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Why El Salvador’s Bitcoin Experiment May End in Disaster
To understand bitcoin’s risk as a currency, let’s look at how it compares against 22 other global currencies
The small Central American country of El Salvador (population 6.5 million) recently became the first country to make bitcoin legal tender. The country now holds 550 bitcoins, currently worth around $25 million. Is this small country — and the world for that matter — ready for bitcoin as an actual medium of exchange? How volatile is bitcoin compared with other currency fluctuations relative to the U.S. dollar? As a follow-up to my earlier blog that described the risk and return of bitcoin, I compare the volatility of bitcoin price changes with that of 22 currencies based on daily data back to 1999, when the Euro was created. Through the lens of five charts, I tell the story of currency fluctuations and how the dollar has performed in the past 22 years, and I compare currency reserves as well — data and charts are available in a downloadable spreadsheet. Bitcoin is about four times riskier than the Brazilian real and about as risky as the Venezuelan bolivar, a country experiencing hyperinflation. El Salvador is embarking on a risky course that may not end well.
Chart 1: Currency Fluctuations
I gathered data for every currency exchange rate relative to the U.S. dollar that was available through the Federal Reserve Economic Data (FRED) website since January 1999, coinciding with the introduction of the Euro. This chart shows the fluctuation in the exchange rates of 21 countries’ currencies in the past 22 years. Ending values above 1.0 indicate that the foreign currency has depreciated relative to the U.S. dollar. For example, relative to January 1999 exchange rates, in September 2021, it takes 4.3 times more Brazilian reals to buy one U.S. dollar. Any ending value above 1.0 indicates that that currency has depreciated against the U.S. dollar. Whether that is good, bad, or neutral from the perspective of a U.S. investor depends. If they invested in, say, Brazilian stocks unhedged, then they would see currency losses…
