The price of Bitcoin has fallen 43% from its high in November 2021. El Salvador’s president Nayib Bukele is buying the dip.
As one of the cryptocurrencies’ biggest promoters, Bukele has made the poor Central American country, with a median per capita GDP of less than $4,000, one of the biggest boosters of cryptocurrencies. In June 2021, Bukele championed a legislative vote adopting Bitcoin as legal tender in El Salvador. At the time, Bukele and many legislators claimed accepting Bitcoin could bring unbanked citizens into the economy and enable easier cross-border payments, while critics called the move irresponsible.
Now, that thesis is being put to the test. Bukele’s commitment to Bitcoin has sown distrust among citizens and in global financial markets. Lenders and international bond markets have begun to view Bukele and, by extension, El Salvador as a risky debtor. The country’s economy could suffer, along with Bitcoin’s prospects as a viable currency for other countries.
Bullish on Bitcoin
Bukele’s decision to use government funds to invest in Bitcoin as part of its financial reserves is unnerving creditors. The country holds at least 1,801 bitcoins, according to Bloomberg, worth about $66 million as of Jan. 25, or 2% of the country’s listed 2020 reserves. (At Bitcoin’s all-time high in November, those coins would have been worth $124 million.)
Bukele, whose pronouncements often sound more like those of a Wall Street day-trader than a head of state, announced a recent Bitcoin purchase on Twitter. “We just bought the dip,” he tweeted in September. “150 new coins!” Since Bukele bought the “dip,” the price of Bitcoin surged to an all-time high in November 2021, but has since lost nearly half its total value, a crash generally attributed to losses in the traditional financial markets amid record inflation and looming US interest rate hikes. Despite the volatility, Bukele announced on Jan. 21 the country had bought 410 additional bitcoin for $15 million, doubling down on his risky crypto gamble.
While Bitcoin is designed to be an alternative payment system, it’s mostly an unregulated and highly volatile asset used for speculation rather than spending. That makes El Salvador’s game a perilous one, according to the International Monetary Fund (IMF) and other critics. Since El Salvador adopted bitcoin as legal tender in September, its five-year credit default swap—a price measure of how likely a country is to default on its debt payments—has increased four-fold, a sign of waning faith in El Salvador’s ability to repay its sovereign bonds. And its devaluing bitcoin holdings are now a major impediment as El Salvador negotiates a $1.3 billion loan from the IMF.
What is Bitcoin doing to El Salvador’s economy?
When El Salvador’s legislature approved bitcoin as legal tender last June, it paved the way for the cryptocurrency to be integrated into its economy. Bitcoin can now be held in the country’s banks and…
Read more:El Salvador is still buying the dip as Bitcoin sinks