South Africa Should Add Bitcoin to Their National Reserve Assets

To Investors, 

American President-elect Donald Trump ran a fascinating presidential campaign premised on growth and prosperity. Within that strategy he tapped into the crypto economy and essentially declared himself the most pro-crypto president ever since President Nayib Bukele ran and won the presidency in El-Salvador. 

There appears to be positive sentiment towards the United States buying and holding bitcoin as a treasury reserve asset, which would add a significant stamp of approval on bitcoin as an asset. 

Yes, major financial institutions such as BlackRock and ArkInvest already have bitcoin backed products that they sell to clients, especially since the approval of bitcoin ETFs in the U.S. in January this year, but support from the United States economy at the highest level of government (the most influential government and economy in the world) carries the ultimate level of approval. 

I think the South African government should also put bitcoin on their balance sheet as a reserve asset. 

Here’s why… 

One of the reasons why countries hold various assets on their balance sheets is as a store of value, because the belief is that in the long term that asset will appreciate in value, meaning if the country’s debt doesn’t go up at a faster rate, the “net worth” of that country will also appreciate; and the second reason is because that asset supports the viability of the country’s currency; and those reasons work in lock-step, meaning one is true because of the other. 

Let's double click on those… 

If you as a budding entrepreneur want to borrow money from a bank to finance a new project, they’ll ask you for collateral, that acts as insurance for the bank, something that says that if you can't repay the loan to the bank then you must give them that asset that you posted as collateral. The greater the value of your assets the more money you can borrow from the bank. 

Similarly, in the context of a domestic economy like South Africa for example, think of economic actors such as you and I as the banks. If we choose to conduct economic activity in South Africa we are making the decision to hold the rand because it's something of value. As economic actors we give the South African government our full support when choosing to buy and sell goods and services in the country. Foreign traders that we export and import goods and services with are driven by the same mentality. The “loan” that we give the South African government is the agreement that: “we will do business as long as you have something to give us should something extreme happen in South Africa that would cause the rand to no longer be valuable”. That idea is supported by the quality and value of the assets that the treasury holds in reserve.

The same situation played out in Zimbabwe. The value of the Zimbabwean dollar went to zero once the economy had no goods to offer, and the Zimbabwean government essentially had no assets to trade instead, so people stopped doing business with the country, which led to an economic spiral. Now I’m over simplifying and the events in Zimbabwe were much more complex, but the point stands. 

The U.S. is in a situation where their government debt is increasing at an unprecedented rate, and their government debt-to-GDP currently stands at ~122% as of Q2 2024, or $35 trillion. 

So the argument for Americans is that the U.S. government needs an asset that will appreciate at a faster rate, improving the balance sheet of the government, as they try to tackle debt-driven spending. 

South Africa isn’t in a similar situation, government debt-to-GDP was only ~72% in 2023. However South Africa needs a higher performing reserve asset like bitcoin because the rand appears to be a proxy for emerging market sentiment, so it takes a beating way too often. 

This is mostly because of obvious reasons like high unemployment, high youth unemployment, a relatively high steady-state rate of inflation because of market inefficiencies; and a dim growth story. 

A weakening currency also leads to higher costs of imports, lower foreign investment because domestic assets are in less demand, and higher inflation. 

However that aside for now, currently South Africa holds 125 mt of gold in reserve as of Q2 2024, which is valued at ~$11.9 billion at the current gold price.

Gold is the traditional reserve asset, but bitcoin is the 21st century reserve asset. 

Since inception bitcoin has tremendously outperformed gold. 

The bitcoin industry as a whole (including related industries) is a trillion dollar industry that we cannot afford to not be a part of. 

We can look at that idea through 4 key themes… 

Financial Independence  

South Africa is part of the BRICS nations which is an alliance group of countries aiming at forming a counterbalance to traditional western alliances led by the United States. That western alliance exerts influence through NATO and the U.S. led SWIFT payments system. 

