El Salvador’s Bitcoin bet could put the country at risk as its holdings have already lost $40 million amid a cryptocurrency route.
The losses — equivalent to the Central American country’s next bond payment — come amid a so-called “crypto winter” and the president’s plans to build a volcano-fueled “crypto city” to mine bitcoins.
President Nayib Bukele announced in September that El Salvador would become the first country in the world to accept Bitcoins as legal tender and spend $105 million on the digital currency.
But since then, its value has fallen 45% amid a general burst of the crypto bubble, pushing the value of the 2,301 Bitcoins bought by the state treasury to $66 million.
The decision to make Bitcoin legal tender has taken bond investors by surprise, who see it as a way to expose the government’s treasury to crypto market volatility and thereby affect the country’s ability to make bond payments.
“It’s risky because it’s an extremely volatile asset, and it’s an investment at the discretion of the president,” said Bloomberg, former head of El Salvador’s central bank, Carlos Acevedo.
El Salvadoran President Nayib Bukele (left, in the cap) has unveiled architecture studio FR-EE’s designs for a cryptocurrency-funded city slated to rise from the side of a volcano in the south of the country.
President Nayib Bukele announced in September that El Salvador would become the first country in the world to accept Bitcoins as legal tender
The decision to make Bitcoin legal tender has astonished bond investors, who see it as exposing the treasury to crypto market volatility and thereby impacting the country’s ability to make bond payments.
El Salvador’s President Nayib Bukele has spent $105 million on the digital currency. But since then, its value has fallen by 45% amid a general burst of the crypto bubble, which has reduced the value of the 2,301 Bitcoins bought by the state treasury to $66 million.
Self-proclaimed ‘coolest president in the world’ Nayib Bukele (above) is a big supporter of the cryptocurrency Bitcoin
“He buys it on his phone if he wants to take advantage of the dip, but he doesn’t do it right because when he buys there’s always a bigger dip.”
El Salvador owes bondholders $382 million in interest this year, with July being the toughest month for payments as $183 million is due.
The country has $3.4 billion in reserves as of April, according to the central bank, and there are plans to raise $1 billion through a Bitcoin-backed bond, although this is now questionable given the collapse in the cryptocurrency’s value.
Despite these reserves, the markets are now seriously questioning El Salvador’s ability to service its debts due to its flirtation with cryptocurrency.
Rating agency Fitch downgraded El Salvador’s rating to CCC, or “junk” in the sector, amid fears that rising debt to GDP levels, expected to hit 86.9% by 2022, “raise concerns about the economy.” sustainability of the debt in the medium term’.
Bukele has maintained his enthusiasm for the digital currency even as its price plummets after purchasing a double tranche of 500 bitcoins for $15.5 million on May 9 – now valued at $14.1 million just four days later.
That same day, he tweeted lavish architectural plans for a “crypto city,” a lush and green science fiction vision of a coastal megalopolis, complete with monuments and an airport.
Bukele has maintained his enthusiasm for the digital currency even as the price plummets, purchasing a new tranche of 500 bitcoins on May 9 for $15.5 million – now valued just four days later at $14.1 million.
The lavish architectural plans for a ‘crypto city’ a lush and green sci-fi vision of a coastal megalopolis complete with monuments and an airport
Bitcoin City plans put construction — whose start date is unclear — near Conchagua Volcano on the Gulf of Fonseca in the southeastern Central American country
“Trees everywhere,” he said on Twitter. “With a beautiful view of the volcano.”
The plans for Bitcoin City have been built — the start date of which is unclear — near the Conchagua Volcano on the Gulf of Fonseca in the southeastern Central American country.
Nayib Bukele – The First Millennial Dictator?
Nayib Bukele, the 40-year-old self-proclaimed “coolest president in the world,” has developed a new form of authoritarianism that other savvy Democratic leaders could soon adopt.
Since early May, he and his supporters have taken classic authoritarian measures to strengthen their grip on power and neuter democracy.
On May 1, he sacked the country’s top prosecutor and the highest court, showering both institutions with loyalists.
Since then, he has used government agencies to harass journalists, investigate political opponents and dismantle government checks and balances.
He is also in the process of drafting a new constitution.
He has explicitly stated that his mission is to ensure that his opponents never come to power again.
Yet he retains over 80% popular support in the polls.
He seems to be achieving this by positioning himself as the antidote to El Salvador’s infamous and endemic corrupt establishment — the opposition he never wants to bring to power again.
He has deliberately appealed to the illiberal tendencies of younger voters disillusioned with democratic politics that have spawned decades of corruption.
They would rather have an authoritarian leader who represents their interests.
First proposed in 2001, it aims to become a ‘smart’ city based entirely on the use of Bitcoin as the digital currency, where citizens will be free from most taxes.
“We will have no income tax forever. No income tax, no property tax, no purchase tax, no tourist tax and no CO2 emissions,” Bukele said in a statement in November.
“The only taxes they will have in Bitcoin City is VAT, half will be used to pay for the council bonds and the rest for the city’s public infrastructure and maintenance.”
El Salvador has struggled over the years with which currency to use. It abandoned its own volatile fiat currency — and thus control over its own monetary policy — in favor of the US dollar in 2001.
The move to Bitcoin was intended to help the country’s citizens who rely on remittances from the US and other countries avoid the notoriously predatory services the money had to go through.
The government developed an app called Chivo Wallet to enable daily crypto transactions with a $30 giveaway for citizens who downloaded it to promote its use.
But only 20% of users continued to use it after spending the giveaway, with the volatility that makes crypto such an attractive unregulated security, making it a poor everyday currency.
The nation was in talks with the International Monetary Fund about an expanded fund facility to weather the recent turmoil, but they stalled over Bukele’s decision to make Bitcoin legal tender.
Since then, spreads on the country’s credit default swaps – a type of insurance against missed payments – have widened by more than 20 percentage points, implying an 87% chance of default over the next five years.
El Salvador’s tribulations come against the backdrop of a decline in digital currency values across the board in a so-called “crypto winter” that has lost investors billions.
Just yesterday alone, more than $200 billion was wiped from the cryptocurrency market.
During the pandemic, record low interest rates intended to stimulate economies led investors to buy riskier assets such as cryptocurrency with higher returns.
As skyrocketing inflation leads to a rise in interest rates to safeguard savings, these assets are sold in favor of safer government bonds – which will yield better returns.