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Bitcoin’s decline in value is ‘deadly blow’ for El Salvador

After the world’s most popular cryptocurrency fell 21% this week, the Central American country lost an estimated $70 million of its public finances

Bitcoin El Salvador
The president of El Salvador, Nayib Bukele, at the Latin Bitcoin Conference in February 2022.AFP
Isabella Cota

This week marked a milestone in the history of cryptocurrencies, which traded at impressive figures 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 low not seen in two years. This is relevant for countless investors worldwide, but it is perhaps an even more pressing issue for 6.5 million Salvadorans, whose president invested part of the nation’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 asset’s most recent decline. Bitcoin has been in a tailspin since the end of 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 of 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 of 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,” said the economist in a telephone 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 their daily lives, but these have not paid off, said Castaneda, since there is a lot of mistrust among the population. Not even one of the great areas of opportunity, remittances 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 losses are pretty much a deadly blow to the possibility of a massive adoption of cryptocurrency in El Salvador,” said Castaneda. “People have experienced firsthand the volatility and the 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 first person,” noted Castaneda. “In this scenario, citizens themselves have decided not to use bitcoin. What happened this week only aggravates this distrust, and I would say that it is very difficult to find a way back from this point.”

If Salvadorans do not know how much of their taxes have gone into buying bitcoin, it is because the government never made its 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 remarkable drop in bitcoin value. But this past week, Bukele kept silent.

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

But El Salvador is racing against the clock. The Bukele government has an international debt payment of $667 million due in January, and analysts believe that the Central American country could go into 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 under consideration 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 request financing, but the organization said no, instead asking the government to reconsider its national experiment with bitcoin.

“I see a paradox here,” noted Castaneda. “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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