Bitcoin will become America’s ‘savings technology’: A lesson from Costa Rica

medium.com4m ago

Bitcoin will become America’s ‘savings technology’: A lesson from Costa Rica

BTC and USD are not threats to each other, but will share the same space as complementary tools.

As I discussed in Part 1 — “Why experts believe Bitcoin will prosper greatly in a Dual-Currency World,” Both Michael Saylor and Nic Carter believe that the future of Bitcoin is to work in concert with other currencies more suitable for spending. Below, I want to use the example of a country that has successfully pulled off such a “dual currency model” for decades: Costa Rica. You’ll see that this is the most likely next phase for the Bitcoin here in the US.

I will make the case that BTC and USD are not threats to one another, but will share the same space as specialized and complementary tools: ‘Savings technology’ and ‘Spending technology.’ USD will remain ‘spending technology’ because it optimizes for price stability, and BTC will increase in popularity as ‘savings technology’ because it optimizes for value accrual at the same time that the USD is losing that quality. As Americans, it’s helpful to consider that this dynamic, separate spending and savings technologies with both broadly defined as money, is not new. Non-US countries like Costa Rica have been doing this for decades with the USD.

This is a simple but powerful concept. It gives an obvious place to BTC for the average American without requiring open hostilities with the US Dollar. As Michael Saylor notes, this is the path of least resistance.

Below you’ll learn that dual currency models can be cooperative and stable, even when one currency is much stronger than the other. Dual currency systems allow governments the ability to control money for their own domestic needs while allowing the population to store value outside of it, thereby protecting them from the value-leeching effects of inflation. It is a compromise that lets the government keep some of their control, while letting the population keep the value they have earned.

First, let’s look at how the dollar has filled the role of savings technology for other countries.

How the dollar is used outside of the US

As I’m sure you know, the US Dollar is used throughout the world. In addition to eight sovereign nations that use the USD as their formal currency (Ecuador, El Salvador, Zimbabwe, Timor-Leste, Micronesia, Palau, Marshall Islands and Panama) it is even more widely used as an informal currency. Investopedia lists 20 countries where the dollar is in informal use, meaning it has no legal tender status. These are places where people hold the US Dollar because they choose to, not because the government gives them any incentive. All of these are, to some extent, dual-currency models.

Why do people choose to hold a second currency?

Money serves the following functions:

In a perfect world, all money would serve these functions fully. Instead, governments have given themselves the power to print money at will. The result is constant inflation which results in a degradation of the “store of value” feature for all modern currencies. When people outside the US choose to use the USD as an informal secondary currency, they’re doing it so they can have a store of value where their domestic currency is failing.

Why was the USD a better store of value?

The US Dollar was historically backed by gold which was a near-perfect store of value (more on that later). But the US got off of the gold standard in 1971 and began printing money to keep up with ballooning governmental spending. Over the last fifty years spending and money printing has continually increased, but inflation remained moderate compared to most developing nations. Lately, however, we seemed to have reached a breaking point and inflation is now at the highest level in 40 years and climbing.

As the US dollar loses its store of value function we need to keep our eyes open for an alternative. But first, Costa Rica.

So how does a dual-currency model work in Costa Rica?

Although the dollar has no legal tender status in Costa Rica, it’s very common to hold it as a form of savings. The government holds it, banks hold it, companies hold it, and private citizens hold it. But why? It’s not exactly convenient to spend. People will accept it, but they’ll punish you on the exchange rate and generally prefer to transact in Costa Rican Colones (₡CRC). So why is it in demand? Because it’s much ‘harder’ (non-inflationary) than the Costa Rican Colon.

The Costa Rican Dual-Currency Model

The Colon inflates at 12.9% a year on average. This creates an impossible hurdle for the Costa Rican saver. At 12.9%, the purchasing power of their money is cut in half every ~5 years. As an example of how untenable this is, if someone exchanged $50 for Colones in 1970, by 2022 it would have retained the spending power of $0.52. So around 1% of the original value was “saved,” and 99% was lost to inflation. Another example: Fifty years ago the exchange rate was ₡8 Colones to $1. Today it’s ₡640. So the CRC has lost almost 99% of its purchasing power against the dollar in the last 50 years.

