El Salvador abandons Bitcoin as legal tender

Speculative asset class fails as non-speculative legal tender class.

If king for the day with a sovereign wealth fund I wouldn't forbid investment choices like this on risk grounds, I mean you need risk assets as well as boring ones, right? But I have problems with the moral quality: it's like state investing in the casino business. Monaco? works fine. Anywhere else? It's got problems.

Like a lot of people, I probably fall into severe errors which would be bread and butter for "bad economics" reddit groups but truly, I can't see how this wasn't forseen and expected. It was about WHEN, not IF.

> sovereign wealth fund

That reminds me of Hong Kong, where I used to live and which maintains a large sovereign wealth fund to ensure its currency is pegged to the US dollar.

While various US think tanks ranked it well on their checklists of "economic freedom", they tended to gloss over the rest of the recipe that made it work. Not just the huge sovereign wealth fund, but also how half the housing is government-run or subsidized and you don't really own land, you just rent it for a very long term from the government.

> you don't really own land, you just rent it for a very long term from the government.

This is probably economically a good idea, absent something like georgist land taxes. It eliminates some or all of the incentive to speculate in land, which is of course the whole problem El Salvador ran into with bitcoin as currency.

It hasn't entirely stopped rents in HK being untenably high, for many people. It has rent controls, but the system permits some very untenable outcomes which if left unchecked would re-create Kowloon Walled City.

So whilst politically I agree, practically I am unsure there is no land speculation: A waterfront view remains valuable in and of itself, no matter what.

Speaking of Sovereign Wealth Funds...

Trump Calls for Wealth Fund in Executive Order https://www.nytimes.com/2025/02/03/us/politics/sovereign-wea...

> That reminds me of Hong Kong, where I used to live and which maintains a large sovereign wealth fund to ensure its currency is pegged to the US dollar.

That doesn't sound like a soverign wealth fund. Foreign currency reserves are not the same thing as a soverign weath fund.

Wouldn’t they need to balance a budget first?

Not in my lifetime

Kowloon Walled City ended because it was attacked by the state, rather than through market forces.

Many of those people are now likely in worse shape effectively renting a cage sized bed, but now paying the governments cut on top of whatever black market shenanigans goes on in both the slum housing and kowloon.

Right, obviously HK is a bit of a special case. Land in Manhattan would, I'm 100% certain, remain incredibly expensive.

The cool thing about leases is that you can change the cost of the lease periodically, which ensures that the value of the land does not accrue purely to the person occupying it.

Forgive my ignorance but with just so many people and so much money and so little area, isn't high rents inevitable?

I contrast that to places like the USA and Canada that have huge amounts of area but policies that encourage inefficient land usage.

There is no problem with property values or rent values being high because they are the result of demand for living in a high quality area. There isn't a problem either with these prices varying over time as the attractiveness of the area changes.

The problems are wholly on the supply side, where either

- there are bad laws that lead to any of the following, or - developers legally or illegally cooperate to suppress supply

- landlords cooperate to push up rents or reduce quality.

- investors use land or housing units as speculative assets

- normal people want to use their primary residence as a way to build wealth, so politically support measure that artificially inflate their property values. Individually, this is not a problem, but when everyone does it, the system breaks.

The goal is to design a system where all of the above doesn't happen. A very big task.

P.S. I don't know anything about HK.

> Not in my lifetime

Were you alive in the mid to late 90s? A string of balanced budgets and surpluses. There are new problems and no dot com bubble right now but most Americans were alive the last time we had balanced budgets. It is quite possible.

> Speculative asset class fails as non-speculative legal tender class.

This. Bitcoin proponents often claim that eventually everyone will use Bitcoin for payments ("Finally no more governments or central banks!") and that's why it will increase in value, so everyone should invest in BTC.

But this argument is fundamentally flawed: A currency, in order for it to work (in order for people to be able to trust it), needs to be stable in value. Which contradicts it being an investment vehicle and drastically varying in value over time.

Kowloon Walled City was neither a dystopia nor a utopia. It works and was able to maintain itself, but it could have been done better if it was actually supported by the government.

Or in Singapore

I'm not sure what you're reacting to here, I never said it was just US currency reserves. (Those are a component, sure, but that's hardly abnormal.)

> The Exchange Fund of Hong Kong is the primary investment arm and de facto sovereign wealth fund of the Hong Kong Monetary Authority.

https://en.wikipedia.org/wiki/Exchange_Fund_(Hong_Kong)

It's also 10th-largest on:

https://en.wikipedia.org/wiki/Sovereign_wealth_fund#Largest_...