It was reported earlier this year that BRICS countries surpassed the G7 countries, holding 36% of global GDP vs the G7’s 29%. BRICS should build on that, led by South Africa, by striving to ensure financial independence from traditional global payments systems. 

Bitcoin runs on its own network, and allocating resources to Bitcoin will naturally lead to the exploration and growth of other crypto assets - with that aim of financial independence at heart. BRICS nations already have significant resources especially in energy and raw materials, so they need to leverage that to add technical expertise on top of building wealth through a diverse portfolio. 

South Africa’s local exchanges like VALR or LUNO could be propelled onto the global stage through the mission of creating a counter balance to the SWIFT system, escaping the United States government’s weaponisation of the U.S. dollar.

Consider this for a second: in the last 10 years, the price of bitcoin in U.S. dollars has grown at a 75% compound annual rate. If the South African government had 100 bitcoin in 2014 at ~$300 each, that would be worth over $1.3 billion today. 

This idea of financial independence is not a theoretical idea because it has already happened in El Salvador. El Salvador announced in 2021 that bitcoin would be accepted as legal tender in the country and also proceeded to allocate capital to bitcoin as a reserve asset - now holding over $570 million worth of bitcoin at the current price. In September this year, President Bukele announced that for the first time in decades El Salvador will no longer need to depend on foreign government loans for their national budget. 

Bitcoin Mining and Energy 

Support from the South African government will allow a crypto economy to flourish in the country, starting with bitcoin mining. In Texas in the U.S., Quebec in Canada, and Iceland for example, bitcoin miners are contributing to the growth of the local energy markets by supporting energy dealers when they face periods of low demand. Bitcoin miners come in and buy energy from these dealers and support the dealers’s income and keep their businesses alive and growing. 

As the electricity market in South Africa starts to support private energy dealers through the Independent Power Producer Program, bitcoin mining could help these new South African energy suppliers by buying the new suppliers' production especially at the early stages of the business.

Bitcoin Corporate and Personal Treasury 

Anyone can buy bitcoin with as little as R10 in South Africa. A project to add bitcoin as a reserve asset in the national treasury will raise awareness to the bitcoin and crypto industry for all South Africans, allowing them to find creative methods for financial independence. 

On the corporate side, we’ve yet to see a company in South Africa like Semler Scientific and Microstrategy in the U.S., or Metaplanet in Japan - companies that play a bitcoin treasury game where they hold large amounts of bitcoin on their balance sheets, which allows their stock price to appreciate almost in lock-step with the price of bitcoin, this allows “risk-averse” investors, or investors who cannot hold bitcoin directly in their portfolios by mandate to indirectly own bitcoin by buying the shares of these treasury companies. That in turn allows the companies to to buy more bitcoin because they can authorise new share issues or issue convertible debt to buy more bitcoin - keeping the flywheel alive.

Exchange Traded Products 

In January 2024, the securities and exchange commission in the U.S. approved for an initial 11 companies to provide exchange traded funds backed by bitcoin, which for the first time meant that if their mandates allowed, institutional investors would be able to get exposure to bitcoin through a fund that holds actual bitcoin, and not bitcoin futures. Since then billions of dollars have flowed into those funds and they’ve also earned billions as they just put 1% in their pockets from management fees as the value of their holdings goes up. Simply put, South African institutional investors should and could have that similar opportunity through similar funds if that environment was allowed to thrive in South Africa. 

Real money is now flowing into the bitcoin and broader crypto industry. National governments are buying into it, and the appreciation of bitcoin to a $1.9 trillion asset class means that it is now being taken seriously as an asset. 

The South African government should participate in this trillion dollar asset class by buying and holding bitcoin as a reserve asset, allowing the related industries described above to also prosper in the country.

I hope you enjoyed this letter. 

On my journey to becoming a master capital allocator, one lesson down, a billion more to go. 

Hope you all have a great day 

-Mansa