No other country is as bullish as El Salvador when it comes to bitcoin. Bitcoin was seen as a tool to transform the country’s economy and bring the financial revolution that people of this small and poor Central American country could capitalize on.
In September last year, Nayib Bukele, the president of the country, stunned the financial world by declaring its most popular digital currency a national currency. However, it appears that his gamble is becoming disastrous for the countrymen. This highlights the disconnect between cryptocurrency’s much-hyped assurances and actual economic reality.
Due to the global downturn in the crypto market, nearly 60% value of bitcoin holdings owned by the government has been vaporized. The country reportedly owns 2,301 bitcoin by investing $105.6 billion. However, as per the current bitcoin price, the value of investment has been plunged to more than half. The current value of the country’s bitcoin holding is down to $46.16 million only.
After Mr. Bukele failed in his efforts to keep cryptocurrency investors excited and raise fresh capital, the use of bitcoin by Salvadorans has plummeted and the country is now short of cash.
Surprisingly, despite the financial hitch, Mr. Bukele’s popularity has not been diminished. Surveys indicate that more than eight out of 10 Salvadorans support the president. This is due to his widespread support for crackdowns on criminal gangs, and fuel subsidies that have reduced the impact of global inflation.
Critics say that Mr. Bukele’s failure to achieve the stated goals for bitcoin — to bring investments to the country and provide financial services to the poor — has revealed the weaknesses of his administration. This has raised questions about the financial viability and visibility of his ambitious plan for modernizing El Salvador at the cost of democratic governance.
His government spent 15 percent of its annual investment budget last year to encourage the adoption of bitcoin in the country’s economy. Each citizen who downloaded a government-backed cryptocurrency payment application called “Chivo Wallet” was offered $30 dollars. This is nearly 1 percent of the average Salvadoran’s annual income. Chivo means “cool” locally.
According to Mr. Bukele, his call was listened by nearly 3 million Salvadorans, which is 60 percent of all adults.
Despite this initial uptake, cryptocurrency usage has plummeted.
According to a survey by three American-based economists and published by the National Bureau of Economic Research, only 10% of Chivo users continue using the app for bitcoin transactions after they exhaust the $30 rewarded by the government. The survey report also highlights that almost no new users downloaded the app since the beginning of 2022.
Fernando Alvarez, an economist at the University of Chicago and author of the study, stated that “the government left no stone unturned to push the adoption of the app, but it still failed.”
In March, El Salvador’s Chamber of Commerce conducted a separate survey and found that only 14% of businesses had made bitcoin transactions since September 2021. Only 3 percent of those surveyed visualized business value in it.
Mr. Bukele’s isn’t facing challenges towards the use of bitcoin from inside the country only. The United States based Salvadorans have also turned a blind eye to Mr. Bukele’s request to use bitcoin while sending money back to their relatives. According to El Salvador’s central banking, digital currency payment apps like Chivo accounted for less than 2 percent of all remittances during the first five months of this year.
But the adoption of Bitcoin wasn’t the only challenge that Mr. Bukele has to deal with.
A global downturn in cryptocurrency that has wiped out more than $2 trillion, in terms of market cap, was another blow to Mr. Bukele’s bitcoin push. The global Crypto market cap has fallen below $1 trillion for the first time since 2021. Just to put things in perspective the market cap of cryptocurrency skyrocketed to nearly $3 trillion by the end of last year.
People now say that his $30 stipend received from the Chivo app was worth $10 after the recent price collapse.
Despite the downturn, entrepreneurs and bitcoin enthusiasts argue that El Salvador has been transformed by bitcoin and that it has opened up new financial opportunities to its citizens that the mainstream banking system is missing.
But people directly/indirectly involved in El Salvador’s bitcoin ambition have started downplaying the situation.
