Bitcoin’s devaluation is a ‘death blow’ to El Salvador | International

This week marked a milestone in the history of cryptocurrencies, which traded at impressive numbers during the Covid-19 pandemic, but lost almost all of their gains this year. Bitcoin is the most popular of them all, as it is considered the most reliable, but this week it lost 21% of its value and its price hit a two-year low. This is relevant to countless investors worldwide, but it is perhaps an even more pressing question for 6.5 million Salvadorans, whose president invested part of the country’s public finances in this cryptocurrency.

It was the bankruptcy of one of the largest cryptocurrency exchanges, FTX, that caused the Bitcoin crash this week. But this was only the digital resource’s latest decline. Bitcoin has been in a slump since late last year as a result of tightening global financial conditions. Time has not been an ally of the president of El Salvador, Nayib Bukele, who made bitcoin legal tender in September 2021 and invested part of the public finances in the asset. Since Bukele bought the first digital tokens on September 6 last year, they have lost 67% of their value.

It is not known with any certainty how much Bukele has invested in bitcoin, but based on his own announcements on social media, it is estimated that losses could be in the range of $70 million, according to Ricardo Castaneda, an economist at the Central American Institute for Fiscal Studies (ICEFI ). “This has a very high opportunity cost for a country like El Salvador, because it represents, for example, almost the entire budget of the Ministry of Agriculture in a country where half the population suffers from food insecurity,” the economist said in a phone call. interview from San Salvador. The smallest country in Central America, El Salvador, has a poverty rate of 26%, according to the World Bank.

In a dollarized country, Bukele has made great efforts to get citizens to use bitcoin in everyday life, but these have not paid off, said Castaneda, as there is a lot of distrust among the population. Not even one of the major areas of opportunity, money transfers from abroad, has materialized. According to data from the Central Bank of El Salvador, only 2% of money transfers are made in bitcoin. “This week’s loss is pretty much a death blow to the possibility of massive cryptocurrency adoption in El Salvador,” Castaneda said. “People have experienced firsthand the volatility and problems associated with the lack of transparency.”

“It is no longer the case that someone else is going to tell you about the implications of investing in bitcoin; instead, people have already experienced it in the first person,” Castaneda noted. “In this scenario, citizens themselves have decided not to use bitcoin. What happened this week only exacerbates this distrust, and I would say that it is very difficult to find a way back from this point.”

If Salvadorans don’t know how much of their taxes went into buying bitcoin, it’s because the government never made the purchases transparent. Financial analysts have based their studies on the announcements made by Bukele on Twitter. In December 2021, when bitcoin was falling rapidly, Bukele announced that the country had increased its position in bitcoin due to the low price. A similar announcement was made in May of this year, during another notable drop in bitcoin value. But for the past week, Bukele has been silent.

In an article published on November 6 in a digital publication called Bitcoin MagazineBukele attacked his critics, claiming that “it is false” that the country has incurred losses, as it has not sold its digital currency. “For those who don’t understand, the real question is not if other countries will adopt bitcoin, but when,” the president said. “We are at a very early stage of this paradigm shift, which is why common sense action is controversial; there are many people who applaud it, but many more critics.”

But El Salvador is fighting against the clock. The Bukele government has an international debt payment of $667 million due in January, and analysts believe the Central American country could default. On Monday, Vice President Félix Ulloa told the Bloomberg agency that China had offered to buy the country’s foreign debt, a proposal that was being considered by the government. Two days later, Bukele announced on his social media that El Salvador had signed a free trade agreement with the Asian country. At the beginning of this year, the president approached the International Monetary Fund (IMF) to ask for funding, but the organization said no, instead asking the government to reconsider its national experiment with bitcoin.

“I see a paradox here,” Castaneda noted. “El Salvador was the first country in the world to make bitcoin legal tender, but it is very possible that El Salvador is also the country where the highest percentage of people do not want to use bitcoin.”

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