s much more about what bitcoin adoption means at the sovereign level. A medium of exchange that goes beyond the world’s central banking system is not in the best interest of a body like the IMF. Period.

MarketWatch: Is bitcoin or another cryptocurrency the future of international finance, capable of replacing or dethroning central banks’ digital currencies?

Nilus: I would say the jury is still out.

As I just mentioned, fiat currencies have their own problems – including the core problem of theoretically unlimited supply.

And we already know that traditional financial systems can collapse spectacularly. Central banks are hardly perfect decision makers.

So from a high level, bitcoin – and/or other crypto – can serve as a store of value and medium of exchange as viable as any other paper currency, precious metal or pile of cowrie shells. In some ways it can do it more efficiently and without the need for any central authority or control. Again, it all boils down to adoption rates and universal acceptance.

Will bitcoin replace the existing system? It’s unlikely to happen anytime soon.

Can it exist outside the traditional system and provide a viable alternative to fiat currencies and centralized finance? That’s what crypto has tried to do already with some early success.

And could more countries embrace bitcoin on their balance sheets just like El Salvador already has? Absolutely. For the same reasons they have historically embraced things like gold.

If anything, given the state of geopolitics these days, I think more and more countries will choose to go that route.

Combine that with increasing adoption at the individual level, and it’s easy to see why Bukule’s efforts could end up paying off big, even if the Bitcoin Beach experiment has largely been a bust so far.