Back from El Salvador, We are Very Bullish Bitcoin in 2025
Author: Chris Wood
The price of Bitcoin has consolidated of late after the 62% price surge triggered by Donald Trump’s election and the resulting expectation of a more crypto friendly approach by US regulators.
Meanwhile, this writer had an interesting interlude recently.
That was to spend a couple of days in El Salvador for the first time ever to attend a Bitcoin conference, also for the first time ever, while also meeting with the El Salvador President, the 43-year-old Nayib Bukele who was re-elected last February for a second five-year term in an 84.65% landslide.
El Salvador is in many respects a “start-up” nation.
Bukele’s landslide victory is due primarily to him having dealt with a chronic problem of gang violence by locking up in 2022 more than 76,000 gang members or 1% of the population in a specially constructed prison (see AP News article: “The president jailed 1% of El Salvador’s population”, 9 February 2024).
This writer can confirm that the country seems extremely safe and ordinary people seem completely unbothered about the suspension of habeas corpus, while gang members who are not incarcerated are desperately trying to remove tattoos which are the sign of gang membership.
Meanwhile small businesses are no longer having to pay the 20% of revenue which was the standard demand for “protection”.
This should be a huge boost for an economy with a GDP of US$34bn in 2023.
But the main reason to visit El Salvador was because El Salvador made history by becoming the first country to make Bitcoin legal tender on 7 September 2021, 64 days before Bitcoin’s previous post-halving peak price of US$68,992 in November 2021.
Importantly, Bukele’s strategy has also been to accumulate Bitcoin on the country’s balance sheet.
The president announced in November 2022 that the country would buy one Bitcoin every day.
El Salvador now has 6,026 Bitcoins on its balance sheet worth US$568m.
So far this has proved a massive positive for El Salvador’s US dollar bonds as its credit rating has improved and, much more importantly, its dollar borrowing costs have fallen.
Moody’s upgraded El Salvador’s sovereign credit rating by two notches from Caa3 to Caa1 last May and by another notch to B3 in November.
Fitch also upgraded El Salvador’s sovereign credit rating by one notch from CCC+ to B- last week.
Meanwhile, the yield on the El Salvador US dollar bond maturing 2052 has declined from a peak of 36.3% in July 2022 to 9.39%.
The visit to El Salvador in November coincided with the presence of an IMF team.
Unfortunately, the country has a legacy debt of US$28.8bn or 84.7% of 2023 GDP of US$34bn.
The IMF has been critical of a El Salvador proposal to issue a Bitcoin bond urging the El Salvador government in October to narrow “the scope of the Bitcoin law” as well as to limit “the public sector exposure to Bitcoin”.
The plan is to issue US$1bn of Bitcoin bonds, known as “volcano bonds”, to finance the construction of a “Bitcoin City” in the south-eastern region of the country.
This Bitcoin-backed state bond received regulatory approval from the National Digital Assets Commission in December 2023.
Still the clear message from the way El Salvador bonds are trading is that the market views the Bitcoin connection as a positive not a negative.
Meanwhile, the IMF’s scepticism as regards El Salvador’s Bitcoin policy will become politically incorrect in Washington given the president-elect Trump’s aggressively pro Bitcoin and pro crypto stance.
The way the political right has championed crypto in the presidential election year is clear from the fact that Bukele was a speaker at the Conservative Political Action Conference (CPAC) last February in Maryland, though from a conservative point of view the law and order stance is probably a bigger draw than Bitcoin in terms of explaining Bukele’s star appeal.
The Outlook for Bitcoin Couldn't be Better in 2025
Meanwhile, moving on from El Salvador, it is hard to exaggerate how bullish is the current set up for crypto given the combination of the usual post-halving rally in the asset class, previously discussed here (see Gold and Bitcoin Tactical Update, 4 September 2024), and the arrival of a second Trump administration.
Trump’s plan is to put the 198,109 Bitcoins currently held by the federal government into a strategic national Bitcoin stockpile.
This represents just 1% of all Bitcoins in circulation and is currently valued at US$18.7bn. But as important, he has signaled that he wants a change of regulatory policy towards crypto at the Securities and Exchange Commission (SEC).
This is now surely coming.
Meanwhile, it is also worth noting that Howard Lutnick, the co-chair of Trump’s transition team as well as Trump’s pick to be Commerce Secretary, is also a champion of Bitcoin and crypto.
It is also the case that Lutnick is chief executive officer of Wall Street firm Cantor Fitzgerald which is one of the major custodians of the crypto world’s major stablecoin Tether in terms of where the latter deposits its dollars.
As an aside, it is further worth noting that Tether has, by all accounts, been a massive beneficiary of the Fed tightening cycle since it earns interest on its dollars while it pays out no interest to its customers (see CoinDesk article “Stablecoins Are Beneficial to US Economy, Tether’s Custodian Says”, 11 April 2024).
Tether reportedly earned a record US$7.7bn of profits in the first three quarters of 2024.
Historical Precedent says a 300% Rally is Likely This Bitcoin Cycle
The base case of this writer is that Bitcoin will rally three times in this post-halving cycle since the trend has been for the capital gains on holding Bitcoin to more than halve following each halving cycle.
After the first halving on 28 November 2012, Bitcoin rose about 90 times in the following 12 months, while the second halving on 9 July 2016 resulted in a 30-fold gain within 18 months.
As for the third halving on 11 May 2020, Bitcoin rose 7.5-fold in the following 11 months to a high in April 2021 and was up eight-fold in 18 months to a then all-time-high of US$68,992 in November 2021.
While for the latest halving on 19 April, Bitcoin has since risen by 47% to US$94,083.
All of the above will be familiar to the crypto cognoscenti.
But the main point is that it is becoming risky to ignore crypto for the many institutional investors who have still not focused on it.
This is because the Trump administration’s seeming championing of it means it is about to move into the mainstream.
Bitcoin is a Gold Alternative, Not a Substitute
Still this writer does not view Bitcoin as a substitute for gold but simply as a digital alternative.
This is worth mentioning again since Republican Senator Cynthia Lummis, who has proposed establishing a “Strategic Bitcoin Reserve” by implementing a Bitcoin purchase program to acquire a total stake of 1m Bitcoins over five years, or approximately 5% of the total Bitcoin supply, said last quarter that the federal government should sell its gold reserves and use the proceeds to buy Bitcoin.
This writer does not agree with this.
The best approach is to have both a physical and a digital hedge against the policies of currency debasement which have been the primary feature of G7 countries’ monetary policy in the post-2008 quanto easing era.
While it is true that Bitcoin has outperformed gold dramatically since its first appearance on the scene in 2009 or when transaction pricing data became available in mid-2010, it remains the case that gold has history on its side while it has also served as a hedge against inflation as shown by its rise against the major fiat currencies in recent years.
The gold price has risen by 73%, 54%, 50% and 40% against the yen, the renminbi, the euro and the Swiss franc respectively since the start of 2023.
