Bitcoin in El Salvador: What Does Cryptocracy Mean for the Nation?

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

Of Luke Taylor

Bitcoin’s value has fallen by 22 percent over the past five days as investors rush to sell the cryptocurrency amid fears that an asset bubble is about to burst.

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

For El Salvador, which invested its economy in the success of bitcoin when it became the first country to make cryptocurrency a legal tender in September 2021, the crash has wiped out more than half of its bitcoin holdings – and could be the death knell for the country’s nationality. crypto experiment.

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

These promises have not yet been realized as most Salvadorans have avoided the cryptocurrency and prefer to continue using the US dollar.

The Central American nation also spent an estimated $ 105.6 million of taxpayers’ money on bitcoin in the hope that its value would rise. Each time the value has fallen, Bukele has bought more, live-tweeted the purchases.

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

El Salvador’s finance minister Alejandro Zelaya said at a news conference on June 13 that the risk to the bitcoin fund was “extremely minimal” and that the country has not lost anything since it has not yet sold its holdings.

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

But the fall in value is a huge sum in a low-income nation with 6.5 million people with rising debt and an economy that is less than a hundredth the size of Britain.

The Salvadoran government will not disclose its spending on bitcoin, but the cost of buying it, rolling out bitcoin ATMs and developing software has probably cost El Salvador at least $ 200 million, says David Gerard, author of Attack of the 50 foot blockchain. “Blowing $ 200 million would be like the United States blowing $ 200 billion,” he says. “People will feel it.”

“But also, it has not just blown that money. Bukele has alienated the World Bank, the IMF and all the other people he needed to borrow the money from to pay his bills,” Gerard said.

As El Salvador’s bitcoin gambling fails, economists are increasingly fearing that El Salvador is heading for default. The country’s credit rating has been consistently downgraded since it embraced bitcoin and debt payments are bought at a high price discount as investors fear they may not be able to do so, Bloomberg reports.

A billion-dollar bond scheduled to launch in March could have helped El Salvador raise capital outside traditional markets, but it has been put on hold due to unfavorable market conditions.

Before the last price crash, El Salvador’s national bitcoin push already failed. A study published in May found that most Salvadorans left the national bitcoin wallet after receiving a sign-up bonus, and most who continue to use it trade in dollars, not cryptocurrencies.

Bitcoin’s current price crash may be the latest nail in the coffin for bitcoin in El Salvador, says Oscar Salguero, a software developer from San Salvador. “Now the price of bitcoin is falling fast, even fewer people will use it.”

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

On top of soaring inflation, Salvadorans who trade or hold bitcoin now feel extra financial pain. “Everything, everything is expensive, which means we do not earn anything,” says Carolina Reyes, a food supplier who accepts bitcoin in the tourist town of El Palmarcito. “And now everyone loses their money in bitcoin. Imagine!”

Some Salvadorans have said that although the value of bitcoin continues to fall, it is unlikely that Bukele, an ex-marketer who has invested his image as a technology-savvy messiah in his cryptocurrency gambit, will turn around.

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