Why Bitcoin Works for Latin America
With El Salvador’s recent transition of making bitcoin legal tender, people are starting to take cryptocurrency more seriously. An important consideration regarding President Nayib Bukele’s incorporation of Bitcoin into the country is the ability to address many of the issues unique to Latin American economies and markets, namely the issue of trust. While bitcoin’s usefulness as a technology and an investment vehicle is clear to market participants in the United States and other English-speaking economies, bitcoin has particular relevance to people in Latin America. This is due to many social, cultural and historical precedents, which are not necessarily shared or fully understood by people outside the region.
Understanding these topics and their implications for investment strategies is crucial for anyone looking for an asymmetric advantage among English-speaking investors. It’s simply because these elements aren’t fully understood or written about outside of Latin America (or even in languages other than Spanish, period). Indeed, many of these concepts are taken for granted by those who live there, which does not even make them worthy of attention. This is inside information that the average American misses, information that makes Bitcoin a smart move for anyone betting on the future of Latin America.
Without a doubt, Latin America is one of the last frontiers of serious economic development left in the world, and it is attracting money fast. Atlantico announced a “$18.6 billion investment in the region through the end of 2021, a staggering 250% increase in investment from the $5.3 billion deployed in 2020.” Those seeking outsized investment opportunities flocked to developing economies and stock markets for decades, but the ground is now more ready than ever for advanced growth in this part of the world.
Bitcoin offers unique advantages over foreign stock portfolios for several reasons. One of the benefits is that bitcoin is a solid, non-confiscable currency that acts more like a bearer asset than a market fund or stock portfolio. Indeed, bitcoin is currently overtaking the term “cryptocurrency” with its ever-increasing functionality, incorporating benefits that resemble stocks, currencies, and bearer assets like gold all at the same time. It is quickly becoming its own unique asset class. There is no single centralized authority that can control, stop, confiscate, or inflate bitcoin. Instead, the system is distributed among millions of participants across the Earth, making it “trustless”.
A “trustless” system is the perfect solution for companies with low trust
A great resource on societal differences in trust is Erin Meyer’s “The Culture Map” (must-read for anyone doing cross-cultural business). As an international business consultant, Meyer points out the important differences between Latin American and American companies that go far beyond corporate culture; they go straight to the heart of interpersonal relationships.
Meyer describes how trust between business associates differs significantly from culture to culture. She highlights the difference between “cognitive trust” and “affective trust:”
“Cognitive trust is based on the confidence you feel in another person’s accomplishments, skills, and reliability. It is the confidence that comes from the head. It is often built through business interactions: We work together, you do your job well and you demonstrate through work that you are reliable, pleasant, consistent, intelligent and transparent. Result: I trust you.
“Emotional trust, on the other hand, stems from feelings of emotional closeness, empathy, or friendship. This kind of trust comes from the heart. We laugh together, relax together, and see each other on a personal level, so I feel affection or empathy for you and that you feel the same for me. Result: I trust you.
Latin American countries operate much more on an “emotional trust” paradigm. Meyer explains that due to very low trust in institutions and the legal system, residents of these societies need a sense of personal trust in their associates before working together. Compared to the United States, which welcomes lawsuits, many Latin Americans have good reason to believe that if they are rejected in a deal, there will be no legal recourse to recover their money. As such, personal references and connections are important in ways that the average American just doesn’t quite understand. In fact, it’s the opposite of the United States, where “business is business”. In the words of Meyer, in low-trust societies, “business is personal.”
As a result, this obviously creates a slowdown in many processes. Add to that Latin America’s staggering record of central bank hyperinflation and widespread political corruption and you’d be much slower to trust, too. Bitcoin is important in Latin America because it eliminates large institutions, governments, large corporations, and central banks and enables direct, instant, and peer-to-peer transactions between individuals and businesses.
Bitcoin removes the trust factor entirely
The implications for this are enormous. There’s a reason why Bukele – president of a country where hyperinflation is so bad he just gave up on having his own money – instituted bitcoin as the national currency. This solves the confidence factor that Latin Americans are so familiar with, with all of their life savings becoming worthless within months. Yes, Bitcoin has volatility, but not as extreme as the Venezuelan bolivar, Argentine peso, Mexican peso, or even the Salvadoran colón over the past few decades. In an unstable environment, people seek solutions that devalue trust in outside institutions and maximize trust in trusted personal transactions. With Bitcoin, there is no middleman, governmental or otherwise, to get in the way of said transaction.
Just imagine when smart contracts truly go live on the Liquid network, and you’ll see contract enforcement for the first time that’s only enabled in the United States by our trusted forensics and law enforcement systems. These will promote economic development and opportunities that have been stifled for many years in Latin America. These are guaranteed contracts built on the toughest money ever. This is a cultural difference that gives bitcoin dimensions of value that few people in the United States can even understand. They do not take this into account in their bitcoin price predictions. Not to mention the convenience of being able to move money across borders safely and easily, another common business requirement in Latin America that most Americans overlook.
A trustless transactional system based on sound currency that cannot be canceled, confiscated or inflated solves the fundamental obstacles to the widespread economic development of Latin America. Latin America is an industrial powerhouse with over half a billion consumers and rich natural resources; however, due to complex economic hurdles, it has not yet been able to realize its potential on a global scale. We are most likely on the cusp of seeing this potential realized and experiencing a type of growth that has not been seen in our lifetime.
If bitcoin becomes the new gold standard for the economic development of this whole region, do you want to be late to the party?
This is a guest post by Nico Antuna Cooper. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or bitcoin magazine.