Land in HK is weird. The lease thing is true but there are massive national parks that have nothing built at all.

The buildings that do exist are ~50 stories even though that's not optimal because of the typhoon situation. So constructive cost is high because government does not release enough land for development.

The rents are high because someone wants it that way. It's not a land scarcity problem IMO.

Also the government and the upcoming merge with China is strange in itself.

And quite apart from that fundamental misalignment, sovereign states having some measure of control over their own monetary policy is arguably a pretty good thing.

Economically, communism is a great idea. In practice, you get "collectivization" in the Soviet Union that basically starves millions to death

It might have worked if El Salvador made their own cryptocurrency which they control and could mint more of and backed it properly as a non-speculative legal tender, but they didn’t and that didn’t happen.

In fairness, markets can operate quite well with almost nobody in them being able to argue why. Gold has remarkable staying power but it is rare to find gold proponents who can explain why convincingly. A lot of the arguments for where the value comes from are bunk. If I hear one more person explaining that jewellery matters I'll ... go peacefully about my day I suppose.

Still holds its value though, the economy does not care if people understand why the price signals are so.

Singapore relies on the fact like 20 or 30% of their tax paying population is ineligible for public housing due to not being a PR nor citizen.

So... fiat?

And on top of that, consumers prefer institutions in the loop. That’s why people use Amex to pay for stuff, because if it goes wrong you’ve got a massive institution with a tonne of clout to help you out.

The argument is that it'll become more stable if it's adopted as a worldwide currency, kinda like gold.

Correct. The IMF can’t run its debt trap/looting playbook without more currency control

Don't millions starve too in capitalism?

What currency is stable in value? Certainly not the U.S. dollar.

Yes, it does happen from time to time coincidentally usually in the lead-up to financial crises…

None, really. They are all floating relative to each other. But USD is stable enough to know what you can get with $10. Although the last few years have put that to the test.

The USD doesn't frequently lose all or nearly all value as we see from cryptocoins. My $10 today will be worth $10 tomorrow barring nuclear war or an apocalypse.

No. No liberal capitalist economy has ever had a famine. By contrast, most communist economies have created major famines, and history's largest famines have all been created by communist economies, outdoing even colonialism in their death tolls.

These are well-known historical facts.

A better way to put it is that a deflationary currency is, counterintuitively, not a particularly good currency.

The reality is, Bitcoin and similar, are not being used to actually purchase things. Not at any notable percentage. You're "best bet" is to horde it, and that doesn't make a good currency.

It makes sense when you realize that it's a religion

To save some time, can you define the True Scotsman here? Would the US in the 1920s count as a liberal capitalistic country for example? England in the 1860s?

That's "just" a bug-feature of common law systems

>The Kowloon Walled City was exempt and remained under the control of Qing China.

https://www.thecollector.com/kowloon-walled-city-lawlessness...

https://en.wikipedia.org/wiki/999-year_lease https://en.wikipedia.org/wiki/999-year_leases_in_Hong_Kong#V...

And anything beyond 3m you put into real estate, stocks, or bonds anyway. Real rates have mostly been positive; and if not, that's the result of an economy wide equilibrium process that can't be undone risklessly by some magic beans.

Yes, and yes, which is one reason that, as it turns out, neither the US in the 01920s nor England in the 01860s experienced the famines that affected some other parts of the world at the same time. (In the 01920s Russia was experiencing its first famine that could reasonably be attributed to communism, and in the 01860s Sweden and Finland were experiencing their last famines before their transitions to capitalism.) But not, for example, Ireland in the 01840s and 01850s; that was neither, being colonialist and agricultural.

Nobody starved to death in "famines" like the so-called Lancashire Cotton Famine. By contrast, in the Finnish famine starting the next year, almost 10% of the population of Finland died. As it turns out, that was the last famine in Finland because it became capitalist over the following decades.

HK has a currency pegged to the USD via a currency board, that is (similar to a stable coin) backed one-to-one with USD denominated short-dated treasuries. That is within the HK exchange fund operated by the HK Monetary Authority.

The exchange fund also (and somewhat controversially) runs additional portfolios (with foreign shares and bonds, and private equity, real estate etc.) in the manner of a sovereign wealth fund.

> obviously HK is a bit of a special case

Reminds me of the old macro economist joke: There are 4 types of economies, developed economy, developing economy, Japan, and Argentina. Maybe HK should be added to that joke...

Doing much shopping with gold coins lately? Even big things. Bought a car with a bar?

Sure but the USD has two order of magnitude more total value, and probably more than that in day to day usage.

So there's an implicit question there which apparently you and everyone else missed.

