Bitcoin’s drop in value is a ‘death blow’ for El Salvador | International

This week marked a milestone in the history of cryptocurrencies, which traded at staggering figures during the Covid-19 pandemic but lost nearly all of their earnings this year. Bitcoin is the most popular of all, as it is considered the most reliable, but this week it has lost 21% of its value and its price has hit a low not seen in two years. This is relevant to countless investors around the world, but is perhaps an even more pressing issue for 6.5 million Salvadorans, whose president has invested some of the nation’s public finances in this cryptocurrency.

It was the failure of one of the largest cryptocurrency exchanges, FTX, that caused Bitcoin to collapse this week. But this was only the most recent decline in the digital asset. Bitcoin has been on tilt since the end of last year due to the tightening of global financial conditions. Time was no ally of El Salvador’s President Nayib Bukele, who made bitcoin legal tender in September 2021 and invested some of the public finances in the asset. Since Bukele bought the first digital tokens on September 6 last year, they have lost 67% of their value.

It is not known for sure how much Bukele invested in bitcoin, but based on his own social media announcements, it is estimated that the losses could be around $ 70 million, according to Ricardo Castaneda, an economist at the Central American Institute of Fiscal Studies. ICEFI). “This has a very high opportunity cost for a country like El Salvador, because it represents, for example, almost the entire budget of the Ministry of Agriculture in a country where half the population suffers from food insecurity,” said the economist. on the phone interview from San Salvador. The smallest country in Central America, El Salvador has a poverty rate of 26%, according to the World Bank.

In a dollarized country, Bukele has made great efforts to get citizens to use bitcoin in their daily lives, but it hasn’t paid off, Castaneda said, as there is a lot of distrust among the population. Not even one of the great areas of opportunity, remittances from abroad, has materialized. According to data from the central bank of El Salvador, only 2% of money transfers take place in bitcoins. “This week’s losses are practically a death blow to the possibility of massive cryptocurrency adoption in El Salvador,” Castaneda said. “People have experienced firsthand the volatility and problems associated with the lack of transparency.”

“It is no longer necessary for someone else to tell you about the implications of investing in bitcoin; instead, people have already experienced it firsthand, ”noted Castaneda. “In this scenario, the citizens themselves have decided not to use bitcoin. What happened this week only aggravates this mistrust, and I would say that it is very difficult to find a way back from this point ”.

If Salvadorans don’t know how much of their taxes have been invested in buying bitcoin, it’s because the government has never made its purchases transparent. Financial analysts based their studies on Bukele’s Twitter announcements. In December 2021, when bitcoin was falling rapidly, Bukele announced that the country had increased its position in bitcoin due to the low price. A similar announcement was made in May of this year, during another notable drop in bitcoin’s value. But last week, Bukele remained silent.

In an article published on November 6 in a digital publication called Bitcoin magazine, Bukele attacked his critics and said it was “false” that the country suffered losses, as it did not sell its digital currency. “For those who don’t understand, the real question is not whether other countries will adopt bitcoin, but when,” the president said. “We are at a very early stage of this paradigm shift, which is why common sense is controversial; there are many people who applaud him but many more detractors ”.

But El Salvador is racing against time. The Bukele government has a $ 667 million international debt payment due in January and analysts believe the Central American country could default. On Monday, Vice President Félix Ulloa told Bloomberg that China had offered to buy the country’s external debt, a proposal that was under consideration by the government. Two days later, Bukele announced on his social media that El Salvador had signed a free trade agreement with the Asian country. Earlier this year, the president turned to the International Monetary Fund (IMF) for funding, but the organization said no, instead asking the government to reconsider its national experiment with bitcoin.

“I see a paradox here,” noted Castaneda. “El Salvador was the first country in the world to make bitcoin legal tender, but it’s very likely that El Salvador is also the country where the highest percentage of people don’t want to use bitcoin.”

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