“Bitcoin is no longer talked about here, as if it has fallen into oblivion. I don’t know if it’s appropriate to call the adoption of Bitcoin a failure, but it certainly wasn’t a success,” Carlos Acevedo, the former head of Salvador’s central bank, told Bloomberg. But only the following months and years will show whether a similar Bitcoin path is worth following or will serve as a deterrent example.
However, President Bukele is not giving up on big crypto dreams. He wants to directly HODL into the bright future of El Salvador – the term HODL is a time-honored shorthand in the Bitcoin community for holding a cryptocurrency for the long term, usually rewarded with high profits. However, the pioneering Central American country with bitcoins in its accounts may face a severe financial crash before the sudden riches.
The numbers speak clearly, and it is far from just the development of the bitcoin price itself. The introduction of bitcoin as a currency did not improve the financial situation of 71 percent of respondents in a survey by the Salvadoran university Universidad Centroamericana José Simeón Cañas. The respondents even call the adoption of the new state currency the second biggest failure of Bukele, after the futile taming of inflation. On the contrary, they value the fight against violent crime the most in the president, as El Salvador has long been among the states with the highest number of murders.
Still, Finance Minister Alejandro Zelaya considers the year-long bitcoin experiment a success. The country is said to have also attracted foreign investment from crypto exchanges and blockchain developers thanks to its crypto approach, provided access to financial services for people without bank accounts and increased tourist interest.
According to the head of finance, more than four million users have installed the state-owned digital wallet Chivo in a country of seven million people. The government uploaded a balance of thirty dollars to each new user of the wallet. Most people immediately chose it in dollars and stopped using the app.
The project is also problematic due to the volatility of Bitcoin. “When you have some money in it to pay rent and bills, you don’t know if you will have ten percent more or less funds at the end of the month. You don’t know if you will have any money left over for the rent, which is not very sustainable in such a short-term monthly horizon,” explained anthropologist Martin Tremčinský from the Faculty of Social Sciences of Charles University, who specializes in researching cryptocurrency communities, to the E15 daily. Salvadorans are also struggling with technical outages of Chiva or a lack of ATMs allowing the conversion of bitcoin to dollars and vice versa.
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“Talking about failure is like saying around 1900 that the invention of the car doesn’t make sense because no one drives it,” says Paolo Ardoino, chief technology officer of the crypto exchange Bitfinex. The latter is supposed to help El Salvador with the issuance of bonds backed by the supply of bitcoins in Salvadoran government accounts. The adoption of cryptocurrency by ordinary Salvadorans is just one aspect of the experiment. The other—and perhaps even more important—occurs at the national level.
Bukele’s fascination with bitcoin angers the International Monetary Fund, on whose finances the Central American country relies in part. The IMF has repeatedly warned against the risks of the Salvadoran crypto-adventure. Because of him, they are also delaying the approval of a loan program in the amount of 1.3 billion dollars.
However, warnings about the instability of Bitcoin turned out to be justified. Over time, Salvador purchased nearly 2,400 bitcoins with an average purchase price of around $46,000. However, the virtual currency has written off more than half of that value.
Over the past twelve months, more problems have piled up for Bukele. Rating agencies Fitch and Moody’s also lowered El Salvador’s rating to the CCC level, which is only one notch higher than Fitch’s rating for Ukraine, due to weak Bitcoin. The CCC rating is accompanied by a warning that bankruptcy in the given country represents a real threat. Fortune reported a few months ago that El Salvador has a 48 percent chance of defaulting on its debt next year. Specifically, it concerns $800 million worth of bonds.
But Bukele wants to help himself by issuing roughly a billion dollars worth of new “volcanic” bonds that would be backed by bitcoin. He would like to use part of the proceeds to build infrastructure and a brand new Bitcoin City, which is intended to serve as the technology center of the region. The nickname “volcanic” was given to the upcoming bonds due to the fact that bitcoins are to be mined in the metropolis using electricity obtained from the geothermal sources of the surrounding volcanoes.
The Salvadoran president thus likes to style himself in the role of the creator of a new, better world, who passes off his activities as akin to the struggle for national sovereignty. It presents El Salvador as a country that will not let the International Monetary Fund dictate its terms and will instead use its bitcoin wealth in a creative way.
View the photo gallery, where you can also find a visualization of the Bitcoin City project:
But the fact is that the issuance of “volcanic” bonds is still being postponed. The government admits that, in connection with the development of the price of bitcoin, it also registers a lower demand from investors for the upcoming bonds, but still insists on the plan. However, Bukele did not convince even some of the more prominent members of the Bitcoin community of the quality of his intentions.
“I’m not exactly a fan of buying bitcoins with taxpayers’ money. Bitcoin is simply Bukele’s plan B in case he has to flee somewhere to Switzerland,” he wrote, for example, on
popularizer of bitcoin Josef Tětek and author of the book Bitcoin: Separation of money from the state.
Tak já nejsem zrovna příznivce kupování bitcoinu za peníze daňových poplatníků :). Ten bitcoin je prostě Bukeleho plán B když bude muset utéct někam do Švýcarska.— SatsJoseph (@SatsJoseph) September 7, 2022
On the other hand, cryptocurrency holders usually believe that the price of Bitcoin will one day significantly surpass the hundred thousand dollar mark. Under such constellations, Bukele’s crypto purchases would appear to be an extremely prudent decision. But until then, Salvador must not go bankrupt.