Eight months after its launch in September, it has become apparent that El Salvador’s much-publicized experiment in making bitcoin legal tender has so far been a failure.
President Nayib Bukele’s policy was never popular, as it was met with substantial protests upon its launch and widespread apathy after that.
but at least it was fiscally successful. Despite a bumpy first day, bitcoin fell from $52,600 to $46,800 on September 1. on November 7, it rose fairly steadily through mid-November, peaking at nearly $68,800 on November 1. on January 10, a short-term gain that made Bukele seem prescient, despite widespread opposition from citizens, more than three-quarters of whom called for the law’s repeal in a poll four days before he will come into force.
see more: survey shows that 70% of salvadorans are anti-bitcoin
then the bottom fell out. the bitcoin bear market hit in the second week of november, dropping as much as 50%, well below the average price of $48,000 the savior paid for his 1,801 btc.
Even that average came after President Bukele “bought the dip” on January 1. 21, at $36,450. at the time of this writing, the price is $38,800.
no, I was wrong, I didn’t miss it.
el salvador just bought 410 #bitcoin for only 15 million dollars 🥳
some guys are selling too cheap 🤷🏻♂️ https://t.co/veuezp5udu
— nayib bukele (@nayibbukele) January 21, 2022
Meanwhile, the cost of making the no. 1 cryptocurrency a form of legal tender on par with the us uu. dollar was huge.
The international monetary fund (imf), a strong critic from the start, said in February that the cost of implementing the program, including a $30 incentive for each citizen who downloaded the country’s goat digital wallet, was necessary to carry out Bitcoin payments, research and development of the wallet itself, and building a network of crypto ATMs across the country was 1% of the country’s gross domestic product (GDP). And that’s not counting the cost of the 1,801 bitcoins that President Nayib Bukele bought.
see more: the experiment of bitcoin as a currency costs el salvador 1% of its gdp, informs the imf
drop in interest
According to the national bureau of economic research (nber), that hasn’t improved, which published a report last month and found that in the first quarter of 2022, the goat wallet had “almost no new users.” The report also said that its use for remittances, a key target with a strong economic benefit due to its traditionally high cost, “is at its lowest point since the launch of the goat wallet.”
Which was never very high, the group said, estimating that only 60% of eligible citizens had downloaded a goat wallet, and only one in five used it after spending the bonus.
That has been the experience on the ground, according to the president of the salvadoran banking association (abansa), raúl cardenal. on Feb. On February 25, he told the local graphic press that the banks had not seen any significant consumption of bitcoin.
Despite the requirement to accept bitcoin to pay for loans and other services, by the end of the year the association’s members had not seen “a large number of customer transactions to [pay] any type of loan,” he said. he said.
Perhaps even more revealing, only 2% of remittances collected by Salvadorans came in bitcoin, despite the extraordinarily high costs of those small cross-border transactions, which can be 5% to 10% or more, which makes remittances look like they should be ripe fruit.
in fact, a study conducted in september by pymnts and the stellar development foundation found that 23% of u.s. uu. consumers who send remittances have used cryptocurrencies.
Also read: Digital Currency Exchange: The Cross-Border Remittances Report
the biggest losses
And yet, the expense was, in a way, the least of bukele’s costs.
On the one hand, the young president, who has full control of the legislative assembly, spent a great deal of political capital: not only were there protests at first, but the launch of the goat wallet was a disaster, with serious technical problems and widespread fraud and hacking.
Also read: Flaws, fraud and high fees annoy users of El Salvador’s goat bitcoin wallet
Then there was the external economic and credibility damage. In addition to being widely criticized by international economic organizations and governments, especially the US government. uu. — The IMF has blocked a planned $1.3 billion loan that El Salvador needs to pay off debt due early next year and has made it quite clear that the loan will not take place as long as bitcoin remains an official currency.
see more: the silence of the imf indicates that the savior must abandon bitcoin to obtain a loan of 1.3 billion dollars
Markets have had a similar reaction, with Moody’s and Fitch’s cutting the country’s credit rating to junk level, substantially increasing its borrowing costs.
Also read: Weeks before bitcoin bond launch, Fitch cuts El Salvador’s credit rating
The international lender of last resort is also not likely to improve its view of bitcoin as legal tender now that it is spreading.
The poor, war-torn Central African Republic followed in El Salvador’s footsteps last week, making bitcoin an official currency. moving the car on April 27 did not make much sense, as only a third of the country’s population has a mobile phone and only 4% have access to the internet, which is necessary to use a cryptocurrency.
see more: the central african republic, like el salvador, could soon regret adopting bitcoin
however, the bitcoin experiment was hugely popular in the crypto world, especially as bukele also announced plans for a “bitcoin city” on the side of a volcano that would include geothermal-powered bitcoin mining in an economy fully cryptographic.
Initially, this would be paid for with a $1 billion bitcoin-backed bond to be used 50% to build the mining facilities and buy more bitcoins.
Dubbed the “volcano bond”, both the government and the company boasted that it was going to issue it tokenized on a blockchain and claimed that it would be oversubscribed by at least $500 million.
see more: cso blockstream: $500 million committed to el salvador’s bitcoin bonus
however, it was repeatedly postponed, and most recently finance minister alejandro zelaya said it would be postponed indefinitely due to uncertain economic conditions caused by russia’s invasion of ukraine, and subsequent sanctions and political instability that was causing investors to withdraw from riskier investments.
Also read: Volatility and political turmoil jeopardize El Salvador’s bitcoin bond plans
but given that bukele has regressed further and further as the criticism mounted, it is not very likely that he will regress without a crisis. having called groups ranging from bloomberg to the usa. uu. congress, the political withdrawal will be more than embarrassing when it arrives.
see more: the battles on twitter of the president of el salvador run the risk of cornering the nation even more