Adoption monitoring one year later

El Salvador, the small Central American nation that made history just over a year ago when it created Bitcoin (BTC), recently marked its first year of BTC adoption.

The Salvadoran government has advertised BTC as a tool to attract foreign investment, create new jobs, and reduce the reliance on the US dollar in the country’s economy upon adoption. Many supporters of BTC and the libertarian community have rallied behind the small nation despite increasing pressure from global organizations such as the World Bank and the International Monetary Fund (IMF) to remove BTC as legal tender.

A lot has changed in the past year since El Salvador became the first “Bitcoin nation”. The enthusiasm and public interest spiked soon after BTC’s recognition, with the price climbing to new highs.

Salvadoran President Nayib Bukele joined the growing league of Bitcoin supporters to buy several market dips and even reaped the rewards of their BTC purchase in the early days as the country built schools and hospitals with its profits.

As market conditions turned bearish, however, the frequency of BTC purchases slowed and the president, who was often seen interacting with the crypto community on Twitter and sharing future Bitcoin assets, significantly reduced his interactions on the social media.

El Salvador has bought 2,301 BTC since last September for about 103.9 million dollars. That Bitcoin is currently worth around $ 45 million. The most recent purchase was made in mid-2022, when the nation bought 80 BTC for $ 19,000 a piece.

When BTC’s price plummeted, critics who have long raised concerns about a crypto bubble felt validated, with several comments along the lines of “I told you so.” However, market experts believe El Salvador’s BTC experiment is far from a failure.

El Salvador’s Bitcoin Volcanic Bond, a project set to raise $ 1 billion from investors to build a Bitcoin city, has already been delayed on numerous occasions and skepticism is growing not only around the project but also over the overall adoption of BTC itself.

Samson Mow, a Bitcoin entrepreneur who played a key role in designing the Bitcoin Volcanic Bond, also called the volcanic token, told Cointelegraph that contrary to common external perceptions, El Salvador is building through the bear market. He noted that the volcanic bond has been delayed for several reasons and is currently awaiting the approval of a law on digital titles. He explained:

“We are still waiting for the new digital securities laws to go to Congress and, once they are approved, El Salvador can begin the capital increase for Bitcoin Bonds. Hope that happens by the end of this year. Just like Bitcoin companies, El Salvador focuses on building through the bear market. I can’t see President Bukele not racking up more at these prices. “

The price of BTC made a new all-time high of $ 68,789 just one month after the adoption of El Salvador on November 10th. Since then, however, the price has plummeted by more than 70% and is currently trading at around $ 19,000. Many critics believe that the future of the volcanic bond and its native token is highly dependent on the cryptocurrency market and therefore could only gain traction during bull markets.

Paolo Ardoino, Bitfinex chief technical officer, told Cointelegraph that Volcanic tokens would generate interest from investors regardless of market conditions, explained:

“The volcanic token will be the first of its kind. Although investors’ appetite for new offerings is generally higher during a bull market, we are confident that the unique proposition this token represents will generate significant interest regardless of market conditions. The Volcanic token has broad support in the Bitcoin community and there is manifestly a large appetite for the offer regardless of whether we are in a bear or bull market. “

Bitfinex is the key infrastructure partner of the El Salvador government responsible for processing transactions from the sale of volcanic tokens.

The adoption of bitcoin has increased remittances and tourism

While critics have called El Salvador’s Bitcoin experiment a failure from the start, proponents see it as something of a revolution and believe that adopting El Salvador could create a domino effect for other nations with similar financial challenges such as a large number of non-bank citizens and significant volume remittances.

Bukele previously said that the main goal of BTC’s recognition was to offer banking services to more than 80% of non-bank Salvodrans. Within six months of the law being passed, the country’s national Bitcoin wallet managed to board four million users, ensuring that 70% of the non-bank population had access to payment and remittance services without having to go to a bank.

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Aarti Dhapte, senior research analyst at Market Research Future, told Cointelegraph that El Salvador’s adoption of BTC has proved successful on several fronts, whether it is non-bank banking or promoting tourism:

“We should accept that the digital currency has helped the Central American nation of El Salvador rebuild its tourism industry, despite the country still having a hard time enduring the long winter of cryptocurrencies. According to information from the Ministry of Tourism, travel spending of El Salvador increased by 81% in the post-pandemic period. In 2021 the nation welcomed 1.2 million visitors and 1.1 million in the first half of 2022 “.

Statista data shows that more than 9% of El Salvador’s GDP is made up of the tourism industry, so an almost doubling of tourism is a significant advantage for the country.

Share of tourism in El Salvador’s GDP. Source: Statista

In addition to tourism and offering financial services to non-banks, the adoption of BTC has also proved beneficial in terms of cross-border remittances, significantly reducing transaction costs.

The El Salvador Central Reserve Bank estimates that from January to May 2022, remittances from citizens residing abroad were more than $ 50 million. The adoption of Bitcoin and the Chivo wallet, an initiative supported by the government of El Salvador, helped boost Lightning Network’s transactions by 400% in 2022.

The disadvantages of adopting Bitcoin

The biggest drawback of El Salvador’s adoption of Bitcoin was the macroeconomic factors that led to a drop in the price of BTC along with the amount of rejections it received from around the world. Pushing back wouldn’t matter in a bull market, but being a small nation-state with financial challenges, the country cannot afford to be on bad terms with international monetary organizations.

Right now, the vast majority of El Salvador’s Bitcoins have been bought at a higher value than they currently enjoy. Bitcoin has closely followed traditional assets, such as the stock market, especially tech stocks. They too have been beaten this year as the world tries to cope with the consequences of government dispensations linked to the pandemic.

Beyond the price of Bitcoin, the biggest problem for El Salvador is how the international financial world sees the move.

The country’s move to Bitcoin has limited the country’s access to traditional financial markets, causing Bukele to have real problems financing the repayment of his bond obligations. Moody’s earlier this year credited the disagreements over Bitcoin as one of the reasons El Salvador was struggling to come to terms with the IMF.

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Richard Gardner, CEO of institutional infrastructure service provider Modulus, told Cointelegraph that maybe five years from now Bukele’s decision won’t look so bad, but it’s controversial at the moment:

“Bukele’s switch to Bitcoin doesn’t seem wise. Even with high inflation for the USD, Bitcoin ultimately failed as an inflation hedge given its decline. However, we are looking at a snapshot of a year during a recession. For a country like El Salvador, access to finance through organizations like the IMF is vital. This makes Bukele’s Bitcoin move difficult to defend. “

El Salvador’s future hinges heavily on the success of overdue volcanic ties, which could bring billions in revenue and set a precedent for others to follow. Until the bond is launched, the outside world will continue to measure its success based on its BTC purchases.