“To the extent, we are pursuing financial freedom, we remain on track for that,” says Eric Gravengaard, CEO of Athena Bitcoin. It is a United States-based cryptocurrency firm that manages El Salvador’s network cryptocurrency A.T.M.s as well as processes bitcoin transactions for some of the country’s biggest retail chains.
On the other hand, critics are not convinced with the argument and claim that bitcoin has failed to create a wave of cryptocurrency entrepreneurs which was anticipated earlier.
According to El Salvador’s central bank, since the cryptocurrency was declared as an official currency of the country, only 48 new bitcoin-focused companies have registered in the country. This is less than 2% of all the businesses that opened in 2019. According to Leonor Selva, the executive director of El Salvador’s National Association for Private Enterprise, almost all of these registered companies are startups, have created negligible employment, and made little investment.
“In the day-to-day, the impact has been null,” she stated. She also focused on the fact that bitcoin has done damage to the existing system instead of reforming it. She argues that bitcoin has scared off traditional financiers as they are now worried about the impact of bitcoin on economic stability.
Not everyone is disappointed though. Gerson Martinez, a Salvadoran bitcoin entrepreneur, is still quite optimistic.
Mr. Bukele has not been discouraged by the price crash, and his enthusiasm for bitcoin has won him the admiration of the global cryptocurrency community.
Over the past year, Mr. Bukele posted a series of tweets stating that he has bought nearly 2,400 bitcoin tokens for $100 million since September. He responded to critics who accused him of financial irresponsibility by saying that transactions are done on his mobile, while naked.
He declared Bitcoin as the future of currency, after announcing his latest purchase amid a continuing cryptocurrency sell-off. “Thanks for selling at a low price.”
It is not clear where bitcoin assets are located, their value, payment method, or who owns the codes that prove ownership.
According to last week’s estimates by Disruptive magazine, Francisco Gavidia University, San Salvador, Mr. Bukele bet on bitcoin has resulted in a loss of $63 million, so far. The loss becomes even more concerning after realizing the fact that it was public money that Mr. Bukele has betting on bitcoin. For a small and poor country such as El Salvador, the loss is quite sizeable.
As the government struggles with rising food and fuel costs and future debt payments, the mounting losses are worrisome.
Highlighting the funding problems, Mr. Bukele decided to cut disbursements to local governments last year, causing some mayors and councilors to reduce services such as scholarships and water infrastructure.
“The problem with Bitcoin is that nobody is actually gaining anything,” said Carlos Acevedo, a Salvadoran economist and former director of the central bank). It’s an investment that doesn’t bring any social benefits.
Already, the collapse in cryptocurrency prices has scuppered a key plan of Mr. Bukele’s financial experiment: The issue of the first bitcoin-backed government bond.
The bond would have enabled Mr. Bukele to bypass traditional finance institutions, like the International Monetary Fund (IMF), which has connected the availability of new funds to the country with financial discipline.
The government-backed off from the $1 billion bitcoin-based bonds now. It delayed the project indefinitely in March citing the worsening global financial situation due to the ongoing conflict between Ukraine and Russia.
Economists believe now the bitcoin-obsessed country has fewer options to pay $800 million on its debt due in January and subsequent payments that are due later this year.
Mr. Bukele is eventually on the fence now. Slashing public spending drastically at the risk of infuriating voters, or putting the country into default are some of those few options left for him. A default could cause disruption to basic imports, slow down the growth, or may cause a bank run.
Frank Muci, the policy expert from the London School of Economics who has been studying El Salvador’s Bitcoin bond, said that “Bukele showed that he cares less about public image than good economic management. But eventually, the chickens will return to roost at a very high price for the country.”
As experts believe that this time crypto winter is expected to be far longer than ever before, the biggest challenge for Mr. Bukele would be to buy time. Even if the cryptocurrency bounces back to its glorious days, which is unlikely to happen anytime soon, El Salvador may not be able to reap significant benefits until the crypto market doesn’t win the confidence of leading economies like the US, China, and India.