How has Bitcoin’s adoption as an official currency been for the Central American country?
The story so far: The crash in the price of Bitcoin and other cryptocurrencies has left the government of El Salvador in trouble. The Central American country, led by President Nayib Bukele, a confessed fan of cryptocurrencies, adopted Bitcoin as its official currency in September last year. The Bitcoin price crash has raised concerns about the government’s ability to repay its debt.
What is the problem in El Salvador?
The crash of Bitcoin’s price from about $69,000 in November last year to about $20,000 this week has resulted in losses for investors worldwide. According to some estimates, the average cryptocurrency investor is deeply lost after a significant price correction. The crash in the price of Bitcoin has not spared the government of El Salvador either. President Bukele has used taxpayers’ money to bet on Bitcoin. Many times when Bitcoin’s price crashed sharply, he had taken to the popular social media site Twitter to announce to the world that he “bought the dip” (this refers to buying an asset after it has fallen in price). ). Even during the recent crash, he rushed into the market to buy Bitcoin and urged the residents of El Salvador to be patient. The government of El Salvador’s investment of more than $100 million in Bitcoin is said to have lost more than half of its value due to the crash.
Why did El Salvador adopt Bitcoin as its official currency?
In 2001, El Salvador adopted the US dollar as its official currency. After Bitcoin was adopted as the official currency last September, Bitcoin and the US dollar have been used as official currencies. El Salvador’s government has primarily encouraged citizens to use Bitcoin daily. It even came out with a payment wallet called Chivo, which initially issued free Bitcoin worth $30 to encourage people to use Bitcoin in transactions. Analysts believe the decision to use Bitcoin as the official currency may be related to the inability of the government of El Salvador to borrow in US dollars. El Salvador’s national debt has risen to more than 100% of gross domestic product, and the recent attempt to borrow $1 billion using Bitcoin-backed bonds has failed.
Government bonds trade at a steep discount and are considered junk by investors. President Bukele relied on financial aid from the International Monetary Fund (IMF) and the World Bank to meet his government’s spending needs. It should be noted that while El Salvador’s government may tax its citizens to meet its dollar needs, it may prove an unpopular move among citizens. Many believe that the president mismanaged money from abroad during the pandemic, and this has caused international organizations to hesitate to lend even more dollars to his government. The IMF had also opposed President Bukele’s decision to make Bitcoin an official currency.
Bitcoin offers the government of El Salvador an opportunity to reduce its reliance on the US dollar to fund its spending. Greater adoption of Bitcoin in El Salvador will allow the government to tax and spend it in Bitcoins rather than US dollars. This may be why the government encourages citizens to use Bitcoin over US dollars. Mr. Bukele has also set up geothermal plants to power his Bitcoin mining facilities. He can use the mined Bitcoins to directly fund his government’s domestic spending as Bitcoin becomes more accepted in the country. Otherwise, he can exchange his Bitcoin for US dollars to pay back debts or even spend it on the domestic economy, as the dollar is still the most accepted currency in El Salvador. This is why Bitcoin’s price drop is worrying analysts. A crash in Bitcoin’s price against the US dollar means that the government will have to sell its Bitcoin for fewer dollars, impacting its ability to repay dollar debt.
How well has Bitcoin fared in El Salvador?
Most residents of El Salvador have been reluctant to use Bitcoin as a medium of exchange, i.e., money. Many citizens, it is alleged, have registered on the Chivo payment wallet that the government simply pushed to sell their free Bitcoin in exchange for $30. It should be noted that the adoption of cryptocurrencies in general around the world is minuscule. Been. This has been the case despite the supply of cryptocurrencies being limited by design, which could help them maintain or increase their value over time. A big reason for the low adoption of cryptocurrencies is their extreme price volatility, making them an unreliable store of value.
People are generally hesitant to accept something like money if they are not quite sure about its potential value in the future. The crash of Bitcoin’s price from about $69,000 in November last year to about $20,000 this week has resulted in losses for investors worldwide. The government of El Salvador’s investment of more than $100 million in Bitcoin is said to have lost more than half of its value due to the crash. Bitcoin offers the government of El Salvador an opportunity to reduce its reliance on the US dollar for its spending. However, most residents of El Salvador are reluctant to use Bitcoin as a medium of exchange, i.e., money.