I think it's safe to read that as "relatively stable." USD is a relatively stable currency, and especially compared to BTC.

I come to these threads expecting criticism about bitcoin being funny internet money run by a small group of shady characters.

But most of the comments are about how stable currency and stores of wealth are actually bad! It kind of sounds like we think bitcoin is working.

If USD is inflating and Gold is staying still, is gold “deflating”?

This is moot for El Salvador. They’ve been dollarized since 2001 and USD is effectively the only legal tender.

Why do you think the USD has so many orders of magnitude usage? Nobody missed the question, that was the point: for currencies, stability is what makes them useful. You don’t have an incentive to hoard dollars hoping they’ll go up in value, so you spend them and boost the economy. Other countries use dollars because they have the same benefit: I can write a contract with you saying what we’ll pay over the next year and be confident that neither of us is going to be widely inconvenienced by the kind of swings Bitcoin has.

Remember that guy who spent 100BTC on a pizza? It’s a funny story but that’s why nobody uses Bitcoin for normal transactions.

It became unbalanced by choice: a recreational war in the Middle East and tax cuts. The dotcom bubble helped, but those trillions in debt were not caused by people paying less capital gains tax on pets.com sales.

What do you call someone who bought a pizza with BTC last year? Paper hands? Shouldn’t they have hodled and not had pizza? How can this be a currency.

Yes. A "digital fiat" currency, basically. It could potentially incorporate privacy features from cryptocurrencies or replace digital payment providers. Or be a ginormous waste of time. I don't really know enough to tell you which one.

> stable currency

You lost me at stable currency. BTC is a speculative asset. Gold is a speculative asset. Neither are stable currencies.

If you'd like to speculate and INVEST in BTC, go ahead. But I'm quite frankly tired of people claiming it to be a currency.

> Why do you think the USD has so many orders of magnitude usage? Nobody missed the question, that was the point: for currencies, stability is what makes them useful.

Hint: cause and effect. You did miss the point and still do probably.

> Shouldn’t they have hodled and not had pizza?

but then starved to death while hodling?

It also needs to scale well, which bitcoin doesn't. This is evidenced by the ever increasing energy demand, slow transaction times and high fees.

I don’t know that’s what I’m asking! Should you only spend your money in life or death situations in a btc economy?

Like in the UK...

Gotta love crypto people putting "looking smarter than you" over actually explaining what it is they mean. If you've got a point to make, don't just hint at it, say something and then we can have a discussion. This just makes you look petty and like you're only in it to stroke your own ego.

I don’t own any btc. But I’m wondering why there is so much FUD about currency that doesn’t inflate.

Ok. But my point is many of the comments are attacking the idea of a stable currency - not btc.

The problem is a currency which is also considered a precious good. It’s like using diamonds as the medium of exchange. Gold is far from the most valuable commodity, and silver even less so. So I think it means we should use some other crypto than BTC if we want to have it be a currency.

The utility of the money is in how you spend it. Your same question could be asked about the S&P.

Why would anyone sell? Well at some point in your life you want to use the money to accomplish your life goals

This is such a huge thing. One of my relatives worked in the housing authority of the HK government - he said that at any given time at least 50% of the housing was publicly owned and rented directly to tenants for like 2k HKD (~300 USD)/mo.

That's why anyone can afford to live there. Actual property leases are incredibly expensive - in the 10s of millions of HKD.

Hong Kong functions as a free-trade market by socializing large parts of its basic economy.

Yes, Democrats balance the budget, then Republicans sneak in and break the bank with wars, or deficit spending.

You should not sell your shares in the S&P 500 to buy pizza unless your financial situation changes drastically for the worse or I guess maybe you are near death. As I said in the other thread, the problem is that btc is too desirable in the market to be a functioning currency and using it for pizza or impulsive daily purchases is a nonstarter in reality.

And 1 bitcoin in your possession today will be worth 1 bitcoin in your possession tomorrow, barring a successful and very expensive attack on the network.

You have little assurance that the buying power of $10 today will be the buying power of $10 tomorrow. If the tariffs had gone through as initially advertised, that would certainly not have been the case.

But you’re wrong. People sell S&P and BTC everyday even if they aren’t dying.

This is time value of money. If I wait 20 years instead of buying a house, I can have more money. But that’s 20 years of my life I didn’t live in the house I wanted.

I could invest more in S&P and not go on vacation, but then I won’t have as much time to go on vacations.

Goods and services now can be more valuable than money later, and that’s why people sell. And that’s why deflationary currency is fine.

