How is El Salvadore's Bitcoin bet doing?

While the crypto bull run was ablaze in September 2021, El Salvadore became the first and only country to approve Bitcoin as legal tender despite the International Monetary Fund (IMF) warning countries against the idea. 

The decision was met with large-scale protests. Citizens criticized their president, Nayib Bukele, on his intent for building a “Bitcoin City” – and it didn’t help that he branded himself as the “world’s coolest dictator”. Many were worried that the cryptocurrency’s volatility would lead to instability for the Latin American country.

One of the main goals of the adoption of Bitcoin is to reduce the country's dependence on the US dollar. The US dollar has been the official currency of El Salvador since 2001, but it has also contributed to the country's economic problems, including inflation and a lack of foreign currency reserves. Perhaps the excessive money printing by the Federal Reserve was the last straw for Bukele’s administration, and thus the Bitcoin Law was born. 

Now a year on and in the midst of a crypto winter, adoption of the technology is iffy. According to a national survey done in February, 78% of respondents have downloaded the state-sponsored Chivo Wallet for Bitcoin transactions. 

But of that majority, 60% only downloaded the app to claim the $30 stipend used to encourage uptake.

The story is just as bleak for business owners across the country too. 80% of firms said that they still don’t accept Bitcoin as a means of payment. Among the remaining minority that do, only 17% kept that balance in Bitcoin – with the overwhelming 83% converting to dollars or cash. 
 

Netizens may argue that Bitcoin is ultimately a store of value, and thus using the cryptocurrency as a means of payment would be a contrived way of retrofitting the technology. 
 

But on the investment front, the initiative hasn’t been achieving its economic goal of having El Salvador migrate from the dollar either. The narrative of Bitcoin as an inflation hedge, at least for now, and its price reversal since the rate hikes from the Federal Reserve means the El Salvadoran government is sitting on a pile of unrealized losses.

When President Nayib Bukele announced his plans for Bitcoin adoption in July 2021, the value of the cryptocurrency was around $35,000. By the time the legislation was passed, the value had risen to $45,000. Two months later, it reached its all-time high of $64,400. 

At the time of writing, Bitcoin is now trading at around $21,000.

Amidst the crypto winter, El Salvadore is choosing to double down. 

On January 11th, El Salvador's Legislative Assembly passed a law enabling the issuance of Bitcoin-backed bonds, commonly referred to as ‘Volcano Bonds’ due the administration’s plan to use the Conchagua volcano to power bitcoin mining with geothermal energy.

President Bukele plans to raise $1 billion using these Volcano Bonds. $500 million will go towards residential sectors, commercial areas, transportation systems, and other critical infrastructure needed to bring ‘‘Bitcoin City’ closer to reality. Another $500 million will be reserved for buying Bitcoin, with bondholders sharing any appreciation in the digital currency. 

Regardless of the feasibility of these bonds, Bukele’s administration seems determined to promote their love of Bitcoin in unorthodox ways. During this year’s Miss Universe pageant, the El Salvador representative, Alejandra Guajardo, sported a Bitcoin-inspired ensemble as she walked the runway during the Miss Universe 2022 preliminary competition.

When asked about her outfit, she responded that "the evolution of the Salvadoran monetary system throughout all these years is a testimony of the way in which Salvadorans have transformed their economy in the different stages of its history." 
 

We wonder if the citizens of El Salvadore share a similar sentiment.