How To Think About Cryptocurrency

In regions that range from Europe to Africa and Central America, the next chapter in monetary history is digital.

Bitcoin Adoption

During June 2021, El Salvador adopted bitcoin as legal tender to complement the dollar. As their basic currency, the dollar was a source of stability. However, it offered them no monetary control or flexibility. In a country where the majority have no credit or debit cards, no bank accounts, and no mobile banking, a digital currency was supposed to transform all transactions. They also hoped to boost financial inclusivity and perk up economic activity.

It began with an initial surge. At first, 50 percent of all households downloaded the Chivo Wallet (digital) app and many spent the bitcoin bonus it included. Then though, it all fell apart.

Displayed below, some people were worried about bitcoin’s fluctuations. (Yesterday, Bitcoin traded at $67,643.40):

Looking at individuals and firms, scholars saw people’s resistance. Many said El Salvador’s cryptocurrency venture had flopped:

Because El Salvador is one real world example of a cryptocurrency experiment, it provides a prototype that others can learn from. However, depending on the country, the concerns differ. Unlike El Salvador, Europe is worried about how much CBDC (central bank digital currency) an individual can possess. Their concern reflects the need to retain control over monetary policy as well as issues that include privacy and a legal structure. Like El Salvador, though, they too have technology concerns.

Our Bottom Line: Characteristics of Money

What was El Salvador’s basic problem?

I suspect that it  all comes down to the characteristics of money. We tend not to believe a commodity is money unless it is a medium of exchange, a unit of value, and a store of value. In El Salvador, even with a slew of incentives, people just did not want to use their digital currency. The reasons included the small size of the network using it, trust, the friction created by app technical problems and convertability glitches.

My sources and more: Though not in the headlines, we cannot ignore cryptocurrencies. While the IMF continues to look at their national adoption, the Bruegel think tank explained what Europe should worry about. But for the most detailed and insightful look at a digital currency adoption, this recent paper on El Salvador was excellent. (Please note that several of today’s sentences were in a part econlife post.)