The trustless nature of Bitcoin allows tremendous societal growth and development in places with low trust in the government and institutions.
With El Salvador’s recent transition of making bitcoin legal tender, people are beginning to take the cryptocurrency more seriously. One important consideration about President Nayib Bukele’s incorporation of Bitcoin into the country is the ability to solve numerous issues unique to Latin American economies and markets, namely, the issue of trust. While Bitcoin’s usefulness as a technology and investment vehicle is clear to market participants in the United States and other English-speaking economies, Bitcoin has special relevance to the people of Latin America. This is due to numerous social, cultural and historical precedents, not necessarily shared or fully understood by those outside of the region.
Understanding these topics and their implications for investment strategies is crucial for anyone looking for asymmetric advantage among English-speaking investors. This is simply because these elements are not 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, thus not even making them newsworthy. This is inside information the average American is lacking, information which makes Bitcoin a smart decision for anyone betting on the future of Latin America.
Without a doubt, Latin America is one of the final frontiers of serious economic development left in the world, and it’s attracting money fast. Atlantico reported an “$18.6 billion investment into the region through the end of 2021, a staggering 250% increase in investments when compared to $5.3 billion deployed in 2020.” Those looking for outsized investment opportunities have flocked to developing economies and stock markets for decades, but the stage is set for advanced growth in this part of the world now more than ever.
Bitcoin offers unique advantages over foreign stock portfolios for several reasons. One advantage is that bitcoin is sound, unconfiscatable money that acts more like a bearer asset than a market fund or stock portfolio. Indeed, bitcoin is currently outgrowing the phrase “cryptocurrency” with its ever-growing functionality, incorporating benefits that resemble stocks, currency and bearer assets like gold all at the same time. It is quickly becoming its own unique asset class. There is not one, 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 Low-Trust Societies
An excellent resource on societal differences in trust is Erin Meyer’s “The Culture Map” (a must-read for anyone doing cross-cultural business). As an international business consultant, Meyer points out important differences between Latin American and United States–based firms that go well beyond corporate culture; they go straight to the core of interpersonal relations.
Meyer describes how trust between business associates differs dramatically from one culture to another. She outlines 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. This is trust that comes from the head. It is often built through business interactions: We work together, you do your work well and you demonstrate through the work that you are reliable, pleasant, consistent, intelligent and transparent. Result: I trust you.
“Affective trust, on the other hand, arises from feelings of emotional closeness, empathy or friendship. This type of trust comes from the heart. We laugh together, relax together, and see each other at a personal level, so that I feel affection or empathy for you and sense that you feel the same for me. Result: I trust you.”
Countries in Latin American function much more on an “affective trust” paradigm. Meyer explains that because of very low faith in institutions and the legal system, residents of these societies need a sense of personal trust in their associates before working together. In comparison to the lawsuit-happy United States, many Latin Americans have good reason to believe that if they are jilted in a deal, there will be no legal recourse to get their money back. As such, personal references and bonding are important in a way that the average American just doesn’t really understand. In fact, this is the opposite of the U.S., where “business is business.” In the words of Meyer, in lower-trust societies, “Business is personal.”
As a result, this obviously creates a slowdown in many processes. Add this to Latin America’s stunning record of central bank hyperinflations and widespread political corruption and you would be a lot slower to trust too. Bitcoin is important in Latin America because it takes large institutions, governments, powerful corporations and central banks out of the picture and allows direct, instant, peer-to-peer transactions between individuals and businesses alike.
Bitcoin Removes The Trust Factor Entirely
The implications for this are huge. There’s a reason that Bukele — president of a country with hyperinflation so severe that they just gave up on having their own money — has instituted bitcoin as national currency. It solves the trust factor that Latin Americans know so well, of all their life savings becoming worthless in a matter of months. Yes, Bitcoin has volatility, but no volatility so extreme as that of the Venezuelan bolivar, the Argentine peso, the Mexican peso or indeed, the Salvadoran colón over the past few decades. In a volatile environment, people seek out solutions that deprioritize trust in outside institutions and maximize trust in trusted personal transactions. With Bitcoin, there is no middleman, government or otherwise, to get in the way of said transaction.
Just imagine when smart contracts go live in earnest on the Liquid network, and you will see for the first time an enforcement of contracts that is only enabled in the U.S. by our trusted court and police systems. These will encourage economic development and opportunity that has been stifled for many years in Latin America. These are guaranteed contracts built on the hardest money ever created. This is a cultural difference that gives dimensions of value to bitcoin that few in the U.S. can even comprehend. They are not factoring that into their bitcoin price predictions. This is not even to mention the utility of being able to move money across borders with safety and ease, another common Latin American business requirement that most Americans do not account for.
A trustless transactional system built on sound money that cannot be reversed, confiscated or inflated away fixes the fundamental obstacles to widespread Latin American economic development. Latin America is a powerhouse of industry with over half a billion consumers and rich natural resources; however, because of complex economic obstacles, it has not yet been able to fulfill its potential on a global scale. We are quite possibly on the edge of seeing that potential fulfilled and experiencing a type of growth that has not been witnessed in our lifetimes.
If bitcoin becomes the new gold standard for this entire region’s economic development, do you want to be late to the party?
Source: Bitcoin Magazine