Although El Salvador currently imports 19.23% of the electricity it needs, mining Bitcoin (especially at times when demand for electricity is low) may prove to be an efficient way to harness volcanoes’ geothermal energy 24/7. Will Bitcoin mining using volcanoes prove to be not only an eco-friendly way to make money for El Salvador, but profitable too? No doubt other countries will be watching with interest to see if El Salvador’s embracing of Bitcoin can encourage those who are unbanked and typically excluded from the traditional financial services. If there is a significant uptake by the citizens of El Salvador to use Bitcoin, how long will it be before El Salvador also makes a stablecoin (such as Tether or USDC) legal tender? Will we see El Salvador issue its own digital colón, backed by US$, with deposits either held by the El Salvador government or, to make it potentially more attractive, have the cash held by the IMF or World Bank? Now that would be a coup….

As the below chart shows, according to data from the World Bank the informal economy is significant, not just in El Salvador, but many other parts of the world i.e., there is a considerable amount of cash being used to pay for transactions. The informal economy is estimated to be worth USD 10 trillion, employing about 1.8 billion people globally. As a result, this makes it difficult for governments to balance their books and claim the taxes required to meet the needs of their citizens when there are vast sums of cash being used and no records of what has been paid to whom. Perversely, crypto currencies such as Bitcoin were historically heralded as a way to make payments and by-pass the banks and other financial institutions, yet now we see governments increasingly embrace cryptos and digital assets such as stablecoins and CBDCs.

Employment in the informal economy as a % of total non-agricultural employment

Source: Indexmundi.com

Another possibility is that other countries and renewable energy producers will increasingly come to realise that Bitcoin mining has the ability to help remove some of the risks associated with renewable energy projects. This possibility exists because surplus energy can be diverted to mine Bitcoin, whereby creating a valuable additional source of income. Mike Colyer, chief executive of Foundry, claims: “This could enable proposed renewable energy projects to havce a faster quicker return on eco-friendly investments, according to the head of one of North America's biggest crypto miners”. Citizens from El Salvador, Guatemala and Honduras are all sources of migrates into the USA. Therefore, instead of spending $millions on a wall between the US and Mexico, the Americans could do well to start investing in green renewable projects whereby enabling these countries to be less reliant on importing energy and, instead, turning them into cheap producers of renewable energy. The use of Blockchain technology could easily track the power being produced and the number of Bitcoins being mined. If the income from the mined Bitcoins could be identified as being spent appropriately, as opposed to being siphoned-off to government ‘cronies’, this would offer greater transparency and therefore encourage further capital for more renewable energy projects. Who would have thought that cryptos could potentially have such a positive impact, not only on a country’s power supply, but the cost of this power, global climate change and also be of help in reducing illegal migration?

As we mentioned in last week’s Digital Bytes, how soon will other countries follow El Salvador’s lead and make digital currencies legal tender? The answer is, potentially very quickly if it helps those countries crack down on the informal economy and support them to become more self-sufficient in terms of electricity production. Indeed, according to Euronews.net: “Following the vote in the Salvadoran assembly, politicians in Argentina, Paraguay, Brazil and Panama took to social media to endorse the decision”. 

Expect to see other countries follow suite …..!

Value from your imagination, selling imaginary sculpture. Salvatore Garau

Source: Oddity Central

In the world of digital assets there are two types, real and imaginary - we will explore what differentiates real digital assets compared to imaginary ones. The difference between the two defines how they store value, when they are used in direct exchange, and the differences they have under the law. By understanding fully what these assets are, then the real and imaginary values can be defined, risks segregated, and their inherent uses identified.

Imaginary Digital Assets

Imaginary digital assets can be broadly defined as having no intrinsic, inherent or intuitive value (without 3i value). Generally, the only source of value is extrinsic and only therefore what other people believe the value to be based solely on their personal feelings of the asset’s worth. This opens up the value of the asset to be viewed very differently and widely by a multitude of people (example: ‘beauty is in the eye of the beholder’). The asset’s capability to be used as a storage of value, its perceived appreciation, its tradability / liquidity and the protection of the asset under the law are all very subjective. These traits lead to a trader’s dream of rampant speculation, uncertainty in value, uncertainty in protection of the law, and this ‘tradability’ (volatility) ultimately resulting in an asset becoming unsuitable for use in long term contracts or for commerce. Some examples of these imaginary digital assets are with us now in the form of Bitcoin, Ethereum and Dogecoin. 

Breaking down such imaginary digital assets’ traits into their constituent components helps us identify their value. Firstly, all of these assets in some jurisdictions (such as England and Wales) are protected by law for possession. However, the law cannot enforce ownership since no court can currently compel transfer upon these assets. No central authority or case law yet exists to control ownership. This uncertainty, therefore, creates questions as to whether the assets are truly suitable for institutional investors seeking the benefit and surety of long-term protection of the legal jurisdictions in which they operate.

The value of the above assets has no independent value other than what another person is willing to pay for them. This has led to wild swings in their perceived value. Interestingly, some of these Imaginary Digital Assets do attract considerable daily trading volumes in which billions of dollars can trade hands in just a few days or weeks. The challenge remains of using such Imaginary Digital Assets as a form of payment in a contract, as the value of such assets over the short to medium term is highly unpredictable. Such assets, then, have very limited utility value and, to add to the challenge that most of these assets are not backed by any tangible real-world assets, their value could plausibly go to zero at any time.

Source: Signet Classics

In summary, Imaginary Digital Assets would only appear to be suitable for speculative trading. This is not conducive for long term contracts or even short-term use in daily commerce.

Liquidity and musical chairs

The proverbial fountain of youth that sustains the value of these invisible assets is simple. Liquidity is the true and only heart of their value. As long as the invisible asset can be traded for another asset at any moment then the invisible asset is useful in trading and others will attribute value to it. Invisible assets are akin to musical chairs. As long as the assets are kept moving between people, and the music keeps playing, then no one person believes that he/she is taking even a short-term risk. Once the music (liquidity) stops, only the person holding the ‘wrong’ digital asset loses.

Source: TrustMe™ Property Exchanges

In conclusion, invisible digital assets are only truly given value through their liquidity. Blockchain technology allows them to be fungilised into digital assets that can be traded. Their value is determined by the velocity of their movement and is akin to keeping a hula hoop rolling around your waist. Once it slows down, it hits the ground and stops.