El Salvador was a sideshow compared to the potential of Argentina
El Salvador was a sideshow compared to the potential of Argentina and Broader Emerging Market Bitcoin adoption
(ARS = symbol for Argentine Peso)
A few weeks ago, the larger “cryptosphere,” and especially the Bitcoin Maxis erupted with enthusiasm at the small country of El Salvador’s adoption of Bitcoin as legal tender. The price of Bitcoin didn’t change a whole lot since then, and responded with indifference at the news that the Salvadoran government was going to “airdrop” $30 to each citizen (only 33% of the population has access to data enabled smartphones, and only 8% to broadband internet). As we have discussed on the Foot Guns podcast, it is difficult if not impossible to “trade the news,” whether it is crypto or any other asset class. It is, however, possible, we argue, to use data points to form a view to enter a long or a short position. Foot Guns exists to express our views on how to make money (or equally as important how not to lose it by shooting yourself in the foot); and that means remaining objective.
Some Bitcoin Maxi’s have missed the point to a degree. There is no need to trash the Fed (one has plenty of reasons to trash various policy positions of the Federal Reserve) and hype the idea that the dollar is going away. Are the bulk of bitcoin holders really hodling because they think BTC will become the world’s reserve currency? Our guess is no. Rather, you trade or buy BTC so at some point you can take profits and exit—which involves measuring the profits in…US dollars.
The strongest case for ongoing adoption of BTC in emerging markets is not because of a fear the dollar may prove some day to be worthless, but because of the (in some cases multi-generational) enthusiasm for dollars as the best store of value relative to a country’s native currency. Of all the country’s we can think of, Argentina holds the most promise as country that is poised to see more BTC adoption. Argentina is so committed to the dollar that they hold an estimated 8% of the physical dollars in existence. 8%. That’s a lot of dollars.
In an always tried, never successful attempt to curb the country’s current inflation woes, the Argentine government has limited the rights of Argentines to hold USD by limiting its citizens right to purchase USD at under $200 per month per citizen. This has created a “blue market” for physical USD that is currently maintaining a 60% premium to the official exchange rate used by Argentine banks and the government.
Although the country remains in one of the strictest lockdowns in the world, it would in theory (and in practice) be possible to travel as a foreign citizen with, say $100,000 USD, sell that into the blue market for 170 ARS (argentine pesos), and then buy $100,000 USD from an Argentine Bank for a 60% return. This kind of physical arbitrage is almost dead on financial systems.
Argentine citizens, however, are prohibited from doing this. The most they can do is $200 per month. From the very reliable author of this article in the Buenos Aires Times these statistics are staggering: “According to a report by economic daily El Economista, Argentines hold some US$130 billion within the financial system — estimated to represent about eight percent of the actual physical stock of dollars in the world — and another US$175 billion “under the mattress,” as we like to say.”
Having traveled extensively in Argentina unlike the Maxi’s who jumped on the bandwagon of El Salvador, we can confirm this is true. When visiting Argentina we have taken $20,000 USD in hard currency as it is widely accepted and we wanted to get the blue dollar rate instead of the crummy official bank rate.
A country of 44mm people, where dollars are literally horded in the amount of $185 billion, in physical form, quite literally under the mattress at times, and that has a further $130 billion stored in the economy, has prohibited its citizens from exchanging more than $200 per month of ARS to USD. You can see the potential here.
What’s a better store of value—an immutable, secure, blockchain (BTC) or putting physical dollars in your mattress? Although no one data point alone in our view can justify exposure, Argentina is a physical USD maximalist nation whose citizens are unlikely to change their view anytime soon as it has been reinforced through successive generations that dollars always beat the ARS. Argentina has defaulted on its debt at least 7 times, and is in a state of default with the $59 billion loan the IMF gave it in 2017. For the last 50 years, Argentina has spent 1 out of every 4 years in a recession. There isn’t a single resident, no matter their age, who has regretted their decision to trade in ARS for USD.
Argentina, unlike El Salvador, does not suffer from wildly authoritarian leaders, rampant gang violence, and a lack of education among its populace. It is a highly sophisticated culture that leads the world in number of psychotherapists per capita, for example. If you have ever been to Buenos Aires, which is like an inexpensive love child of Paris and Rome which has resulted in the city being called “Buenos Paris” where 33% of the population of the country resides, you know it is extremely culturally sophisticated.
What Argentina illustrates is that far from the hype internally within the US by some BTC Maxis that the dollar will collapse, there are so many countries in emerging markets where the dollar is king where BTC adoption may prove attractive. Imagine the upwards lift it would have on the price of BTC if just 10-20% of Argentines decided to circumvent their country’s dollar restrictive policy by using BTC as a store of USD value as opposed to keeping dollars under the mattress. Imagine too, if the entirety of the emerging market economies which also worship the USD adopted it at a similar rate.
So far, in part we think due to an out of control coronavirus situation, a tanking economy, and hyperinflation, Argentines have been slow adopters of BTC in real terms, but the rate of adoption has been astronomical. It has moved from not really on the list to 21st in the world in realized bitcoin gains last year, with US$200 million.
Does this one data point mean you should convert everything into BTC because it will certainly go up? Absolutely not. But it shows you how much pent up potential energy there is for BTC and wider use of crypto in general in emerging markets which possess a near universally held belief that dollars are always better to hold than their local currency. While El Salvador gave the Maxi’s lots to tweet about, it was in our view worth one news cycle and may have cause a slight uptick in BTC (which again is valued in USD in the Salvadoran law). The potential of USD maximalist emerging markets adopting BTC, using Argentina as an illustration, serves as a reason we will not be long term net short sellers of BTC anytime soon.