El Salvador made Bitcoin legal tender a year ago. This is why the experiment failed spectacularly

A year ago, El Salvador became the first country to have legal tender in Bitcoin, along with the US dollar, which the Central American country adopted in 2001 to replace its own currency, the colón.

President Nayib Bukele, a cryptocurrency enthusiast, has promoted the initiative as one that would offer multiple economic benefits.

Making Bitcoin legal tender, He saidit would attract foreign investment, generate jobs and help “push humanity at least a little in the right direction.”

His ambitions extended to building an entire “Bitcoin city” – a tax-free paradise financed issuing $ 1 billion in government bonds. The plan was to spend half of the bond revenue on the city and the other half on the purchase of Bitcoin, with alleged profits then used to pay off bondholders.

Now, a year later, there is more than enough evidence to conclude Bukele – who also called himself “the coolest dictator in the worldIn response to criticism of his creeping authoritarianism – he had no idea what he was doing.

This daring financial experiment turned out to be an almost complete failure.

Making Bitcoin legal tender

Making Bitcoin legal tender meant much more than allowing Bitcoin to be used for transactions. This was already possible, as in most cases (but away from it all) Villages.

If a Salvadoran wants to pay for something in bitcoin and the recipient is willing to accept it, they can.

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But Bukele wanted more. Making bitcoin legal tender meant a beneficiary I had to accept them. As the Legislation 2021 he said, “every economic agent must accept Bitcoin as payment when it is offered to him by anyone who acquires a good or service.”

To encourage the adoption of Bitcoin, the government created an app called “Chivo Wallet” (“chivo” in slang means “cool”) to exchange bitcoins for dollars without transaction fees. It also came preloaded with US $ 30 as a bonus (the average weekly income is around $ 360).

Yet despite the law and these incentives, Bitcoin has not been adopted.

Little enthusiasm

A representative survey at national level of 1,800 Salvadoran families in February indicated that only 20% of the population used Chivo Wallet for Bitcoin transactions. More than double that number downloaded the app, but only to claim $ 30.

Among respondents who identified themselves as entrepreneurs, only 20% said they accept bitcoin as a payment. These were typically large companies (among the richest 10% of companies by size).

Working document NBER 29968, CC BY

A survey for the El Salvador Chamber of Commerce was detected in March only 14% of companies were transacting using Bitcoin.

Making huge losses

Fortunately for the Salvadorans, nothing came of the $ 1 billion Bitcoin bond scheme. But the Bukele government still spent more than 100 million dollars buy bitcoins, which are now worth less than $ 50 million.

When Bukele announced his plans in July 2021, Bitcoin’s value was around $ 35,000. When the legislation went into effect on September 7, 2021, it was around $ 45,000. Two months later, it peaked at $ 64,400.

It is now trading at around $ 20,000.

Bukele did self-congratulatory tweet to “buy the dip” but nearly all government-bought bitcoins were for more than $ 30,000, at an average price of over $ 40,000.

A year ago, Bukele was urging its citizens to keep their bitcoin money. For anyone who did, the losses would be devastating.

Imperfect analyzes

Bukele’s misunderstanding towards Bitcoin – and the economy more generally – has been proven time and again.

In June 2021 he tweeted: “Bitcoin has a market capitalization of $ 680 billion. If 1% of it is invested in El Salvador, that would increase our GDP by 25%. “

This suggests that he seemed to think Bitcoin was some sort of investment fund. He also showed did not understand GDP. Foreign investment is not a component of GDP. There has been no increase in foreign investment or GDP.

In a January 2022 tweet he claimed that “a giant price hike is only a matter of time” because there will only be 21 million bitcoins while there are 50 million millionaires in the world. “Imagine when each of them decides to own at least ONE #Bitcoin,” she proclaimed. Since then, Bitcoin’s value has halved.

The rest of the world is not impressed

The Bitcoin plan negatively impacted El Salvador’s credit rating and relations with the International Monetary Fund. With investors more wary of lending to the country, local borrowers have had to offer higher interest rates.

In January, the IMF urged El Salvador to reverse Bitcoin’s status as a legal lender because of the “major risks to financial and market integrity, financial stability and consumer protection”. Bitcoin is known for its use in scams and other illegal activities, as well as its volatility.

Bukele tweeted a dismissive response involving a Simpsons-themed meme.

El Salvador President Nayib Bukele’s response to IMF warnings about the risk of legal tender in Bitcoin. Twitter, CC BY

This seems particularly reckless, given that El Salvador was looking for a loan of over $ 1 billion from the IMF.

International credit rating agencies Fitch downgraded El Salvador’s credit rating this year, citing concerns about its Bitcoin policies.

No other country with its own currency, not even those like Zimbabwe and Venezuela with discredited currencies, has followed suit and made Bitcoin legal tender.

Given El Salvador’s record, it’s unlikely he ever will.

This article first appeared on The conversation.

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