There has been a lot of focus this week on El Salvador becoming the first country in the world to adopt bitcoin as legal tender

Is it a good idea?

Quick thread (currency risk angle)
Unsurprisingly, many hard core crypto folks have celebrated the step, as a harbinger of a global trend towards broader adoption of bitcoin/crypto (freedom even).

one example below

Others, such as the IMF have expressed caution, although the language was too vague to articulate the specifics of the concern.…
Hence, I will be very specific, and focus on the currency risk angle. If you force companies in a country to accept bitcoin as payment, then you also force them to take currency risk (as not all transactions will be bitcoin, and there will be mismatches between cost and revenue)
It seems to be the case that the government is aware of of this complication. And that they plan to provide BTC hedging (up to some limit). But that just shifts the risk to the government:

via @CoinDesk
This is a particularly tricky situation in El Salvador, since it is a dollarized economy, and El Salvador does not have the ability to print USD. Hence, the currency risk could ultimately take down the government (create insolvency) if they want to provide unlimited hedge
Thinking about the currency risk, and assuming that the private sector would have to deal with it (if the government cannot provide unlimited), there would be a significant hedging cost if the private sector has to hedge out the cost on its own.
This new BTC related currency risk is much more serious than the one companies normally face:

First, btc vs usd can be extremely volatile (> 10x normal fx volatility)

[see the daily volatility calculation in the labels in the x-axis)
Second, if a country embeds BTC in the legal tender law, the company may (in theory) receive BTC not just for exports but also domestic revenue. Hence, the impact on the balance sheet would be bigger than normal currency risk, which is mostly for cross-border trading.
Transaction cost on @Coinbase are listed at around 1.5%, although it depends on market conditions (bid/offer), and other exchanges are different

For comparison, transaction cost in FX (say EURUSD, UDJPY) can easily be pushed below 0.1%.

Not cheap.…
Beyond the transaction cost, there is an issue of whether you can hedge fast enough. If you wait 10 min, it could have moved 10%! (much higher cost of timing mismatch than for normal currency risk).
As such, having BTC as legal tender may exposure companies to massive currency risk, and it could impose a massive cost on the corporate sector from a risk and hedging cost perspective.
This stuff will matter not only if BTC crashes, but also if BTC goes up a lot. A merchant with payment in bitcoin (cost) could be put out of business by a bitcoin rally, while others (those a BTC revenue) would suffer in a crash.
I will leave it at that. This was just some quick comments on the currency risk angle specifically. We plan to comment on other angles on Money: Inside and Out in coming days. Pretty interesting crypto moves to macro space.

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More from @jnordvig

7 Jun
The piece by @DanielAlpert got me thinking a bit about US exceptionalism, as it pertains to the labor market, and the role the unemployment benefits may play.

Which country stands out in this chart?

=> some observations on income distribution and labor supply...
This is simply OECD data that tell you what percentage of jobs is less than 2/3 of median earnings.

The US is 23.4%
Belgium,N.Zealand,Finland,Italy,Denmark,Portugal all <10%

The US has an awful lot of low paying jobs (in a relative sense, but also relative to cost of living)
You can argue. 'but US is a wealthy country, and if the median is high...'. But what about the food stamps then. They would not be needed if the absolute level was fine.

=> it is both a relative and absolute issue.
Read 7 tweets
20 May
My twitter follower count has suddenly spiked to 15K today on the back of @donnelly_brent 's #fintwit top 20 survey today (Brent is a powerful man!).

I am happy to be in good company on the list, and also happy to get followers from Brent's network, which itself is high quality!
Here is the main list from Brent's AM/FX publication this morning.

I follow most of these folks already, but will have a look at the exceptions in coming days. Should I do a list?
Since I am interested in FX, I was also interested in the FX specific ranking :-)
Read 5 tweets
19 May
There used to be little correlation between crypto and global markets in general. But the sell-off in Nasdaq futures overnight does look (very and unusually) correlated to the breakdown in crypto space

[here illustrated with BTC (green) and ETH(yellow), vs Nasdaq (white)]
Here is the correlation matrix, for reference:

We should probably add Nasdaq to this matrix @WBegole . Will be interesting to track...
Read 5 tweets
17 May
The debate about bitcoin now reminds me of a wedding I went to in 2006.

A beautiful wedding that was ruined by a discussion about the US housing market.

It went like this...
1/ Back in 2007, I was at a fantastic wedding in LA. The dinner was outdoors, in spectacular weather, with a unbelievable view to the ocean. All was going well, until the discussion touched on the US housing market.
2/ I was working as an economist at Goldman Sachs at the time, and the fundamentals of the housing market looked shaky. I argued, after being asked about my opinion, that the US housing market could be in a bubble. That was a mistake.
Read 11 tweets
2 May
My tweet from yesterday has generated A LOT of debate. In fact, almost 1 million people have looked at the basic chart I circulated (showing with EU catching up to the pace of vaccine administrations the US first achieved in March).

It has also generated some misinterpretation. I did not mean to imply that any country was ‘winning’ against any other country. In this battle, it is all countries against the virus, and we should all celebrate when more countries join the winning side.
In terms of what it means to be ahead, clearly it is not just about a good pace for a few days. It is about the speed at which you can reach a critical level of overall immunity in the population; at which put the virus will be on a sustained declined (including after reopening).
Read 8 tweets
26 Apr
Here is an important chart. It has changed a fair bit over the past month, and I am not sure everybody has internalized it.

The EU is closing the gap to the US in terms of vaccine administrations. Image
I know the EU has somewhat higher population and the J&J pause may have impacted the US numbers more (and temporarily), and that demand may be an increasing issue in the US.

But the numbers are what the numbers are in the aggregate, and the EU roll-out has accelerated notably.
Further, the EU roll-out can probably accelerate further, as J&J comes fully online and Pfizer/BioNTech scales up deliveries more.

Things will look different by May...
Read 4 tweets

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