Driven by El Salvador, a new narrative for global bitcoin adoption is emerging.

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On this edition of “The Breakdown’s Weekly Recap,” NLW looks at:

  • Why the El Salvador news didn’t (immediately) impact bitcoin’s price
  • How narratives set the tone for new entrants to the bitcoin market
  • How the digital gold/inflation narrative relates to the economic empowerment narrative
  • The bitcoin game theory for small nations to invest in bitcoin
  • How this could impact ESG critiques

See also: Latin America’s Reaction to El Salvador Bitcoin Adoption News; Texas Authorizes State-Chartered Banks to Custody Crypto

Image credit: bakgwei1/Flickr, modified by CoinDesk


What's going on guys, it is Saturday, June 12, and that means it's time for the Weekly Recap. This week, I want to talk about the idea of bitcoin as economic empowerment. And what I see as a new narrative emerging that could bring in the next set of bitcoin users. 

But to set the stage for that I actually want to go back to Tuesday night. Thhe El Salvador bitcoin Bill had been released in full and the assembly was about to debate it. I was inspired to do a thread on Twitter answering a question that I had seen a number of different people ask, all of which amounted to, how could this possibly not cause the price to go up? 

I have a theory about this: that individual events don't actually impact bitcoins price. And a lot of the issues that I get into I think are salient for this conversation today. So I'm going to read in some places paraphrase that thread. 

On this momentous night in bitcoin history, I've seen a number of people ask, how could this possibly not cause the price to go up? My theory, individual events don't impact bitcoin's price, at least not really, and not alone. Bitcoin markets are driven by big structural narratives that create the raison d'être for new entrants to participate. Obviously, we've been in one of those big structural narratives since March 2020. This is the "Money Printer Go Brr," means inevitable inflation means institutions get in here. 

Within the context of those meta narratives. Individual events that validate and amplify the narrative can impact price, both by drawing new people in on the strength of the evidence for the narrative, as well as by arming bulls and traders who are inclined to go long. The end of Q4 of last year and the beginning of Q1 this year was all about these types of events culminating, I think, with Tesla's $1.5 billion bitcoin buy. That really seemed to cement the idea that this whole bitcoin Treasury thing wasn't just for the Michael Saylors of the world. But then something happened and we started to head sideways and down. Was it the endless barrage of FUD around Tether, around China, around the environment, around Elon, around China? Again, I don't really think so. 

To the extent individual events did start downward action, they weren't really the force that shaped how far the fall took us. That, of course, was leverage. I've explained that on previous shows. But even beyond leverage, I think that something bigger was happening, the "Money Printer Go Brr" meme, the meta narrative that set the context for the last year plus, has been losing steam on a macro scale. Because remember, and this is really important, the "Money Printer Go Brr" was not just a bitcoin meme, it was a meme that explained and justified exorbitant valuations across the stock market, across markets in general, but especially in tech stocks and risk on bets. The vaccine and reopening has changed everything. 

More specifically, it has changed the market's belief in the Fed's ability to keep monetary policy as it has been. For the last few months, every time Jerome Powell has said that they aren't even thinking about thinking about raising rates, markets have basically said, "we don't believe you." So the market started to reconsider some prices, particularly around the riskiest things in tech. Instead of "Money Printer Go Brr" stocks on the go up market, we started to be enough "who knows what happens next" market. 

This doesn't tend to lend itself to piling into risk assets and novel new monetary systems. And to the extent the macro folks did have conviction, they knew what was coming. Their bet was inflation that forced the Feds hand to back off, which would mean rising interest rates and lower valuations for stocks, and consequently, bitcoin. Now, of course, there are plenty of macro folks who have bought into the narrative of bitcoin as an inflation hedge and have continued to be bullish. 

But on a macro scale, that take on bitcoin one, competes with other ideas of it like a risk on asset; and two, is a long-duration view. In other words, I imagine that there are a hell of a lot of people who have long term conviction that the programatically hard cap supply asset is going to be a great fiat inflation counterweight over time, but will still trade like a risk on asset in the short term. So what you've got is a setup where there's a lot of macro context for CFOs and institutions to take a more wait-and-see approach. And certainly the endless chain of FUD doesn't help here. That means no momentum and narrative supporting news for the traders and bulls to make their levered bets that raise the price and offer that confirmation bias of the institutional narrative. 

Instead, we've had just a slow to not-so-slow drip of FUD without counter weighing institutional entrance event announcements, set in a larger liminal macro moment where everyone feels like we're in an in-between. And so we tread water, waiting for either A, the institutional narrative to reassert itself, perhaps with some new dimension; or B, a new bull market meta-narrative to emerge to take its place that doesn't rely on the same things. 

