Bitcoin: The Currency The Developing World Needs
Summary
- Bitcoin is most useful in developing nations.
- El Salvador’s adoption of Bitcoin opens the door for other poor nations to adopt BTC.
- Bitcoin’s TAM ranges from hundreds of billions to trillions of dollars.
- The value of money does not come from the power of government.
Investment Thesis
The debate revolving around Bitcoin (BTC-USD) has been Ameri-centric. Many forget or are unaware of the desperate need for stable money in developing nations. El Salvador’s adoption of Bitcoin as legal tender we have entered the nation adoption phase of Bitcoin. This means Bitcoin is here to stay whether you like it or not.
El Salvador & The FBI Seizure Changes Everything
A common argument by Bitcoin Atheists (people who believe Bitcoin will go to $0) is “my currency is backed by the guns of my government and BTC is backed by nothing.” That has now changed. Bitcoin is now legal tender in the nation of El Salvador and backed by all of El Salvador’s guns which number around 3 tanks and a revolver.
My father was born in the capital city of El Salvador and grew up in extreme poverty. I am acutely aware of the problems the country faces, and I inherited no love for the nation as my father’s attitude toward his homeland has always been “All they gave me was hunger, poverty, and war”.
El Salvador has also received support from the developmental bank known as CABEI to ensure Bitcoin’s use as legal tender is successful. El Salvador is a small nation of 6.8 million people with a GDP of $53.6 billion. I believe its small size will prove beneficial to integrating Bitcoin as well as minimize the impact it has on the price of Bitcoin.
El Salvador’s GDP represents a fraction of Bitcoin’s market cap. This means any disruption in the BTC-USD exchange rate will be small, and it will be easier for El Salvador to integrate BTC into the economy successfully.
Source: Author's calculations showing the size disparity between El Salvador's GDP and BTC's market cap at various BTC prices.
Another argument raised by Bitcoin Atheists is that only black market players use BTC. At face value, this ignores the fact the USD was organized crime’s preferred currency for decades. During the B Word conference, Philip Gradwell, the chief economist at Chainanalysis addressed this.
During his presentation, he illustrated that criminal activity was only 2% of all activity on Bitcoin in 2020. The benefit of Bitcoin’s transparency means law enforcement can easily follow the BTC trail. This was used to take down a large dark net marketplace in 2019. In US dollars, criminal activity amounted to $10 billion for 2020, showing how minuscule criminal activity is on Bitcoin. Most of the criminal activity comes from scams, think of our close friend the Nigerian prince.
More recently the FBI’s seizure of the Bitcoin ransom from the Colonial pipeline ransomware hack shows Bitcoin is as safe or safer than physical dollars. If law enforcement knows where the BTC is kept they can act and seize the BTC similarly to law enforcement operations involving traditional illegal activities.
Bitcoin’s TAM
Ultimately, El Salvador’s adoption of Bitcoin brings to light the 800 lb gorilla both the pro & anti Bitcoin camps have missed, the developing world needs a reliable currency. There are several nations with local currencies backed by government power that fail to provide economic prosperity for their citizens. A few famous examples are Venezuela, Nigeria, and Nepal.
Source: Statista
Nations like Nepal, where Remittances make up a significant part of their GDP benefit from Bitcoin as it removes middlemen like Western Union and significantly reduces the time needed to send and receive money.
Source: World Bank
On the very conservative side of things, BTC becomes the method used to send remittances worldwide. Based on World Bank Estimates the 2020 dollar value of all remittances was ~ $650 billion. If we assume a 1:1 ratio for remittances to BTC market cap that would mean BTC would be overvalued by about 13% and should trade around $34,000 per coin if everyone used BTC to send remittances.
On the bullish side, BTC is valuable to nations that have economic problems. This group is colored red and orange in the graph below.
Source: Heritage Foundation
The economies of the African nations in orange and red are worth a combined $2.1 trillion. Ukraine has a half trillion dollar economy and is a large adopter of Bitcoin. Russia has the 2nd most powerful military in the world and a strong central government, despite both traits, Russia’s currency, the ruble, had a crisis in 2014. These nations lack “sound” money.
