El Salvador has invested heavily in bitcoin and related infrastructure in a bold plan to build its economy around the cryptocurrency, but now its value has plummeted
16 June 2022
Bitcoin’s value has plunged by 22 per cent in the past five days as investors rush to sell the cryptocurrency amid fears that an asset bubble is bursting.
For El Salvador, which staked its economy on the success of bitcoin when it became the first country to make cryptocurrency legal tender in September 2021, the crash has wiped out more than half of its bitcoin holdings – and could be the death knell for its national crypto experiment.
El Salvador has invested heavily in creating and promoting the bitcoin infrastructure that president Nayib Bukele said would help Salvadorans access banking, save money on international payments and boost the economy.
Those promises are yet to be realised as most Salvadorans have shunned the cryptocurrency, preferring to continue using the US dollar.
The Central American nation also spent an estimated $105.6 million of taxpayers’ money on bitcoin in the hope that its value would rise. Each time its value has dropped, Bukele has bought more, live-tweeting the purchases.
With the cryptocurrency’s value now 70 per cent below its November 2021 peak, $58.1 million is believed to have been wiped out.
El Salvador’s minister of finance Alejandro Zelaya told a press conference on 13 June that the risk of the bitcoin fund was “extremely minimal” and that the country hasn’t lost anything as it hasn’t yet sold its holdings.
“Forty-million dollars does not even represent 0.5 per cent of our national general budget,” said Zelaya.
But the drop in value is a vast sum in a low-income nation of 6.5 million people with growing debt and an economy less than a hundredth of the size of the UK’s.
The Salvadoran government won’t publish its spending on bitcoin, but the cost of buying it, rolling out bitcoin ATMs and developing software has probably cost El Salvador at least $200 million, says David Gerard, author of Attack of the 50 Foot Blockchain. “Blowing $200 million would be like the US blowing $200 billion,” he says. “People will feel it.”
“But also, it hasn’t just blown that money. Bukele has alienated the World Bank, the IMF and all the other people he needed to borrow the money from to pay his bills,” says Gerard.
As El Salvador’s bitcoin gamble fails, economists increasingly fear that El Salvador is heading for a default. The country’s credit rating has been consistently downgraded since it embraced bitcoin and its debt payments are being bought with a heavy price discount as investors fear it can’t make them, Bloomberg reports.
A billion-dollar bond that was planned to launch in March could have helped El Salvador raise capital outside of traditional markets, but it has been put on ice because of unfavourable market conditions.
Prior to the latest price crash, El Salvador’s national bitcoin push was already failing. A study published in May found that most Salvadorans abandoned the national bitcoin wallet after receiving a sign-up bonus and most who continue to use it trade dollars, not cryptocurrency.
Bitcoin’s current price crash could be the final nail in the coffin for bitcoin in El Salvador, says Oscar Salguero, a software developer from San Salvador. “Now the price of bitcoin is coming down quickly, even less people will use it.”
Salguero says the money lost on bitcoin should have addressed poverty or a series of national crises. El Salvador is currently mired in severe floods and a draconian crackdown on drug gangs that has left nearly 2 per cent of El Salvador’s adult population behind bars.
On top of soaring inflation, Salvadorans who trade or hold bitcoin are now feeling extra financial pain. “Everything, everything is expensive, which means we’re not earning anything,” says Carolina Reyes, a food vendor who accepts bitcoin in the tourist town of El Palmarcito. “And now everyone is losing their money in bitcoin. Imagine!”
Some Salvadorans have said that even if bitcoin’s value continues to tumble, Bukele, an ex-marketer who has staked his image as a tech-savvy messiah on his cryptocurrency gambit, is unlikely to turn back.
“They are never going to accept that they have failed on this,” says Mario Gomez, a developer who was detained by police for criticising the bitcoin law.
Article amended on 17 June 2022
We corrected how much of its value bitcoin has lost since November 2021.
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