One year of bitcoin in El Salvador: between disillusion and hope for a rebound

Posted 06 September, 2022

The endless fall in the value of bitcoin, a year after it was established as legal tender in El Salvador, alongside the dollar, is straining the nerves of Salvadorans. Still, converts aren't giving up hope that a rebound will be a game-changer.

2021 has been “a good year, but for the past five months bitcoin has only been going down. We try to keep using it though,” comments Maria Aguirre, a 52-year-old trader in El Zonte, a resort town where cryptocurrency has been enthusiastically embraced.

In fact, in the shops of this famous surf spot, 60 km northwest of the capital, bitcoin was used long before President Nayib Bukele decided that El Salvador would be, on September 7, 2021, the first country in the world to make it legal tender.

In the first four months, the device for using bitcoin was downloaded 4 million times on mobile phones, for a population of 6.6 million Salvadorans. President Bukele's idea was to promote money transfers from some 3 million emigrants, mainly in the United States, to their relatives back home, by saving bank charges. A strategic issue, since these transfers weigh more than a quarter of El Salvador's GDP.

Alas, according to data from the Salvadoran Central Bank, “less than 2%” of remittances from emigrants have gone through cryptocurrency, notes Carlos Acevedo, former president of the Central Bank.

“For a while, yes, I used bitcoin. But the way things are going, I no longer have confidence, and I even deleted the application, ”admits Carmen Mejia, a 22-year-old student, who has returned exclusively to the dollar, the country’s legal currency for around twenty years. years.

In September 2021, bitcoin was worth around $45,000, and three months later it was $68,000. In euphoria, the Salvadoran president announced that he would use the winnings to build a public veterinary hospital.

He then floated the idea of ​​issuing a billion-dollar loan in cryptocurrency to build a “Bitcoin City”.

 

Vertiginous fall 

 

But the vertiginous fall of bitcoin, currently below the 20,000 dollar mark, has postponed these grandiose projects.

According to financial rating agency Moody's, Mr. Bukele's government “has spent about $375 million on bitcoin rollout, including about $106 million from the treasury to purchase bitcoin, resulting in untold losses. of approximately $57 million".

In El Zonte, Maria still believes in it and invokes the advice provided by the "experts" of the seaside resort: "when bitcoin is down, you must not touch it (to change into dollars), otherwise you lose everything".

President Bukele intends to recover by taking advantage of the decline: he bought 80 bitcoins for El Salvador at the price of 19,000 dollars, bringing the country's basket to a total of 2,381 bitcoins acquired over the last twelve months. In June, he preached “patience” and recommended “stop looking at the curve” of the bitcoin-dollar exchange.

For the ex-president of the Central Bank, the presidential bet on bitcoin is “failed”, at least for the moment.

But "it's not a failure yet, because (the market) may recover," bringing bitcoin and the country out of "crypto winter."

Besides that the collapse of bitcoin has "a psychological effect on people", its adoption has "complicated" El Salvador's negotiations with the IMF for a loan of 1.3 billion dollars, further notes Mr. Acevedo.

Faced with a risk of default on debt service which exceeds 80% of GDP, President Bukele announced in July a plan to buy back bonds maturing in 2023 and 2025, ensuring that the country does not lack liquidity.

The country risk has certainly been improved from 35% to 25%, but "it is unthinkable that El Salvador can return to conventional borrowing markets as long as the country risk does not drop to at least 5%", judges Mr. Acevedo.

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