Bitcoin has lost more than half of its value since November. Still, El Salvador buys crypto coins. Critics fear that the vagaries of the crypto market are driving the country towards bankruptcy.
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In September last year, El Salvador became the first country in the world to introduce bitcoin as legal tender, alongside the US dollar. A much-discussed financial experiment pushed through by “millennial president” Nayib Bukele, who was elected head of state three years earlier at the age of 37. Bukele hoped with this to digitize the economy, reduce dependence on the US dollar and attract new investors to the small Central American country.
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The measure not only obliges local shopkeepers to accept bitcoin as a payment method in addition to the dollar, but also the government in El Salvador. Citizens can pay their taxes in bitcoins, the state buys bitcoins and recently even issued a (completely flopped) government bond of 1 billion to buy even more bitcoins with the proceeds or to ‘mine’ bitcoins themselves.
Price drop of 55 percent
This risky policy is met with a lot of criticism from the outside world. Not least because it means that public money is at the mercy of the crypto market. And how volatile that crypto market can be, has become apparent in recent weeks and days.
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The price of bitcoin continues to fall and temporarily even briefly fell below the symbolic threshold of 30,000 dollars in the Asian market (only to recover somewhat in the European market). That is the lowest price since July 31, 2021 and no less than 55 percent below the historic bitcoin record of November last year. Coincidence or not, almost all cryptocurrencies share in the blows, which can lead to problems in several places in the crypto market. (see inset).
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Farmers in El Salvador protest against the introduction of bitcoin as legal tender (photo from 2021).
Photo: app
The IMF and the World Bank have been fiercely criticizing El Salvador for months. In January, the IMF even explicitly urged to ditch bitcoin as legal tender. Not long after, both credit rating agency Fitch (in February) and Moody’s (in May) gave the country a bad report. Both downgraded El Salvador’s credit rating to CCC, due to its increased reliance on short-term debt and limited funding sources. That means that ‘default is a real risk’ and investors fear that the South American country may soon be unable to meet payment obligations on its national debt.
‘Buy the dip’
But Bukele – who critics say linked his political fate to the success of the financial experiment – has repeatedly interpreted those public rebukes as pats on the back. After every warning and price dip, he lets his country buy a few hundred bitcoins.
Also yesterday. Just before bitcoin plunged below the $30,000 threshold, El Salvador bought an additional 500 virtual bitcoins. El Salvador just bought the dip tweeted he even in consummate crypto jargon: the country has bought cheaply when the price has fallen. According to CNBC El Salvador now owns 2,301 bitcoin, good for a preliminary value of 71.7 million dollars.
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It earned Bukele the nickname ‘cool kid’ internationally, the rebellious young president who dares to take on the old, established order. But it is doubtful whether he will be able to maintain the same image among his own population for long.
Ordinary Salvadorans have been strongly encouraged in recent months to use bitcoin as a means of payment. Bitcoin vending machines were installed and everyone was given a virtual wallet worth $30 (the three-day minimum wage in the country). This wallet is a way to store and spend the digital bitcoin, often via an app on the smartphone.
Bukele coin?
Problem: In 2019, half of El Salvador’s population did not have access to the internet. In fact, 70 percent of the population does not even have a bank account and hardly knows what it is about. Many Salvadorans are therefore skeptical (DS 1 november† For example, some thought that the bitcoin and the B logo refer to the president, the ‘Bukele coin’.
Many quickly gave up bitcoin and cling to the dollar. Market trader Hugo Pérez, for example, bought groceries with that money only once at the Dollar City supermarket. After that, he stopped using the app, he recently told the Dutch newspaper NRC Handelsblad.
President Bukele is heading for a confrontation with the IMF, which may now be even more difficult over an additional $1.3 billion loan requested by El Salvador. The Central American country may have to find another way to reorganize its public finances.
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