I notice you mentioned big ticket purchases which I specifically did not mention. Your argument looks a bit different if you replace houses and vacation with lattes and sneakers. We live in a consumer economy where a marginal drag on purchasing activity due to currency deflation would probably be pretty disruptive to put it mildly.

It is for all intents and purposes a stable store of value. There's a reason everyone in crypto thinks only in terms of the dollar value

If you’re arguing that people would think harder about their purchases and frivolous spending would decline. I agree. And I think that’s a benefits

If you’re asking if people would not use their deflating currency to buy lattes and sneakers, I disagree. People like sneakers and lattes more than money. They prove this everyday by buying them instead of s&p.

There is an issue of the cost of a transaction - which nis bad for btc and s&p. Nobody wants a tax form for buying a pizza. But the regulatory environment creating high selling costs is orthogonal to the deflationary property.

More than money, yes. More than precious bitcoin?

The argument simply is that exchange should be frictionless and deflationary currency will slow the velocity of money. I guess you agree this will lead to reduced prosperity and economic activity, though you call it frivolous purchases. Your comment about preferences doesn’t play into it; this is about mechanics of exchange, and a precious asset is an inefficient medium for commerce which would lead to reduced economic activity because not only do you have to factor in the opportunity cost of buying a good or buying some other good (sneakers or s&p), now you also have hodling, zero economic activity, as a 3rd option with its own expected return and opportunity cost to forgo. When I buy sneakers, the s&p 500, or btc, my dollars don’t disappear. A counterparty receives them and they stay in the economy. If you pay me in btc and I just hold it, then that money effectively does disappear from the economy.

And I’m not even mentioning all the macro issues of not being able to provide liquidity in the form of new capital in times of crisis.

> More than precious bitcoin?

I’m advocating for stable currency. Not bitcoin.

> you agree this will lead to reduced prosperity

I agree that it will reduce the velocity of money and maybe “GDP”. But not prosperity, individuals being able to save wealth into the future is a better life outcome than more goods changing hands.

> and a precious asset is an inefficient medium for commerce

You are conflating liquidity with deflation. To be a currency it has to be liquid, we agree. We also agree btc is not as liquid as cash. But deflation or stability is orthogonal from liquidity.

> now you also have hodling, zero economic activity,

Already addressed. People want money to buy goods.

> my dollars don’t disappear.

The value isn’t lost in the exchange but it’s lost everyday due to inflation. And by “lost” I mean transferred to government projects.

> that money effectively does disappear from the economy.

No it merely is saved for a future consumption date. If we average consumption needs of participants in the economy there is no reason to expect a monotonic hoarding effect. That would mean consumers are not satisfying their desires for goods.

Here is one last framing. The economy is not money, it’s goods and services. Money is just a tool for claiming them. So what does an inflationary currency do to help the economy? Does it cause more people to get out of bed and create new goods and services? No. It just transfers claims to resources to someone else.

> You are conflating liquidity with deflation. To be a currency it has to be liquid, we agree. We also agree btc is not as liquid as cash. But deflation or stability is orthogonal from liquidity.

I’m not; you have a limited view of what inefficiency means. The currency can be liquid and still inefficient for exchange due to other kinds of overhead such as opportunity cost of spending the currency itself.

The economy is not money but a frictionless (opportunity cost wise NOT liquidity wise as you keep trying to divert to) currency is better for facilitating exchange and access to goods and services.

I think a perfectly stable currency could be OK too but that would require incredible management on the monetary side to maintain that equilibrium. And absent being able to hit that bullseye it’s been proven, as much as things like this can be, that a stable little bit of inflation with a fiat currency is much stabler and leads to more prosperity than a currency bound by finite resources external to the economy.

Isn’t it enough that you can buy gold or whatever or bitcoin with your depreciating dollars? Why the fixation on it being a currency?

> Gotta love crypto people putting "looking smarter than you"

Oh I'm sorry, that was your shtick. Apologies!

Also, I'm not a crypto person, I made some gains and sold a long time ago. I just have to laugh that you think one pointing out that an argument is weak makes one a part of the opposite tribe.

> But not, for example, Ireland in the 01840s and 01850s; that was neither, being colonialist and agricultural.

England was a capitalistic economy in the 1850s, no?

Yes, and England was at that time and for almost another century causing famines in its colonies abroad by preventing them from becoming either capitalist or liberal. Ireland didn't even get the worst of it; India suffered much worse under the English yoke.