Source: Cost Rica: Review of the Financial System 2020, OECD

According to the above graph, private savings held in Foreign currency (mostly USD) in Costa Rica is usually somewhere between 20% and 40%. But it’s noteworthy that the dollar doesn’t simply dominate the CRC as the currency of savings. It’s a supplement, simply an option for the saver to take if they choose. The two currencies exist in balance with each other. At any given time, a majority of the savings in Costa Rica is still in the Colon, despite high inflation.

I asked a Costa Rican why this might be. He said even though the Colon loses value, Costa Ricans save in it to protect against dollar volatility. The Colon is stable in relation to existing debt and expenses. This challenges the belief among some that the presence of a harder money simply eviscerates the easier money. In actual practice, and when legal jurisdictions are taken into account, people keep ample local money on hand, even as it inflates away, because of the comfort that it will handle their debts and expenses.

Source: Cost Rica: Review of the Financial System 2020, OECD

A noteworthy trend is the proportion of private versus state-owned entities saving in USD. Private USD savings have skyrocketed over the last 20 years, from 10% of total in 1997 to 60% in 2020. Think of this as “hard money” shifting from the government to the people over time.

So all in all, the dual currency model in Costa Rica seems largely a success. It has been going now for over 25 years, leaves a role to play for the Colon as well as offering the Dollar as a means of inflation protection for those who want it. It’s not complicated. It’s not rocket science. Americans who want to protect their savings can do this too!


Coming back to the US, and our future with BTC. With 7% inflation and growing, the USD is no longer performing the ‘store of value’ function that money are supposed to. This has left a ‘savings’ vacuum in the US that Bitcoin will fill the way USD historically did in Costa Rica. We will learn to be a two currency nation to protect our savings, like so many others have been doing for decades.

Up to this point we’ve regarded the US Dollar as the source of monetary stability in the world. And to a large extent, it was. But the truth is it has been losing value right along side other currencies, only slower.

As an example, recall how $50 of Colones fifty years ago would have lost 99% of its value to inflation. But what if that same $50 was put into something that held its value better than the dollar, like gold? Today, that gold would be worth $823. This is what I mean by ‘savings technology.’

So it appears Costa Ricans weren’t the only ones losing money by saving in their local currency. This becomes clear when contrasted against a truly hard asset like gold. So the dollar is the hero of the Costa Rican story, but in actuality it’s not a true savings technology. It was simply the best option available.

Many people believe that Bitcoin possesses the value-retaining properties of gold, but even better. Easier to buy, hold, transport, transact with, authenticate, and is harder to confiscate.

So, what’s next?

Forty six million Americans already own Bitcoin. That means that the dual-currency model is already dawning on 17% of the adult population. As the US Dollar becomes more inflationary, we can expect this to accelerate.

BTC is a superior savings technology vs the dollar in many respects, but I’ll point out one very important one. As the dollar is adopted it is designed to not appreciate in value (this keeps stable prices, hence ‘spending technology’). But BTC is designed to accrue value, so every person, company, or country that adopts Bitcoin raises the value of all other Bitcoin.

For example, if a country like Argentina were to dollarize, and hundreds of billions or or even trillions of dollars were to enter the US Dollar ‘network,’ those who saved in the dollar wouldn’t see any benefit. If the dollar did start to ‘strengthen,’ they would weaken it immediately to ‘keep exports competitive.’

With BTC on the contrary, if Argentina’s $450b GDP came onto the network, current BTC holders would see an increase in the value of their savings of over 50%. So unlike with the US Dollar, savers benefit from network growth. This is all the more incentive for people to use BTC for their savings, as the network continues to grow year after year.

-Matt Harder runs the civic engagement firm Civic Trust, where he guides cities in re-building their civic infrastructure by helping residents, civic organizations, and local government co-create public projects. He is also a passionate Bitcoiner.