Amid fanfare a year ago, El Salvador announced its ambitious plan to adopt Bitcoin as a national co-currency. In the following months, it declared the creation of Bitcoin bonds and a special Bitcoin City.
Interestingly, when the Bitcoin plans were announced on September 7, 2021, Bitcoins (BTC) the price was $46,811.13. But exactly a year later, on Wednesday, it was down more than 50 percent to $19,290.32, according to Coinmarketcap data.
As of July of this year, El Salvador reportedly held 2,381 Bitcoins at an average purchase price of $45,171.
The story of a year ago
El Salvador announced its Bitcoin plans with much fanfare. The news made waves as the crypto market was on a high and everything looked optimistic.
In September 2021, El Salvador’s President Nayib Bukele said the country could save about $400 million in foreign exchange annually if it stopped using traditional transfer and payment services.
To do so, he adopted Bitcoin as legal tender and launched a crypto wallet called Chivo, powered by the Latin American crypto exchange Bitso. The exchange provides El Salvadorians with a commission-free transfer and payment experience in both BTC and US dollars.
Bukele also announced plans for an ambitious Bitcoin city in November 2021, along the Gulf of Fonseca, near a volcanic mountain, the possible site of a geothermal power plant to power the Bitcoin city and Bitcoin mining. This coincided with the Bitcoin price crossing the $60,000 mark around November 2021.
To fund the plan, Bukele said his government would issue $1 billion worth of “Bitcoin bonds” using a tokenized instrument solution developed by Blockstream on the liquid network. Bukele stated that he would buy Bitcoin for $500 million and use the other $500 million for Bitcoin mining and energy infrastructure construction.
A year later: What went wrong?
A year later, the experiment seems to be going nowhere. According to an investigative report by Reuters, “No heavy machinery, construction workers or raw materials indicate any progress towards building this great symbol of bitcoin,” referring to Bitcoin city, the biggest symbol of El Salvador’s ambitious plans.
According to Sharat Chandra, vice president of research and strategy at EarthID, a decentralized identity management company, El Salvador’s approach to Bitcoin adoption was right, but it ventured into other areas without proper planning.
“El Salvador was right to adopt Bitcoin as a medium of exchange since the country has no currency of its own and is dependent on the US dollar. This helped them get foreign remittances from their citizens working abroad without much cost, but later decisions like “Bitcoin City, Bitcoin Bonds (which saw little participation) were taken enthusiastically and without much strategic planning. The idea was good, but the plan to execute it was done in a hurry and therefore these ideas did not gain much traction,” Chandra added.
Some experts still hope for a turnaround because of the strength of the idea. According to Hitesh Malviya, founder of itsblockchain.com, India’s oldest cryptocurrency and blockchain media publication website, “El Salvador was right to use the Bitcoin city plan to attract investors and crypto economy talent in the country and promote tourism, and if the city plan goes through, it can increase El Salvador’s GDP.”
According to a report in The Fortune in August 2022, El Salvador’s The $1 billion Bitcoin bonds face two main challenges: the lack of investor interest in these bonds and legal and legislative obstacles in parliament.
Bitfinex and Tethers CTO (Chief Technology Officer) Paolo Ardoino, who works closely with the El Salvador government, said in the article that authorities had told him the legal issue could be resolved by September.
What is the future?
What happens to the country’s future and bitcoin stakes depends on which way the crypto markets take.
“In the near future, if Bitcoin’s price goes up, say $1,00,000 or more, then El Salvador’s Bitcoin bet works, and other countries that don’t have their own currency can adopt Bitcoin as legal tender and follow El Salvador’s path.” says Malviya.
If the crypto markets remain as volatile as now or fall further, it goes without saying that the El Salvador case will be cited as a bad example. Even in the past, many experts have called such a move highly speculative and risky.
“Bitcoin is a volatile asset since its price is affected by factors such as geopolitical crises, economic situations and others. For example, the Russia-Ukraine war, Taiwan-US, inflation, the US Fed raising interest rates, (and) others have affected Bitcoin’s price. I feel that the price may also go (up) to $10,000 in the near future if more such events occur,” Chandra added.
However, Malviya feels that the probability of such a complete fall is low. “It all depends on the time the crypto market takes to recover from the current recession, inflationary factors and other factors. El Salvador’s economy must survive this difficulty in market conditions to reap the benefits of a possible downturn in the crypto market.”
It is also a matter of survival and sustaining through the bear phase in the crypto market. “El Salvador must survive the crypto downturn and then only efforts can bear success,” Malviya added.
Bitcoin has no price floor and relies heavily on global signals to judge its price. El Salvador reportedly bought 80 Bitcoins in July when the price had fallen to around $19,000.
