Q9 Markets: Real Money

10th September 2021

Q9 Capital: www.q9capital.com

• Crypto markets pull back this week
• El Salvador first country to legally adopt BTC
• …and seeks to solve issues with costly remittance payments

Bitcoin (and other cryptos) jittered this week following technological glitches that marked the first day of El Salvador adopting BTC as legal tender. The price of Bitcoin on Tuesday plummeted to its lowest in nearly a month, falling from $52,000 to under $43,000 at one point, before closing the week at $46,391. Most high beta alt-coins fell by larger amounts with many seeing double digit declines. The sell-off triggered liquidations of billions of dollars of trading positions due to margin calls and a number of crypto exchanges that serve the US market encountered operational problems as prices fell.

El Salvador took a giant step to become the first country to adopt Bitcoin as legal tender, allowing residents to pay all public and private debts in the cryptocurrency. Goods, services and even taxes can now be paid using the world’s oldest crypto.

A day before the law came into effect, El Salvador purchased its first 200 BTC, with Bukele saying the country’s brokers would be buying a lot more. On Monday, Bukele tweeted that El Salvador had purchased 150 more Bitcoins, bringing its total holdings to 550 BTC.

The law puts BTC on level footing with the US dollar, which has been the country’s national currency since 2001. The move is meant to improve Salvadoran’s access to financial services and reduce the Central American nation’s dependence on the US economic regime. The government’s Chivo wallet (slang for “cool”) may end up being something of a savings account for the two-thirds of Salvadorans that currently lack banking access.

The government is incentivising new users by giving them $30 worth of free Bitcoin to every Salvadoran inside the country who signs up for the Chivo wallet. That’s no small sum in a country where the monthly minimum wage is $365.

El Salvador is betting that being the first to open its doors completely to Bitcoin will help boost its economy. President Bukele said he believes this will encourage investors with cryptocurrency to spend more of it in his country. He even has a plan to have El Salvador’s state-run geothermal utility use energy from the country’s volcanoes to mine Bitcoin. “We must break the paradigms of the past,” President Bukele tweeted. “El Salvador has the right to advance towards the first world.”

Bond traders appeared to disagree. A fresh round of selling this week pushed the yield on long-dated Salvadoran debt issued in dollars close to 11 per cent while shorter maturities were offering up to 14 per cent. Prior to Bukele announcing the crypto move in June, Salvadoran long-dated yields were around 8.5 per cent.

We still live in a greenback world. Although Bitcoin is now legal tender the USD remains the accounting currency. Everything is still priced in USD and people still think in dollars. Most people initially will likely cash Bitcoin into USD, as this is what they are used to, but we could now see a gradual adoption of Bitcoin as the main means of transaction and pricing.

A Pittance for Remittance

In 2020, El Salvador received nearly $6bn in remittances, accounting for about 23% of its GDP. Some 70% of the Salvadoran population receives remittance payments. The average monthly remittance transfer is $195, and for the households that receive them, it makes up 50% of their total income. So the funnelling of cash from abroad back home to El Salvador is critical to survival for most of the country.

Yet wiring cash abroad can be inconvenient, slow, and costly. Around 60% of that cash comes via remittance companies and 38% through banking institutions. Fees vary by company, but typically, the smaller the payment, the higher the percentage that goes to fees.

Western Union charges fees of up to 33% for online transfers, significantly cutting into the amount recipients actually receive. It can also take days to process. Were a payment to be made in BTC from a Chivo wallet instead (which is reserved for Salvadoran nationals living at home or abroad) the transaction would be free. It would also take a matter of minutes. This is a revolutionary leap for the many who rely on remittance to live.

Due to the adoption of BTC as legal tender, President Nayib Bukele estimates that money services providers like Western Union and MoneyGram will lose $400 million a year in commissions for remittances should the population adopt Bitcoin at scale.

Remittances are one area where the status quo in our legacy financial system is terrible, with extraordinarily high fees levelled at populations that can ill afford them. Cross-border payment infrastructure in the world’s poorest nations remains expensive, inefficient and a burden to those who receive them. This is clear use case for BTC and crypto.

Of note is the choice to use BTC in making it legal tender and facilitating the remittances. It will expose the average user to price volatility but gives them and El Salvador some level of freedom from the current fiat system. They could have chosen stablecoins, but this is ultimately a trade-off as it is less volatile but directly backed by (and connected to) fiat.

This will be an extremely interesting experiment in the $25bn economy. It won’t be overnight. 100% of remittances aren’t going to move to the Chivo app tomorrow, and as noted it’s still a dollar world. These things take time, and people naturally worry about trying new things with money. But the current fee levels for remittances are unsustainable and crypto promises to change this — not just in El Salvador, but across the globe.

In the News

• Coinbase said the SEC has threatened to sue over the crypto exchange’s yet-to-be-launched “Lend,” a lending program for “verified borrowers” that offers 4% annualised yields.
• Moody’s Investors Service, one of the world’s largest credit-rating companies, is looking to hire crypto analysts to come to grips with “the potential wide-reaching impact of decentralized finance (DeFi) on existing ecosystem,” according to a recent job posting.
• Singapore’s MAS has finally granted a fintech the mandate to enable crypto and CBDCs in merchant acceptances.
• Multinational banking giant Banco Bilbao Vizcaya Argentaria (BBVA) launched its latest digital investment account, featuring an integrated cryptocurrency wallet.
• Payment services company Mastercard has acquired blockchain analytics firm CipherTrace to bolster its own cyber security tools and to better comply with crypto regulatory guidelines. The surprise acquisition announced Thursday via press release gives Mastercard the ability to track over 900 cryptocurrencies.
• The SEC has extended its consideration of VanEck’s Bitcoin ETF application a final time. The U.S. securities regulator posted an extension notice on Wednesday, saying it intends to take an additional 60 days to review the proposed rule change.
• NFT event ‘The Sevens’ skyrockets Ethereum gas fees by 300%.

Legacy Markets

Oil futures dropped -2.6% and the SPX receded -1% as a slower recovery and fear that the Fed could move sooner than expected on tapering, and concern ignited by jobless claims hitting an 18 month low. 10-year US treasury yields were unchanged and the US dollar index advanced +0.3% while the Gold & Silver index fell -2.6%.

Crypto Markets

• BTC/USD dropped -6% while ETH/USD fell 9.6%. The total market cap of the crypto universe remained north of the $2.1 tln mark and Bitcoin’s dominance fell below 40%
• Among other majors EOS/USD fell -8.5% and SUSHI/USD and UNI/USD took the largest beating among large cap DeFi names, falling -16.2% & -22.3% respectively
• Annualised volatility rose to 92% for BTC and held steady at 103% for ETH this week

Flows

• Two-way flow on client pad slightly better to buy (1.1x buyers vs sellers) during last week
• Net buyers in ETH and LINK with an evenly distributed flow on BTC
• Net sellers in EOS and LTC

Q9 Capital: www.q9capital.com