Bitcoin’s devaluation is a ‘death blow’ to El Salvador | International

This week marked a milestone in the history of cryptocurrencies, which traded in impressive numbers during the Covid-19 pandemic, but lost almost all of their gains this year. Bitcoin is the most popular among them because it is considered the most reliable, but this week it has lost 21% of its value and its price has reached a low level not seen in the last two years. This is relevant for countless investors around the world, but perhaps more relevant for the 6.5 million Salvadorans whose president has invested part of the country’s public finances in this cryptocurrency.

The collapse of bitcoin this week was caused by the bankruptcy of one of the largest cryptocurrency exchanges, FTX. But that was just the latest decline in the digital asset. Bitcoin has been in decline since the end of last year as a result of tightening global financial conditions. Time has not been an ally of El Salvador President Nayib Bukele, who made bitcoin legal tender in September 2021 and invested some of his state finances in the asset. Bukele has lost 67% of its value since receiving its first digital tokens on September 6 last year.

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

In the dollarized country, Bukele has made major efforts to get citizens to use bitcoin in their daily lives, but these have not worked, Castaneda said, because there is a lot of mistrust among the population. Even one of the major areas of opportunity, remittances from abroad, has not materialized. According to data from El Salvador’s central bank, only 2% of money transfers are made in bitcoin. “This week’s losses are a fatal blow to the possibility of mass adoption of cryptocurrency in El Salvador,” Castaneda said. “People have experienced first-hand the instability and problems associated with opacity.”

“It’s no longer a case of someone else telling you about the perils of investing in bitcoin; On the contrary, people have already experienced it in the first person,” Castaneda said. “In this scenario, citizens themselves have decided not to use bitcoin. What happened this week only adds to this distrust, 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 goes into buying bitcoin, it’s because the government has never made their purchases transparent. Financial analysts conducted their research based on Bukele’s statements on Twitter. In December 2021, when bitcoin was rapidly depreciating, 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 significant drop in the value of bitcoin. But last week, Bukele remained silent.

In an article published on November 6 in the digital edition of Bitcoin magazine, Bukele attacked his critics and claimed that it was “a lie” that the country suffered losses because it did not sell its digital currency. “For those who don’t understand, the real question is not if other countries will accept bitcoin, but when,” the president said. “We are very early in this paradigm shift and so common sense action is controversial; There are many who applaud it, but there are many who condemn it.”

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

“I see a paradox here,” Castaneda said. “El Salvador is the first country in the world to make bitcoin legal tender, but El Salvador is probably also the country where the largest percentage of people don’t want to use bitcoin.”

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