El Salvador's crypto experiment ends in failure

I'm pretty open to the idea that their crypto experiment ended in failure because bitcoin must be a truly terrible reserve asset, but being assassinated by the IMF isn't really evidence of that. El Salvador doesn't seem to have independently changed their minds about the merits of their policy.

I might draw a very vague parallel with a gentleman who can't repay a mortgage and through various machinations the bank forces him to sell his beanie baby collection. The beanie baby collection might have been a success or a failure for him personally. Probably was a failure. But that isn't really what we're learning in this story.

And pointing out that they lose money on the bitcoin reserve is a bit of a non-sequiter. They all do that. Gold has storage costs, the USD inflates like crazy and sometimes the US sanctions you. The analysis has to be a bit deeper than just noting that money was lost, it is a tricky question of relative options.

The article makes a case on the merits for the failure of the project, in terms of its uptake, the direct value generated, and the costs of its rollout.

Those arguments could be levelled against any currency. Typically uptake is only 100% because the government has a "thou shalt accept this" policy. If it was practically voluntary then a bunch of businesses would operate on a barter system or private scrip. Even with the insistence of the tax office it takes regular crackdowns to stop alternatives springing up.

And it is even easy to argue that normal currency is value destructive, all the flows of money into crypto are implicit "I'd rather be burning energy than using USD" announcements.

No, this was very specific to crypto:

> The IMF was wary of lending to El Salvador while bitcoin was legal tender. Its volatile price posed a risk to financial and fiscal stability.

Government currencies don't have the price volatility of Bitcoin. You simply can't reliably manage an economy with that kind of volatility.

Why not? Government currencies are volatile too, people just tend to ignore that or blame price changes on greedy businesses.

Prices change continuously. You can never be sure what the price of anything is going to be next week.

> Government currencies are volatile too

Nowhere near to the same extent.

Just over the past year BTC has gone between $54K and $104K.

Currencies are subject to inflation, but in a well managed economy that is generally a single digit yearly percentage and fluctuates slowly, and the currency changes value in a single direction only.

Normal government currencies don't gain or lose 10% of their value over a few days in purchasing power, as regularly happens with Bitcoin.

The distinction between government and crypto currencies is wrong one to make.

I fail to see how gold-pegged, gasselized (demurraged at constant rate until they vanish down to UBI limit, except from government/CB wallets, with other assets also demurraged when sold/bought via cap gains style taxes), constant supply cryptocurrency would not be in fact better than the dollar and the euro and the yen, and it would be both inflation & deflation resistant.

> gold-pegged

Between Sep 2012 and Jul 2013 gold went from $1780 to $1210 (-32%).

Between Feb 2024 and today gold went from $2040 to $2950 (+45%).

That's a crazy amount of volatility you would never want as a currency. Can you imagine signing multi-year contracts denominated in that? Even monthly contracts! It would be madness.

Did it ever fluctuate like that when it was pegged?

How could it, it was pegged? That’s begging the question.

But you can see that inflation (and worse deflation) had volatility when the us was on the gold standard: https://www.investopedia.com/inflation-rate-by-year-7253832

If you dig into the 1800s the volatility was even worse.

It's a bidirectional relationship. The value of gold actually remained stable when the U.S. dollar was pegged to it. I view that as evidence for pegging stabilizing the value of the commodity it is pegged to. However is an simplification, because share of the dollar relative to other currencies policies has changed. I also only believe the system I depicted would work, if the exports of the commodity were restricted so that no one or only the central bank could sell it abroad.

Saying something is “pegged” is saying that the price is fixed. There doesn’t exist any volatility between pegged instruments because that’s what a peg means.

So you have to compare them to other things, which is what inflation (or deflation) measures. And gold pegged usd has volatility to other items in the economy greater than modern fiat usd.