The Daily Dive #001: Let The Game Theory Commence

The Shot Heard Across Central & South America

“1. Great weather, world class surfing beaches, beach front properties for sale.

2. One of the few countries in the world with no property tax.

3. No capital gains tax for Bitcoin, since it will be a legal currency.

4. Immediate permanent residence for crypto entrepreneurs.” - Nayib Bukele

The game theoretic adoption of bitcoin by nation states has started.

On the last day of the Bitcoin 2021 conference, collaborating with Jack Mallers, the CEO of Strike, the President of El Salvador, Nayib Bukele announced that he was proposing a bill to make bitcoin legal tender in El Salvador.

While Western skeptics in their ivory towers will tell you that this is insignificant, pointing to the $27.7 billion GDP of El Salvador, it is anything but. This move has absolutely MASSIVE implications.

First off, why does the move make sense for El Salvador? Most importantly is that El Salvador currently uses the U.S. Dollar as a native currency in the country, which is both positive and negative for the nation, for various different reasons.

The country began using the dollar after the Law of Monetary Integration was passed, officially allowing the USD to circulate and be used as legal tender in 2001, and since then the country has been dollarized.

While using the dollar offers its advantages, such as serving as a relatively stable medium of exchange and unit account, the major downfall of using a foreign currency as a nation state is that you cannot print your own currency, while monetary sovereigns can.

This essentially means that El Salvador was at the mercy of the monetary expansion of the dollar without getting any of the seigniorage benefit enjoyed by issuers of currency. Not ideal.

For some context, the U.S. Treasury has issued $4.5 trillion worth of debt since February of 2020, and the Federal Reserve has monetized (read: printed) 56% of said issuance, representing 76% of the cumulative fiscal deficit.

The inflationary effects of the eye popping monetary expansion that has taken place doesn’t fall just on the shoulders of U.S. citizens, but of every USD holder around the world, including the population of El Salvador.

While the decision by Bukele to propose a bill to adopt bitcoin as legal tender wasn’t just because of the dollarization of the country, it was most definitely a leading factor.

Another important role in the decision is El Salvador’s reliance on remittance.

Ease of remittance with bitcoin and more specifically the lightning network plays a large role as well, with approximately 24% of the country’s GDP being from inbound remittances, which until Strike and the lightning network was subject to ridiculous fees and inefficiencies.

TLDR: Bitcoin fixes this.

Game Theory 101

Following Bukele’s action and the attention that it garnered, politicians from Ecuador, Mexico, Panama, Argentina, Paraguay, Brazil, El Salvador, and Colombia added the notorious laser eyes to their twitter profiles, in de facto support for bitcoin.

Does your country want to attract vast amounts of capital from across the globe?

Does your country want to attract the brightest young minds and most entrepreneur businesses?

If so, then you must eventually bend the knee to the inevitability of sound money in the digital age. Every nation will be forced to adopt bitcoin, and the longer a country waits, the more it will be punished.

Welcome to game theory, where you are not insulated from the decisions made by other players in the game, but rather directly affected by them.

Central and South American countries will simply watch an immense amount of financial and intellectual capital flow into the country without acting themselves.

It seems that El Salvador is the first domino, and while relatively insignificant, don’t think for one second that additional nations aren’t watching intently. Developing nations logically seem to be the first movers, but eventually every country will follow.

You cannot insulate yourself from others holding money that is harder than yours. It will take time, and it will be a battle, but make no mistake.

It’s happening.

Let Freedom Ring. Hyperbitcoinization is Imminent. We’re living through it.

More insights and analysis on the sluggish price action tomorrow, Cheers