A little over a year has passed since September 7, 2021, when El Salvador with Ley bitcoin was the first country to adopt the virtual currency as legal tender. The law, proposed by President Najib Bukil, states that all economic agents must accept exchanges using cryptocurrencies and all prices of products offered for sale must be expressed in dollars and bitcoins. The bet is that after more than 14 months it doesn’t seem to be paying off. Bitcoin, which was already in crisis, sank further in the past month after cryptocurrency exchange Ftx went bankrupt. A crash that threatens to send many investors into the red, starting with El Salvador.
On November 17, President Bukele announced on Twitter that he intends to resume the race to buy cryptocurrencies, despite the fall of Ftx, by buying 1 bitcoin per day and without specifying when the accumulation plan will end. On November 22, Bukele’s administration sent a bill to El Salvador’s Congress allowing it to sell $1 billion in Volcano Bonds, the world’s first cryptocurrency sovereign debt product, to invest in building Bitcoin City.
A crypto asset has lost 60% of its value
When El Salvador bet $425 million on bitcoin, the cryptocurrency was trading at an all-time high of $47,000. Today, it is hovering around $16,000. Moreover, Bukele’s choice to focus on cryptocurrency made the country look like a risky place to invest. The bitcoin plan has also soured relations with the International Monetary Fund, which has urged El Salvador to revoke its status as a legal lender of bitcoin. The main risks to the safety of financial markets, financial stability and consumer protection. El Salvador’s Bitcoin holdings have lost 60% of their value: The country’s 2,381 bitcoins are worth just over $40 million at current prices, far less than the roughly $105 million the government paid to buy them, according to calculations conducted by Bloomberg.
Default risk
The cash-strapped government. Losses from bitcoin gambling cost the country dearly. As explained The Economist In a recent article, analysts and creditors fear El Salvador will not be able to service its debts, including about $667 million due in January. To reassure markets, the government bought back $565 million of its sovereign bonds in September. But in the same month, rating agency Fitch downgraded the country. In recent days, the government has announced that it will conduct a second buyback of sovereign debt securities due in 2023 and 2025, in an attempt to calm markets that fear the country’s default. The government capped the buyback at $74 million. Ricardo, an economist at the Central American Institute for Fiscal Studies (ICEFI), explained that it is not known exactly how much investment Bukele has invested in bitcoin, but based on his social media announcements, the losses are estimated at around $70 million. Castaneda, for the Spanish newspaper El Pais. The economist added that this figure corresponds almost to the entire budget of the Ministry of Agriculture in a country where half of the population suffers from food insecurity.