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

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

Moises Castillo/AP/Shutterstock​

Bitcoin’s value has fallen 22% in the past five days as investors rush to sell the cryptocurrency for fear an asset bubble could 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 bets its economy on bitcoin’s success when it became the first country to make the cryptocurrency legal tender in September 2021, the crash destroyed more than half of its bitcoin holdings — and could spell the end of its business. national crypto. experience.

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

These promises are yet to come true as most Salvadorans have shunned cryptocurrency and prefer to continue using the US dollar.

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

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

Salvadoran 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 lost nothing because it had not yet sold its shares.

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

But the depreciation is a staggering amount in a poor country of 6.5 million people with mounting debt and an economy less than a hundredth the size of the UK.

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

“But it’s not just that money wasted either. Bukele alienated the World Bank, the IMF and everyone else he needed to borrow money to pay his bills.

As El Salvador’s bitcoin bet fails, there are growing fears among economists that El Salvador is headed for default. The country’s creditworthiness has been steadily declining since bitcoin’s adoption and its debt payments are being bought at a sharp price discount as investors fear it won’t be able to meet them, Bloomberg reports.

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

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

The current Bitcoin price crash could be the final nail in the coffin for Bitcoin in El Salvador, says Oscar Salguero, a software developer from San Salvador. “With the price of bitcoin falling rapidly, even fewer people will use it,” he says.

Salguero says the money lost with bitcoin should have addressed poverty or a series of national crises. El Salvador is currently ravaged by severe flooding and a draconian crackdown on drug gangs that has left nearly 2% of El Salvador’s adult population behind bars.

In addition to rising inflation, Salvadorans who trade or hold bitcoin are now feeling additional financial difficulties. “Everything, everything is expensive, which means we earn nothing,” said Carolina Reyes, a bitcoin-accepting food vendor in the tourist town of El Palmarcito. “And now everyone is losing their bitcoin money. To imagine!”

Salvadorans say that even if bitcoin’s value continues to fall, Bukele, a former trader who puts his image as a tech-savvy messiah on his cryptocurrency bet, is unlikely to shrink.

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

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