30 Nov 2021

The economic impact of Bitcoin in El Salvador

TLDR: Bitcoin adoption in El Salvador is currently low and bitcoin does not change things over night. But by leveraging the lure of Bitcoin, El Salvador is attracting business, investments, and tourism that will boost the economy quickly.
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Nayib Bukele announcing plans for the Bitcoin City at LABitconf in San Salvador. Source: Marvin Recinos/AFP/Getty Images
A few weeks ago, Arcane Research traveled to El Salvador to attend the Adopting Bitcoin Conference hosted by Galoy. Others have already written eloquently about both the El Salvador experience and the amazing conference. Instead of giving myself the difficult task of adding value to these takes, I advise you to check out LN Markets’s newsletters on El Salvador. Being among the extremely competent and enthusiastic Bitcoin/Lightning community for a week makes you highly bullish on what’s to come. As a side effect, you also become somewhat one-sided in your interpretation of the present. After a week back in sub-zero temperatures in Europe, creating a distance in both time and weather, here’s my attempt on a neutral take on the effects of the Bitcoin project in El Salvador.
The short-term effects are all about the global pull of Bitcoin - not the SoV and MoE
First off, the effects of Bitcoin in El Salvador should be separated into two distinctly different categories. On the one hand, you have the positive effects of bitcoin as a store of value and the Bitcoin and the Lightning Network as an uncensored, decentralized, and borderless payment rail. On the other hand, you have the indirect effects from the appeal of Bitcoin such as attracting tourism, business, and investments.I believe making the distinction of effects is important. The first-hand effects of Bitcoin are generalizable to similar economies but benefits will be gradual unless bitcoin goes on an extreme bull run. The indirect effects can create benefits much faster but are less generalizable as there likely will be a first-mover advantage, or at the very least not be a large enough cake for all to eat from if many countries adopt bitcoin.So far, the success stories of Bitcoin in El Salvador largely fall into the indirect effects category. The two conferences during Bitcoin Week, Adopting Bitcoin and LABitconf are great examples, leading to an influx of hybrid work/tourism travelers from all over the world. Listening to government officials and seeing the plans for a Bitcoin City, it’s obvious that these indirect effects are a large part of the motivation for taking on the “bet” of introducing bitcoin as legal tender in El Salvador.The impressive Bitcoin Beach project is perhaps the perfect microcosmos of what El Salvador has to come. By singling out a small beachside town and engaging locals to drive the project forward already in 2019, a small bitcoin economy has been created in El Zonte. Over time, the community will benefit greatly from the direct effects of Bitcoin, but as of now, the benefits largely come from an influx of capital through donations and Bitcoin tourists driving up demand for the local offerings.That the indirect effects currently outweigh the direct effects of Bitcoin should be seen solely as a positive. By using the lure of Bitcoin to attract demand for investments and services, the economy will be more advanced when the longer-term direct benefits of Bitcoin kick in.
Bitcoin adoption in El Salvador is limited so far
For the longer-term benefits of Bitcoin to kick in, people must adopt bitcoin. The last section of this blog post is therefore dedicated to my observations of bitcoin adoption in El Salvador.Forced to sum it up in one sentence, I would say Salvadorans generally do not use bitcoin. However, based on the sample set of Salvadorans we met, the Chivo Wallet has been downloaded by a large portion of the population.What the Chivo Wallet is used for varies greatly between individuals. Among more passive users who are the perceived majority, some have simply kept the 30 dollars in bitcoin, others have withdrawn them on the ATMs, and some have in practice used the 30 dollars as a gift card. Among more active users we hear about utilizing the discount on gasoline and people using it actively to send each other money.Traveling around and trying to pay with bitcoin, it’s apparent that bitcoin is not yet widely used as a medium of exchange. It must though be said that a large percentage of merchants follow the legal tender criteria and do accept bitcoin payments if you ask. The process is, however, often time-consuming as the staff disappears into the back to pick up a mobile phone or payment terminal before huddling up to make it work. It’s clearly not the norm to pay with bitcoin in most places yet. This will likely improve greatly with time, and for the moment we should cherish the funny situations it facilitates. Our first trip to the supermercado in San Salvador is a good example, as it resulted in waiting around for our payment to be confirmed on the Bitcoin blockchain while the 10-person strong staff watched us suspiciously.
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Vetle (left) and I wait for our payment to be confirmed on the blockchain at the local supermercado. Outside the picture: Head of Arcane Research Bendik and 10 clerks waiting.
Bitcoin will be a success in El Salvador
To conclude, I believe the Bitcoin project in El Salvador will turn out a success. The first wave of positive effects is, and will be, not from Bitcoin’s attributes directly but rather the economic activity it attracts. Adoption of Bitcoin among Salvadorans will take time but, eventually, the average Salvadoran will also make use of Bitcoin’s attributes as a store of value and payment rail.
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