El Salvador’s Dilemma

El Salvador is said to be the first country in the world to officially accept Bitcoin. It seemed like the move is a great idea for their economy, but is it really now? On June 5th, 2021, President Nayib Bukele declared that El Salvador will make bitcoin legal tender, on par with the US dollar.

Highlights-

• El Salvador is the first country to have made bitcoin legal tender.
• El Salvador's government purchased 2,301 units of bitcoin, which dropped to its lowest value since 2020 on Monday.
• El Salvador currently holds 2,301 Bitcoin, which is worth around $53 million at the time of publication. That is almost half of the $105.6 million invested by Bukele.
• El Salvador's president, Bukele, had intended to issue "Volcano Bonds" to acquire funding for the construction of a "Bitcoin City."
• The bonds, which were intended to go public in March, have been delayed owing to the present state of the crypto market.

With bitcoin trading at $36,000 on June 5, things looked even brighter on Sept. 7, when the law took effect, with the cryptocurrency trading at $52,600. That evening, though, was a different story. Bitcoin fell about $10,000 throughout the day, then rebounded to $46,800 before surging beyond $68,000 two months later. Bitcoin is now at its all-time low of $23,555 since Dec 2020 on its one-year anniversary.

Bukele had gone all-in on Bitcoin, transforming the entire country into a cryptocurrency experiment. Despite surveys indicating a strong majority of the people rejecting this, his allies dominated the Legislative Assembly, which passed a bill making Bitcoin legal money alongside the US dollar, which El Salvador accepted in 2021.

The bubble exploded 2 weeks ago when the stablecoin Terra proved to be considerably less stable than claimed and plummeted, triggering a larger freefall in crypto markets that erased $400 billion in market capitalization. For some, the crash resulted in a devastating loss of personal fortune. The consequences are far-reaching on a national scale. El Salvador is on the verge of defaulting on its obligations, which amounts to over 100 percent of its GDP.

This is worsened by the decline in the value of the country's Bitcoin assets, which Bukele boasted about trading with public funds. So far, he has cost the Treasury around $40 million, which is equal to the next foreign debt payment due to bondholders in June.

El Salvador's government is deeply in debt as a result of decades of financial mismanagement, and it relies on foreign cash to run. However, its bonds have been downgraded to junk status too. Bukele has ruined relationships with conventional banks, the US Treasury, and the International Monetary Fund, which has placed a much-needed $1 billion loan to the country on hold indefinitely over corruption.

The Bitcoin gambit was mostly an attempt to bypass the global banking system and appeal to the crypto community directly as a lender of last resort. So the Bukele administration pushed ever-more-outlandish claims of a Bitcoin City powered by geothermal energy and debuted Volcano Bonds, a crypto-backed sovereign debt product.

The bonds, which were intended to go live in March, have been postponed owing to, well, the present state of the crypto market.

El Salvador's government bought 2,301 units of bitcoin, which dropped to its lowest value since 2020 on Monday. Finance Minister Alejandro Zelaya highlighted a Deutsche Welles projection that the country's bitcoin holdings had lost $40 million in value. This is certainly bad news for El Salvador, which was already in financial trouble. However, Zelaya downplayed fears that a dramatic decline in bitcoin's value would not harm the Central American country's fiscal stability on Monday. He said "Forty million dollars is less than 0.5 percent of our national general budget,"

Bukele has theoretically not lost anything till he decides to sell. Maybe if he keeps holding, he'll be able to retrieve some of the money he's made his country lost. The obvious takeaway is that squandering government funds on extremely speculative crypto ventures is not a smart way to run a country.

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