Bitcoin in El Salvador – one year later

One year has passed since Bitcoin became legal tender in El Salvador. Crypto adoption has not been without problems in El Salvador, but it is difficult to weed through the different stories about Bitcoin because there are so many competing interests promoting or merging Bitcoin. This article will filter through the nonsense and describe how Bitcoin in El Salvador has fared one year after it became legal tender.

Why El Salvador Made Bitcoin Legal Tender

El Salvador made Bitcoin legal tender apparently for several reasons. The government cited the following reasons:

• A significant portion of El Salvadorans receive remittances from the United States. Money from the US actually makes up 20% of El Salvador’s GDP. Fees for transferring money to El Salvador are not cheap. Bitcoin transactions are cheap, so the El Salvador government made Bitcoin legal tender to reduce the fees citizens have to pay for money transfers.
• About 70% of El Salvadorans do not have bank accounts. Transactions in Bitcoin can act as a kind of bank account.
• El Salvador uses the US dollar, which is suffering from pretty bad inflation at the moment. El Salvador moved to Bitcoin to hedge against US dollar inflation.

The three reasons listed above are all the official reasons that El Salvador gave for making Bitcoin legal tender. There are probably other reasons why El Salvador is making Bitcoin legal tender that they won’t say publicly.

It is also important to note that USD is still legal tender in El Salvador. The country still mostly uses USD despite Bitcoin being legal tender. Anyway, the next section will discuss the reality of Bitcoin use in El Salvador since the country made it legal tender.

Bitcoin in El Salvador – The Reality

This section will cover point by point the official reasons why El Salvador made Bitcoin legal tender and then describe the reality of the situation. First of all, money transfers in El Salvador. Do Salvadorans Use Bitcoin for Money Transfers?

No, Salvadorans don’t actually use Bitcoin for money transfers. According to information from worldcoinstats.com, only 3.2% of all transfers are made in Bitcoin, which is quite poor. Of course, no one expected this number to jump to 100% overnight, but it is an overwhelming use compared to what many in crypto expected.

Next, Salvadorans use Bitcoin for their daily transactions?

Again, not really. There is no hard data on this number, but it is estimated that approximately 80% of stores in the country do not accept Bitcoin despite it being legal tender in the country. With that in mind, Salvadorans are unlikely to use Bitcoin for most of their transactions.

This came as a surprise because the Chivo wallet app (the official Bitcoin lightning network app of El Salvador) had over 4 million downloads when it was released. However, this is because new Chivo wallets got a free $30 deposit. The average wage in El Salvador is $12 per day, so $30 is a few days’ work for many Salvadorans. Of course many people will download an app for a free $30 when they earn so little per day.

Finally, has Bitcoin served as a good hedge against US dollar inflation?

Well, El Salvador bought roughly $100 million worth of Bitcoin in the past year at an average price of $45,000. The current price of Bitcoin is around $19,000. USD inflation is currently around 8.2%, so El Salvador has lost more money holding Bitcoin than it would have if it held USD over the past year.

Of course, Bitcoin is more of a long-term thing for El Salvador, so it’s kind of silly to declare this a failure after only one year.

What went wrong with Bitcoin in El Salvador?

As you can see from the points above, Bitcoin in El Salvador has not been the huge success that many expected. However, there is not much reason to fear. It has only been a year since El Salvador made Bitcoin legal tender in the country.

The biggest problem with Bitcoin in El Salvador is that El Salvador probably picked the absolute worst time to make Bitcoin legal tender. They basically did it right at the top of the bubble and then proceeded to buy “the dip” whenever the price fell – the problem was that the price kept falling.

Anyone who went all in on Bitcoin around that time would be down about 50% right now. It happened to many people, but in El Salvador’s case it happened to the whole country. If El Salvador would have invested in Bitcoin a year or two earlier, the country would have been up 500% on its investment, and many would declare it incredibly successful.

This is likely to happen if the price of Bitcoin rises again, which it is expected to do after the Bitcoin halving. The problem with the next halving is a few years away in 2024. Can El Salvador stay with Bitcoin that long? Or will the country abandon the cryptocurrency before the price recovers?

The other problem with Bitcoin in El Salvador is that the government forced people to use it, which goes against many of the principles of cryptocurrency. In fact, is it even cryptocurrency at that point?

We would argue that it is not really cryptocurrency if the government forces you to use it. The government specifically forced people to use the Chivo wallet app, which has a reputation for many bugs. And it has left many Salvadorans with a bad first impression with Bitcoin because they associate all the bugs with the Chivo app as problems with Bitcoin.

This is still a relatively minor problem. The bigger problem was that El Salvador picked the worst time to invest in cryptocurrency, but it is still worth mentioning the other problem with the current system in El Salvador.

Final thoughts

To summarize, Bitcoin in El Salvador has not been very successful one year into the country making it legal tender. There is still no reason to fear. Bitcoin is a long-term project for the country, so if El Salvador can stick with their Bitcoin experiment, they will likely see it succeed.