Bitcoin in El Salvador: What does the crypto crash mean for the nation?

El Salvador has invested heavily in bitcoin and related infrastructure in a bold plan to build its economy around cryptocurrency, but now its value has plummeted.


| Analysis

June 16, 2022

Mandatory Credit: Photo by Moises Castillo/AP/Shutterstock (12786687d) The Bitcoin sign is displayed in the window of a cell phone store in San Salvador, El Salvador, .  The government of El Salvador on Monday rejected a recommendation by the International Monetary Fund to eliminate Bitcoin as legal tender in the Central American country Bitcoin, San Salvador, El Salvador - 02 Feb 2022

A bitcoin sign in the window of a phone store in San Salvador, El Salvador

Moises Castillo/AP/Shutterstock

The value of Bitcoin has plunged 22 percent in the past five days as investors rush to sell the cryptocurrency amid fears of an asset bubble bursting.

The average bitcoin buyer is now in the red after the world’s most popular cryptocurrency lost $1 trillion in value in two months.

For El Salvador, which staked its economy on the success of bitcoin when it became the first country to make cryptocurrencies legal tender in September 2021, the crash has wiped out more than half of its bitcoin holdings and could be the death sentence for their national currency. crypto experiment.

El Salvador has invested heavily in creating and promoting the bitcoin infrastructure that President Nayib Bukele said would help Salvadorans access banking, save money on remittances, and boost the economy.

Those promises have yet to be fulfilled, as most Salvadorans have rejected cryptocurrency, preferring to continue using the US dollar.

The Central American nation also spent an estimated $105.6 million of taxpayer money on bitcoin in the hope that its value would increase. Every time its value has dropped, Bukele has bought more, live-tweeting the purchases.

With the value of the cryptocurrency down 70 percent from its November 2021 peak, $58.1 million is believed to have been wiped out.

El Salvador’s Finance Minister Alejandro Zelaya said at a press conference on June 13 that the risk of the bitcoin fund was “extremely low” and that the country has not lost anything as it has not yet sold its holdings.

“Forty million dollars does not even represent 0.5 percent of our general national budget,” Zelaya said.

But the drop in value is a huge sum in a poor nation of 6.5 million people with mounting debt and an economy less than a hundredth the size of the UK.

The government will not publish its bitcoin spending, but the cost of buying it, implementing bitcoin ATMs and developing software has likely cost El Salvador at least $200 million, says David Gerard, author of Attack of the 50 Foot Blockchain. “Spending $200 million would be like the United States spending $200 billion,” says Gerard. “People will feel it.

“But also, not only has that money been wasted. Bukele has alienated the World Bank, the IMF and all the other people that he needed to borrow the money from to pay his bills.”

As El Salvador’s bitcoin gamble fails, economists increasingly fear that El Salvador is headed for a default. The country’s credit rating has steadily been downgraded since its acceptance of bitcoin and its debt payments are being bought at a deep price discount as investors fear it may not be able to do so, Bloomberg reports.

A $1 billion bond planned to launch in March could have helped El Salvador raise capital outside of traditional markets, but has been frozen due to unfavorable market conditions.

Before the latest price drop, El Salvador’s national bitcoin push was already failing. A study published in May found that the majority of Salvadorans abandoned the national bitcoin wallet after receiving a sign-up bonus and the majority of those who continue to use it trade dollars, not cryptocurrencies.

The current Bitcoin price drop could be the final nail in the coffin for Bitcoin in El Salvador, says Oscar Salguero, a software developer from San Salvador. “Now the price of bitcoin is going down fast, even fewer people will use it,” he says.

Salguero says that the money lost in bitcoin should have addressed poverty or a series of national crises. El Salvador is currently mired in severe flooding and a draconian crackdown on drug gangs that has left nearly 2 percent of El Salvador’s adult population behind bars.

In addition to rising inflation, Salvadorans who trade or hold bitcoin are now feeling additional financial pain. “Everything, everything is expensive, which means we are not earning anything,” says Carolina Reyes, a bitcoin-accepting food vendor in the tourist town of El Palmarcito. “And now everyone is losing their money in bitcoin. Imagine!”

Salvadorans say that even if the value of bitcoin continues to fall, Bukele, a former trader who has staked his image as a tech-savvy messiah on his cryptocurrency gambit, is unlikely to back down.

“They will never accept that they have failed in this,” says Mario Gómez, a developer who was arrested by the police for criticizing the bitcoin law.

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