So, getting back to El Salvador, it's not impossible that if this truly does start a cascade of similar events, that it forms the seat of B, that new meta narrative. But that's the thing that's going to take time to play out. Frankly, I don't care about El Salvador's impact on price. I care about its significance in the history of bitcoin, on the country of El Salvador, and in the nature of how economic power is apportioned globally. As you can see, while nominally this was about a price question for me, it was really more about setting the stage for what comes next in bitcoin. 

I posted this at about 11:45 on Tuesday night, and of course, we all know what happened next. About an hour after that tweet, I woke in a clamor because every appliance in my house was beeping at me after the power went out suddenly and then came right back on, and particularly because the SNOO, which if any parents out there have a SNOO know how essential that thing is, had turned off and the three month old was stirring. I got the SNOO back on and flush with relief at having avoided a crying baby.

I did a victory lap on Twitter, and what should appear but Nick Carter telling us that the president of El Salvador was in his spaces. In about an hour on that spaces, President Bukele answered question after question. He said that the move wasn't a first step in de-dollarization, that adopting bitcoin was a similar move to dollarization in the first place: a way to tap into the power of a larger global currency. He discussed bitcoin mining for the first time, riffing after an Alex Gladstein question about the possibility of harnessing geothermal energy from volcanoes to mine bitcoin. By the next morning, he had initiated a project to do exactly that. 

But to me, the most telling parts of the conversation were about the motivation. First, President Bukele repeated something that he had said in the original announcement video from Bitcoin 2021, that kids used to dream bigger, that they thought the future inherently and naturally meant promise, but that now kids have had their visions for the future radically cut down. 

He believed that bitcoin could be a part of changing that, of reminding them that the future was in their hands. And even more important than that idea, though, beautiful as it might be, was how this specific example of Bitcoin Beach demonstrated that the empowerment and agency that bitcoin offered was not just for people who could afford a lot of it. The conversation went on and it culminated in an amazing moment of hearing the final votes in the applause from the Assembly Building live. By the next morning, something started to become clear. That new narrative that new raison d'etre, the new thing that would propel people through the door of bitcoin had arrived. Bitcoin was economic empowerment.

Okay, I actually want to pause here and get a little clearer about some terms. When I say things like “Bitcoin was looking for a new narrative,” I don't mean that it was looking to justify its existence in a new way. And I don't mean that it was shedding the old ideas that had made it relevant to different groups. Instead, what I'm acknowledging is that for any asset, but more importantly, for any movement, there are waves of adoption, each wave tends to have a slightly different hook that appeals to a slightly different audience. It's not that these hooks are mutually exclusive from one another. It's that they tell a part of the story in a way that resonates with the real experience or perspective of the new group that's being recruited in. 

Let's go back to the "Money Printer Go Brr" meme and the digital gold inflation hedge that struck last year. The real audience for those was these institutions who had one eye on bitcoin, but who had never before felt compunction to fully move in. The Great Monetary Inflation thesis articulated by Paul Tudor Jones and reinforced by Druckenmiller's inflation warnings, by Michael Saylor's melting ice cube metaphor, it was all a message for institutional investors. And they came, they're still coming, that concern hasn't gone away. But that particular group has to balance other considerations and they are ruled by the macroeconomic environment. 

As I discussed in that thread, I believe macro is in a liminal in-between moment. Yes, there are concerns about inflation, it hit 5% this week, but at the same time, while many of these investors who bought into bitcoin's long term structural inflation hedging, they also recognize that in the short term, it trades like a risk asset. That is a benefit: it's gold with the upside, it addresses not only inflation, but a world with no yield. However, if monetary policy takes a Big Rip in the other direction, with rates rising, an outcome many see as inevitable because of rising inflation, then things that trade like risk assets and are associated with tech and high valuations are going to be the things that lose valuation fastest. The point isn't that the path is predestined, just that it's one of a lot of competing forces with no market consensus on what happens next. 

Institutions way more than relegated individuals are sheep when it comes to investing. They're not the type that are going to jump in when there's so much ambiguity. So right now at least, the "Money Printer Go Brr" inflation narrative has run up against some macro limits and is driving new institutions in. I do believe there'll be back but only after more clarity on the market we're resolving into. 

The idea of bitcoin as a force for economic empowerment in smaller nations, who already have less or no control over monetary policy, brings an entirely new set of actors into the bitcoin fold. And just to demonstrate that narratives can be different but contiguous, let's discuss how the money printer inflation narrative and the economic empowerment of small nations narrative relate to one another. 12 countries and territories outside the US use the dollar as their official medium of exchange: El Salvador you already know, but there's also Ecuador, Zimbabwe, Guam, Virgin Islands, Timor, American Samoa, Micronesia, etc. What's more, and more than 65 countries pegged their currencies to the US dollar. 

