One year Bitcoin in El Salvador: Between disillusionment and hope for recovery

In the first four months, the device for using cryptocurrency was downloaded 4 million times on mobile phones, for a population of 6.6 million Salvadorans.

Bitcoin’s endless decline in value, a year after it became legal tender alongside the dollar in El Salvador, is getting on the nerves of Salvadorans. Still, converts aren’t giving up hope that a rebound will change the game.

2021 was “a good year, but over the past five months, bitcoin has only gone down. However, we are trying to keep using it,” comments Maria Aguirre, a 52-year-old trader in El Zonte, a resort town where cryptocurrencies are enthusiastically embraced.

In fact, Bitcoin was being used in the shops of this famous surfing spot, 60 km northwest of the capital, long before President Nayib Bukele decided that on September 7, 2021 El Salvador would be the first country in the world to make it legal tender.

In the first four months, the device for using Bitcoin was downloaded 4 million times on mobile phones, for a population of 6.6 million Salvadorans. President Bukele’s idea was to encourage remittances from some 3 million emigrants, mostly in the United States, to their relatives back home by saving on bank fees. A strategic issue as these transfers account for more than a quarter of El Salvador’s GDP.

Unfortunately, according to the Central Bank of Salvador, “less than 2%” of expatriate remittances are in cryptocurrency, notes Carlos Acevedo, former central bank president.

“Yes, I used bitcoin for a while. But the way things are going, I don’t have any confidence anymore and I even deleted the application,” admits Carmen Mejia, a 22-year-old student who has relied exclusively on the dollar, the country’s legal tender, for around twenty years. Years.

In September 2021, Bitcoin was worth around $45,000, and three months later it was $68,000. The Salvadoran President euphorically announced that he would use the profit to build a public veterinary hospital.

He then came up with the idea of ​​issuing a billion dollar loan in cryptocurrency to build a “Bitcoin City”.

dizzying fall

But Bitcoin’s dizzying fall, currently below $20,000, has put these grandiose projects on hold.

According to financial rating agency Moody’s, Mr. Bukele’s government “spent approximately $375 million on Bitcoin adoption, including approximately $106 million from the Treasury to purchase Bitcoin, resulting in untold losses of approximately $57 million.” dollars led”.

In El Zonte, Maria still believes in it, citing the advice of the seaside resort’s “experts”: “If bitcoin is down, don’t touch it (to change it into dollars), otherwise you’ll lose everything.”

President Bukele is looking to bounce back by taking advantage of the drop: he bought 80 bitcoins for El Salvador at $19,000, bringing the country’s basket to a total of 2,381 bitcoins purchased over the past 12 months. In June, he preached “patience” and recommended “stop looking at the curve” to the bitcoin-dollar exchange.

For the ex-president of the central bank, the presidential bet on Bitcoin has “failed”, at least for the time being.

But “it’s not a failure yet because (the market) may recover,” which will bring Bitcoin and the country out of “crypto winter.”

Aside from having “a psychological effect on people,” Bitcoin’s collapse has “complicated El Salvador’s negotiations with the IMF for a $1.3 billion loan,” Mr. Acevedo further notes.

With debt servicing at risk of default exceeding 80% of GDP, President Bukele announced in July a plan to buy back bonds maturing in 2023 and 2025 to ensure the country is not short of liquidity.

Sovereign risk has improved from 35% to 25%, but “it is unthinkable that El Salvador can return to traditional credit markets until sovereign risk falls to at least 5%,” says Mr. Acevedo.

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