I would argue that, in the case of gold (as well as many fiat currencies) the value is tightly coupled to the trust people put into the asset, and the other way around. "Gold has always been valuable and quite stable, so it won't lose all of its value over night." (and similarly for USD, EUR, …)

Maybe it's improved but when i played with btc and made 3x and freaked out and bought a secondhand pixel with my $800 stake in milliBTC the friction was huge. I paid unpredictable vig getting $ and I had very indirect access to sell price which was being constantly fucked over by whales playing.

A true economy of low friction btc transactions for pizza has never existed at the scale banks do pay wave. Its hypothetical frictionless, not actual. I'm willing to bet even legalised state coins will be tracked, frictive and taxed.

That is helpful context— it's too bad TFA wasn't a bit more clear on the history.

In any event, you could still make the case that prior to this bitcoin experiment, the people and economy of El Salvador still were benefiting from a human hand on the monetary tiller, it's just it was that of the US Fed rather than their own officials (elected or otherwise).

Totally. The practicalities of BTC or any crypto as currency today are also a big problem. On top of the fundamental whyyyy of it all. If you can easily convert to/from USD to crypto or other desired store of value doesn’t that provide the required buffer against inflation? Why imbue the currency itself with value? I know societies used to do it that way but that’s not really an argument for doing so in the present day on its own…

If BTC was widely used as a currency then it would not be subject to nearly as much speculation. I don't know why this needs to be pointed out.

Is that a fact? Any substance you'd care to offer or just leaving that assertion hanging?

Intuition. If the majority of bitcoin usage was for transactions involving services and goods instead of speculative investment, there's a pretty strong case for a wager that the impact of speculative investment on its price would decrease.

I don't personally believe this will ever happen. BTC has too much legacy cruft. The "digital gold" narrative won out. Day-to-day transactions will happen in a newer, perhaps not invented yet crypto.

I agree but that’s like saying if my grandma had wheels she’d be a wheelbarrow innit? BTC is not set up to ever be a reasonable currency. Agree digital dollars is where we’re headed.

> In the 1920s Russia was experiencing its first famine that could reasonably be attributed to communism

There were no famines in the USSR from 1947–1991, but there was a variety of considerations such as monarchy, civil war, 2 world wars, and anti-communist sanctions from the 1890-1947 period, so if anything, it appears that the evidence would imply communism ended the famines, not caused them.

Can you share the point you think people are missing?

You could and should ask the same question about stock shares - and indeed there’s an entire profession with centuries of history around that – but it’s a fundamental error to ignore magnitude. The stock market is based on real value and that avoids wild swings when nothing has fundamentally changed - even through the mortgage bubble my portfolio made made gains because people still needed to buy food, cars, phones, clothing, etc. and if did even a little research it had been easy to spot companies whose fundamentals didn’t support their valuation. In contrast, a pure fiat currency like bitcoin has value only from social consensus and has far more volatility.

This is only true to the extent that your debts are denominated in Bitcoin. Until people want it for purposes other than speculation what matters is the exchange rate because that’s what everyone uses for their expenses.

Then maybe you should explain the point you're trying to make instead of just hinting at it?

I didn't even specify if I thought you were pro or anti crypto - I just find that most conversations around crypto are dominated by statements of "the other side of this just doesn't understand basic facts like I do" instead of actually stating what the facts are and how they apply to the situation that would help someone learn what's being discussed.

I may very well be the stupid one here, and you may be quite a bit smarter than me, but I don't know because I still don't know the point you're hinting at making.

I remember it well.

It was possible. That’s not the same as saying it is still possible at this debt level with the massive shortfalls in social security and other entitlements.

I do not think it’s possible without also seriously eroding the debt burden through sustained higher inflation. That horse has left the barn.

Agreed. So it sounds like capitalistic economies can cause famines?

Certainly, if we're talking about their effects on people who aren't privileged to participate in the capitalist economy itself. Being colonized is much the same experience regardless of what economic system your colonists' families live under overseas. And I'd expect illiberal capitalist economies to cause famines, too; liberalism is more important than capitalism for preventing famines.

Certainly communism did eventually stop causing famines in the Soviet Union, but the Holodomor personally overseen by Stalin was worse than any Tsarist famine. And we have many other examples of communism causing famine: Mao's Great Leap Forward caused history's worst famine, for example (history's only famine worse than Stalin's Holodomor), but also, for example, the Ethiopian famine many of us remember from the 80s was caused by the Derg (who were technically socialist rather than communist), and one aspect of Pol Pot's democide in Cambodia was a famine, as well.

https://www.hawaii.edu/powerkills/COM.ART.HTM has more details, and https://en.wikipedia.org/wiki/Category:20th-century_famines lists some other examples, along with the odd non-communist famine. But none in liberal capitalist economies.

What playbook is this? Genuine question.