All of these countries, effectively then, voluntarily subject themselves to US monetary policy. If your currency is the USD wherever you are, then inflation makes your savings worth less. In the US, at least some people in the population can escape this by putting their savings and wealth into assets that also inflate, like real estate and stocks. But for the bottom part of the socioeconomic ladder here who aren't participants in formal stock markets or who don't own real estate, and certainly, for the poor in countries like El Salvador, $1 worth less than a year than it is today is a meaningful concern. Remember, these populations are hyper-cognizant of the deleterious impacts of inflation. It's often why they dollarized in the first place. In this view, then adopting bitcoin side long the dollar, not as a replacement necessarily, but as a hedge that has a different set of inviolable rules and a different long term trajectory gives more people more choice and agency and how they store the wealth they have, however little of it that may be. 

Of course, as we see in El Salvador, the inflation hedge wasn't the strict driving motivation for people to adopt bitcoin in a place like Bitcoin Beach. In my conversation with Mike Peterson from the project yesterday, he made it clear that the first value proposition that got people excited was the convenience of a natively digital mobile ready asset. The fact that they onboarded a whole community at the same time, meant that they were able to overcome the hurdle of network effects and more quickly allow people to get the benefits. For those who started using bitcoin for remittances, they also quickly saw the huge benefits in lower fees and no intermediaries. Traditionally, remittance companies take fees on both sides, and it often involves going to a physical location to collect which can be hours away. This has time costs and security risks. Bitcoin obliterates that. 

Finally, in Bitcoin Beach, there was a shift in mindset where people started thinking about their savings in a different way, they started to have a sense of investing in their own future. The point being here that it's not like they sat down and had a meeting where they talked about their concerns about Jay Powell's policies, but that the deeper they got into bitcoin, the more that concerns and ideas about future opportunities of where to keep their savings became part of their calculus. Still, one of the things that makes this emergent economic empowerment narrative potentially powerful is that it functions at a bottoms-up level as well as a government level. 

In other words, it has the potential to inspire both more Bitcoin Beaches, as well as more President Bukeles. So what's the game theory for leaders here? There are many pieces of it. First, don't underestimate the popularity of cutting out the fees of middlemen for something like remittances when remittances are 10 to 20% of GDP. Second, bitcoin and crypto are a massive, fast growth entrepreneurial sector that, more than any other industry, even other tech industries is totally unencumbered by the need to be in any one place. The opportunities to attract talent, a new tax base, a new source of money flowing through local economies is incredibly appealing. 

Third, in a world where there is the old standard of US economic affiliation versus the new patronage of the CCP in their Belt and Road, there is much to recommend having a non-aligned hedge, integrating bitcoin deeply into one's economic system potentially makes it less vulnerable to the vagaries of either one of those larger global actors. Fourth, there's the game theory of decreasing supply and increasing demand. For countries who are economically fragile, there is some asymmetric upside in holding bitcoin as a reserve. It's crazy to me that there hasn't been a public announcement about this yet. Which gets me to the fifth part of game theory, the ability to trigger a wave of follow ons increasing prestige and influence but also increasing the value of holdings. We've already seen how fast other politicians in Central and South America strapped on the laser eyes and started working on proposals similar to El Salvador's. 

What's the countervailing force then? Of course, the scorn and ire of the large economic powers. Should the US or China decide to take issue with bitcoin adoption, especially if that issue is more than just rhetorical, but comes with threats of withholding necessary aid or development funding? It could put a real stop to this. If, however, countries can keep those relationships positive while also starting to invest in this alternate money infrastructure, it could be a powerful hedge. It seems to me like many countries are going to try and thread that exact needle. 

So as we wrap up, and we went long for weekly recap, economic empowerment is the thing that got me into the space. When I started thinking about bitcoin not just as a payments technology but as a way for people to opt out of coercive or problematic local monetary regimes that had never really been a possibility in the entirety of human history. And all of a sudden it was, that's why the ESG critique is so frustrating. It's not just the ESG critics are ignoring the whole SNG parts of this: social mobility through independent financial systems, a totally new pressure that makes governments perform better because they have less power to be coercive. It's also the premise of environmental critics that bitcoin isn't worth the energy, regardless of whether it's renewable or not. I believe it is. And I hope the economic empowerment aspect of bitcoin being more front and center helps more people see that. 

Whatever the case, one of the best things is that this is now ceasing to be theoretical. We get to watch exactly how it plays out. Rather than just saying economic empowerment is the new narrative. We get to watch how bitcoin flourishes in places that are making the bet. And that's a pretty remarkable thing. I hope you guys are having a great weekend. Until tomorrow, be safe and take care of each other. Peace!