Bitcoin offers an alternative way to purchase goods and services, but most countries do not consider it a legal tender, and the economic impact of becoming a primary payment option is uncertain.
Only two countries have adopted Bitcoin (BTC) as their legal currency. El Salvador became the first country in the world to adopt Bitcoin in September 2021, and the Central African Republic followed suit in 2022.
According to the Naive Bukele Portfolio Tracker website, El Salvador’s cryptocurrency vaults generated $58 million in profits.
The World Bank Group said the country’s economy is showing signs of improvement after 2021, thanks to a number of factors including public investment and tourism.
El Salvador’s economy is expected to grow by 11.2% in 2021 before leveling off to 2.6% in 2022 and 2.7% in 2023. Source: World Bank Group
Lyn Alden, investment researcher and founder of Lyn Alden Investment Strategy, told Cointelegraph that Bitcoin’s adoption as a medium of exchange in other countries would likely have “significant implications,” some of which are difficult to predict.
“I expect most of the impact to be positive and if bitcoin gets to these levels, I expect it to happen over a fairly long period of time,” she said.
“Cross-border trade is likely to improve, particularly in regions such as Africa, which uses more than 40 currencies, and Latin America, which uses more than 30.”
According to Alden, the current debt-based monetary system used in countries like the United States is incompatible with a sound currency like Bitcoin.
She said that for Bitcoin to become a mainstream alternative for purchasing goods and services, it would likely require a major overhaul of the financial system, such as a shift to a more stock-based economy.
relevant: Stablecoin Growth Surges as Crypto Adoption Grows Worldwide
“I think the economy can handle it and it could possibly improve, but the financial system would have to be quite different. The state would likely be less powerful because it would have less of a seigniorage role,” Olden said. In this case, seigniorage is the revenue the government makes by printing money.
“Until then, countries will make all transfers taxable, which will hinder Bitcoin from being used as a common medium of exchange. There are a few notable exceptions, such as El Salvador.”
In August, El Salvador’s President Nayib Bukele said that while Bitcoin adoption in El Salvador had not been as rapid as he had hoped, it was a positive change for the country.
Bitcoin’s mainstream adoption could be mixed
Alice Liu, senior researcher at CoinMarketCap, told Cointelegraph that if mainstream adoption of Bitcoin for purchasing goods and services becomes a reality, it would likely have “compounding economic implications.”
On the positive side, Liu said this could enhance financial inclusion, streamline cross-border transactions and reduce payment processing costs.
relevant: Cryptocurrency mass adoption is just 12-18 months away – Yat Siu
Additionally, some countries may be able to move away from the dollar and take more control over their economic policies.
“However, Bitcoin’s annualized 30-day volatility is still around 50%, making it difficult for companies to manage pricing and financial planning,” Liu said.
“This transition would likely require central banks to implement coordinated and collective regulation of Bitcoin usage, potentially challenging traditional banking systems and monetary policy controls.”
Bitcoin and cryptocurrencies have been hot topics ahead of the US presidential election in November.
Former US President and 2024 Republican presidential candidate Donald Trump has made his support for Bitcoin and cryptocurrencies very clear, and has laid out plans to use Bitcoin as a reserve asset in the United States if he is elected.
source: Pubkey
Liu said using bitcoin as a reserve asset is different from backing it with fiat currency, but given the US federal government’s debt of over $35 trillion and the “difficulty the Federal Reserve has in implementing effective monetary policy,” it “could have appeal as a reset mechanism.”
“Bitcoin’s fixed supply could help curb inflation in the long run by preventing excessive money printing,” Liu said.
“However, when using Bitcoin for everyday transactions, there are issues that can arise, such as volatility, infrastructure issues, speed, costs, wallets, and DeFi UX.”
She believes the “real challenge” to Bitcoin adoption is likely to come from its integration into the global financial system and asset markets.
“Strong regulation is essential to prevent market manipulation, ensure tax compliance and ensure transaction transparency,” Liu said.
In May 2023, the European Council adopted the first comprehensive legal framework for the cryptocurrency industry.
Most countries and jurisdictions have been slow to create a framework for Bitcoin and the broader cryptocurrency market, with some even banning Bitcoin use outright.
US dominance is tied to the dollar, not bitcoin
Caroline Bowler, CEO of Australian cryptocurrency exchange BTC Markets, said countries with unstable civil institutions and governments, weak infrastructure, and weak currencies are more likely to find a safe haven if Bitcoin is adopted as a legal tender.
“This perspective is difficult to understand in developed countries, where many people have forgotten or taken for granted what it took to achieve the monetary stability we enjoy today,” she told Cointelegraph.
“That’s not the case in countries like Argentina or El Salvador, where inflation, civil war and dependence on the United States have long left their mark.”
El Salvador and Argentina are both among the poorest countries in the world.
In May, some reports suggested that Argentina might consider emulating El Salvador’s Bitcoin approach to help its struggling economy, though this has yet to materialize.
relevant: According to Arkham, Bhutan has twice as much Bitcoin as El Salvador.
Bowler said the impact of Bitcoin adoption in countries like the U.S. “will reverberate around the world,” because Bitcoin’s geopolitical dominance is tied to the power of the dollar. Unleashing Bitcoin “could create global instability and destabilize the existing world order.”
There are growing concerns that the U.S. dollar could lose its dominance as the world’s reserve currency and the standard currency for international trade and commodity transactions.
BRICS, an intergovernmental organization of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates, has been promoting trade in goods using currencies other than the U.S. dollar.
The impact on the stablecoin market could also be far-reaching: the five largest stablecoins by market cap are all pegged to the US dollar.
“The reality that the U.S. is adopting Bitcoin suggests a very different world than the one we live in today,” Bowler said.
“Instead, it is far more likely that we will follow China’s lead and explore a digital US dollar via a central bank digital currency.”
A central bank digital currency (CBDC) is a digital form of a country’s legal tender. It is centralized and backed by the country’s central bank.
According to the Human Rights Foundation, which released its CBDC tracker in November 2023, 16 of the 193 governments worldwide have deployed a functioning CBDC to the public. Only 39 have piloted it, and 64 are still in the research phase.
Bitcoin must first and foremost be a store of value.
Steven Rubka, managing director of Bitcoin platform Swan Bitcoin, told Cointelegraph that Bitcoin is “very unlikely” to be adopted as a major purchasing currency until it becomes a common store of value.
“Using bitcoin for large-scale purchases in a context where most people still use the U.S. dollar as a unit of account creates a lot of friction that makes this scenario very unlikely,” he said.
According to Rubka, the biggest benefit Bitcoin offers the modern economy comes “not from having another means of payment,” but from providing a unique form of collateral or store of value.
“Bitcoin adoption and its benefits are very trajectory-dependent, with store-of-value adoption coming first before benefits from everyday currency can be realized,” he said.
relevant: Bitcoin outperformed almost every asset class last year – VanEck
Fisher Yu, co-founder and chief technology officer of Babylon Labs, which developed a self-custodial Bitcoin staking protocol, told Cointelegraph that the mass adoption of Bitcoin as a fiat currency would be a positive overall.
Mr. Yoo said the biggest benefit is true asset ownership, which will make people feel more secure and create more wealth that will drive economic growth.
“If there is a surge in on-chain activity, the tax fees will cover miner costs. This is exactly how Nakamoto wanted Bitcoin to work in the long run,” Yu said.
“Economically, the general public will finally have a mainstream digital asset that they can literally own rather than having it held by a third party like a bank.”