Bitcoin in El Salvador: What Does the Crypto Crack Mean to the Nation?

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

Moises Castillo / AP / Shutterstock

The value of Bitcoin has fallen by 22% in the last five days as investors rush to sell the cryptocurrency, due to fears that an asset bubble may burst.

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

For El Salvador, which invested its economy in bitcoin’s success when it became the first country to make cryptocurrency a legal tender in September 2021, the crack obliterated more than half of its bitcoin holdings – and could mean the end of its national crypto. experience.

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

These promises have not yet come true, as most Salvadorans have avoided cryptocurrency and prefer to continue using the US dollar.

The Central American nation has also spent about $ 105.6 million of taxpayers’ money on bitcoin in hopes that its value will increase. Each time its value declined, Bukele bought more and live-tweeted the purchases.

With the value of the cryptocurrency at 70% of its peak in November 2021, $ 58.1 million would have been wiped out.

Salvadora’s finance minister Alejandro Zelaya told a news conference on June 13 that the bitcoin fund’s risk was “extremely low” and that the country had not lost anything because it had not yet sold its shares.

“$ 40 million is not even 0.5% of our total national budget,” Zelaya said.

But the decline in value is a huge sum in a poor country with 6.5 million people with rising debt and an economy of less than one-hundredth the size of Britain.

The government will not disclose its spending on bitcoin, but the cost of buying it, installing bitcoin ATMs and developing software is likely to cost El Salvador at least $ 200 million, says David Gerard, author of Attack of the 50 Foot Blockchain. “Spending $ 200 million would be equivalent to the United States spending $ 200 billion,” Gerard says. “People are going to feel it.

“But also, it did not just waste that money. Bukele alienated the World Bank, the IMF and everyone else he needed to borrow money to pay his bills.

As El Salvador’s bitcoin bets fail, there is growing fear among economists that El Salvador is heading for default. The country’s credit rating has been steadily downgraded since its adoption of bitcoin, and its debt payments are being bought at a steep price discount as investors fear it will not be able to make them, Bloomberg reports.

A $ 1 billion bond to be launched in March could have helped El Salvador raise capital outside of traditional markets, but it was frozen due to unfavorable market conditions.

Before the recent price crash, the nationwide bitcoin push in El Salvador already failed. A survey published in May showed that most Salvadorans left the national bitcoin wallet after receiving a sign-up bonus, and most of those who continue to use it trade in dollars, not cryptocurrencies.

The current Bitcoin crash could be the last 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,” he says.

Salguero says the money lost on bitcoin should have addressed poverty or a series of national crises. El Salvador is currently suffering from severe flooding and a draconian repression of drug gangs, which has left nearly 2% of El Salvador’s adult population behind bars.

In addition to rising inflation, Salvadorans trading or holding bitcoin are now experiencing further economic difficulties. “Everything, everything is expensive, which means we do not earn anything,” says Carolina Reyes, a food vendor who accepts bitcoin in the tourist town of El Palmarcito. “And now everyone is losing their bitcoin money. To imagine!”

Salvadorans say that although the value of bitcoin continues to fall, it is unlikely that Bukele, a former trader who put his image as a tech-savvy messiah on his cryptocurrency bet, will retire.

“They will never accept that they failed at this,” says Mario Gomez, a developer detained by police for criticizing the bitcoin law.

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