The small Central American country of El Salvador, which made history by producing Bitcoin (BTC) more than a year ago, recently celebrated its first year of accepting BTC.
The Salvadoran government introduced BTC as a tool to attract foreign investment, create new jobs and, when adopted, reduce dependence on the US dollar in the country’s economy. Despite growing pressure from global organizations such as the World Bank and International Monetary Fund (IMF) to eliminate BTC as legal tender, many BTC supporters and the libertarian community have rallied behind the tiny nation.
A lot has changed over the past year since El Salvador became the first “Bitcoin nation”. Immediately after the recognition of BTC, enthusiasm and public interest increased, the price soared to new heights.
Salvadoran President Nayib Bukele joined the growing league of Bitcoin supporters to buy several market prices and even saw the benefit of BTC purchases in the early days as the country built schools and hospitals with its profits.
As market conditions dipped, the frequency of BTC purchases slowed, and the president, who often interacted with the crypto community on Twitter and shared his future Bitcoin endeavors, significantly reduced his social media interactions.
El Salvador has bought 2,301 BTC since last September for about $103.9 million. This Bitcoin is currently worth about $45 million. The most recent purchase was made in mid-2022, when the nation bought 80 BTC for $19,000 a piece.
As BTC’s price soared, critics who had long voiced their concerns about the cryptocurrency felt vindicated with several comments along the lines of “I told you so.” However, market experts believe that El Salvador’s BTC experiment is far from a failure.
The Bitcoin Volcanic bond, a project that aims to raise $1 billion from investors to build a Bitcoin city in El Salvador, has already been delayed on multiple occasions, raising doubts not only around the project, but about the adoption of BTC in general.
Bitcoin entrepreneur Samson Mow, who played a key role in designing the Bitcoin Volcanic bond, told Cointelegraph that contrary to common outside perceptions, El Salvador is building through a bear market. He noted that the Volcanic bond has been delayed for several reasons and is currently awaiting the adoption of the Digital Securities Act. He explained:
“We are still waiting for the new digital securities laws to go through congress, and once passed, El Salvador can start raising capital for Bitcoin Bonds. I hope it will happen before the end of this year. Like Bitcoin companies, El Salvador is focused on building through a bear market. I can’t see that President Bukele doesn’t pay more attention to these prices.”
BTC price hit an all-time high of $68,789 just a month after El Salvador was admitted on November 10. But since then, the price has fallen more than 70% and is currently trading around $19,000. Many critics believe that the future of Volcanic bond and its native token is highly dependent on the cryptocurrency market, and thus it can only be attractive during bull markets.
Bitfinex CTO Paolo Ardoino told Cointelegraph that Volcanic tokens will generate interest from investors regardless of market conditions, explaining:
“The Volcanic token will be the first of its kind. While investor appetite for new offerings is usually greater during a bull market, we are confident that the unique offering this token represents will garner significant interest regardless of market conditions. The Volcanic token has broad support in the Bitcoin community, and whether we are in a bear or bull market, there is a huge appetite for the offering.
Bitfinex is the primary infrastructure partner of the government of El Salvador, responsible for processing transactions from the sale of Volcanic tokens.
Bitcoin adoption has boosted remittances and tourism
While critics have called El Salvador’s Bitcoin experiment a failure from the start, supporters see it as a revolution of sorts and believe that El Salvador’s adoption could create a domino effect for other countries with similar financial challenges, such as large numbers of unbanked citizens and significant remittances. volumes.
Bukele previously stated that the focus for BTC recognition is to offer banking services to the more than 80% of unbanked Salvodrans. Within six months of the law’s adoption, the country’s national Bitcoin wallet managed to connect four million users, giving 70% of the unbanked population access to payment and money transfer services without going 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 been successful in several ways, whether it’s boosting bankless banking or tourism:
“We have to admit that digital currency has helped the Central American country of El Salvador rebuild its tourism industry, even though the country is still struggling to survive the long cryptocurrency winter. According to the Ministry of Tourism, El Salvador’s travel spending has increased by 81% in the post-pandemic period. The country received 1.2 million visitors in 2021 and 1.1 million visitors 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 the nearly doubling of tourism is a significant boon for the country.
Besides tourism and offering financial services to the unbanked, the adoption of BTC has also proven beneficial in terms of cross-border remittances and has significantly reduced transaction costs.
According to the calculations of the Central Reserve Bank of El Salvador, in January-May 2022, the remittances of citizens living abroad exceeded 50 million dollars. The adoption of Bitcoin and the Chivo wallet, an initiative supported by the government of El Salvador, helped to increase Lightning Network transactions by 400% in 2022.
Disadvantages of Bitcoin Acceptance
The biggest downside to El Salvador’s adoption of Bitcoin has been the macroeconomic factors that have caused the BTC price to fall and the amount of backlash it has received from around the world. The pushback won’t matter in a bull market, but a small nation-state with financial difficulties can’t afford to get on bad terms with international monetary institutions.
Right now, the vast majority of El Salvador Bitcoin has been bought at a higher price than it is currently using. Bitcoin closely follows traditional assets like the stock market, especially tech stocks. They, too, have been battered this year as the world tries to cope with pandemic-related government handouts.
Aside from the price of Bitcoin, the bigger challenge for El Salvador is how the international financial world views this move.
The country’s move towards Bitcoin has limited the country’s access to traditional financial markets and caused some real problems in financing the repayment of Bukele’s bond obligations. Earlier this year, Moody’s cited differences over Bitcoin as the reason for El Salvador’s difficulty in agreeing to the IMF.
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Richard Gardner, CEO of institutional infrastructure services provider Modulus, told Cointelegraph that maybe five years from now Bukele’s decision won’t look so bad, but right now it’s controversial:
“It doesn’t seem wise for Bukele to switch to Bitcoin. Even with high inflation for the US dollar, Bitcoin ultimately failed as an inflation hedge given its downside. However, we are looking at a one-year snapshot during a recession. For a country like El Salvador, access to financing through organizations like the IMF is critical. This makes Bukele’s Bitcoin gambit difficult to defend.”
El Salvador’s future hinges heavily on the success of delayed volcanic bonds that could bring in billions and set a precedent for others. Until the bond goes on sale, the outside world will continue to measure its success based on BTC purchases.