How To Value BTC?
The last common argument I want to cover from Bitcoin Atheists is “how do you value it, it doesn’t generate any cash flows”. While Bitcoin does not generate any cash flows, it is hardly the only asset that does not generate cash flows. Gold and other precious metals, lumber, soybeans, and other commodities, along with currencies are the most commonly known assets that do not generate cash flows. These assets attain a value primarily due to supply and demand forces along with other forces unique to the specific asset.
Bitcoin seems unique, we’ve never had a “cryptocurrency” before, whatever that is. Bitcoin’s classification includes the word “currency” which implies it is a medium of exchange to buy and sell goods and services.
This means the value of Bitcoin comes from its usage. The first nation has adopted Bitcoin and other nations already have many using it. This means the network will expand dramatically and with it the value of Bitcoin.
Source: Statista Data From March 2021
The data here agrees that poor nations, shown in red and orange in the earlier graph are more likely to use Bitcoin. Nigerians are well known for using Bitcoin as a medium of exchange as opposed to Americans who buy it as an investment.
In the Philippines, the central bank has allowed crypto exchanges to operate as transfer companies similar to Western Union. This shows the conservative thesis of Bitcoin’s usage for remittances is already occurring.
How Does Money Get Its Value?
The dollar’s value comes from society’s acceptance of the currency, not from the power of government. This comes from Chief Economist at Google, Hal Varian, who wrote this in 2004 before cryptos existed. He cited the example of the “Swiss” Iraqi Dinar which had no government backing vs “Saddam” Iraqi Dinars which had government backing but became increasingly worthless as the government exercised bad monetary policy.
Ludwig Von Mises provides a different but similar explanation for how money gets its value. Mises looked at the history of money, which included gold, shells, and feathers as mediums of exchange. He concluded that money does not begin with a government mandate but as a commodity. As time progresses, this commodity becomes an acceptable medium of exchange because of social convention.
Bitcoin at the present is transitioning from a commodity to a medium of exchange. In highly developed economies where Bitcoin first started it was and largely still is treated as a commodity. Americans look to Bitcoin as an investment opportunity. They believe it will increase or decrease in value over time, similar to commodity traders in oil.
Oil is a known commodity and has seen its price increase this year. Companies like Chevron are in the business of producing and selling the commodity so their business is directly tied to the price of oil. Bitcoin Miners like Marathon (MARA) are akin to oil companies like Chevron (CVX) and like Chevron are correlated to their commodity which is Bitcoin.
Source: Seeking Alpha
Risks & The B Word Conference
One risk most investors including myself think of is the possibility of another crypto overthrowing Bitcoin. As an example, the Federal Reserve is looking into creating its own cryptocurrency. What are the odds the “crypto dollar” comes out and makes BTC obsolete? This is a legitimate question and during the B word conference Seeking Alpha’s rock star contributor Lyn Alden Schwartzer spoke on this very topic.
In her own words, BTC should be viewed as a protocol. Technological protocols have long lifespans. TCP/IP is an internet protocol created in the 70s. It became the backbone of the internet in the 80s. TCI/IP is still the backbone of the internet today despite superior protocols such as IPv6.
The network effects of Bitcoin are larger than other cryptos. If the U.S. government came out with a crypto, they would struggle to achieve greater network effects than BTC. I also believe the United States government is at a low point in terms of its influence over people. Look no further than the vaccine. Asking people to take 2 shots is an easier request than having people use new money the government invented. Americans seem to have split around 60/40 in favor of the vaccine so the “crypto dollar” will have even less acceptance.
A more powerful central government that also follows sound monetary policy like China could enforce its own crypto within the nation but given its tight control over its fiat currency, it seems unlikely China would allow their cryptocurrency to float freely.
Conclusion
Bitcoin has taken root in poorer developing nations where it is most needed. The adoption of Bitcoin in OECD nations is still up for debate along with whether BTC becomes a global reserve currency. I hope I made a strong case for why Bitcoin is here to stay and why poorer nations benefit from BTC.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BTC-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I own shares of MSTR an indirect way to own Bitcoin. I do not own Bitcoin directly.
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