• El Salvador has high Bitcoin reserves
• Price slump could have resulted in large loss
• Nayib Bukele remains unimpressed
There was a great stir when, in September 2021, heavily indebted El Salvador became the first country in the world to make Bitcoin legal tender. Since then, every trader has had to accept the world’s most popular digital currency as a means of payment if they are technically able to do so, and taxes can also be paid using the cryptocurrency.
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With this step, the now 41-year-old Nayib Bukele wanted to reduce his country’s dependence on the US Federal Reserve. Since the US dollar had been used as the official means of payment in El Salvador instead of a local currency since 2001, people there were strongly influenced by the monetary policy dependent on the US Fed. That should change with Bitcoin, after all, the decentralized cryptocurrency is not controlled by any central bank. A further advantage was seen in the fact that Bitcoin can also be used by that large part of the population who do not have access to traditional financial services.
million losses
But the advantages that Bitcoin El Salvador offers pale in comparison to the fact that the digital currency is subject to violent price fluctuations. It is particularly bitter for the Central American state, which has started to build up a bitcoin reserve for the state budget, that it got in almost at the peak of the crypto rally. Because investors are no longer willing to take risks, Bitcoin has lost over 70 percent of its value in the last twelve months. The insolvency of the crypto exchange FTX in particular has caused turbulence on the crypto market in recent weeks. The bankruptcy was triggered by doubts about the capitalization of affiliate Alameda Research, which resulted in a massive outflow of capital and caught many investors wrong-footed.
For a while, rumors even circulated in the crypto community that Bukele had parked the state-bought bitcoin at FTX and could no longer get hold of them. But then Binance boss Changpeng “CZ” Zhao countered these speculations: He had heard from President Bukele that El Salvador had not done any business with FTX and had not parked Bitcoin there either.
Man, the amount of misinformation is insane.
I exchanged messages with President Nayib a few moments ago. He said “we don’t have any Bitcoin in FTX and we never had any business with them. Thank God!” https://t.co/CrM5wd24Ha
– CZ ? Binance (@cz_binance) November 10, 2022
Nevertheless, the weakness in the crypto market now seems to be making itself felt in the state treasury and the savings of the population. According to the “Handelsblatt”, El Salvador has to pay international debts of 667 million dollars in January, but analysts say the country could then become insolvent. As the newspaper reports, Ricardo Castaneda from the Central American Institute for Fiscal Studies (ICEFI), for example, estimates the losses for state finances at around 70 million dollars – “that corresponds to the entire budget of the Ministry of Agriculture”. That is why the expert is now warning of an imminent national bankruptcy.
Preparations for bitcoin bonds
Meanwhile, El Salvador is planning to raise $1 billion in bitcoin-based government bonds to raise fresh money. According to BTC Echo, the government has now presented a bill to the National Congress outlining the basics of bitcoin bonds. With the money from this capital injection, more bitcoins are to be purchased and the Bitcoin City project – a city dedicated to bitcoin – is to be financed.
Bukele remains undeterred
Despite all the turbulence, Head of State Bukele is sticking to his course of converting his country to Bitcoin in the future and continuing to buy Bitcoins: “Starting tomorrow we will buy one Bitcoin every day,” he announced in a tweet in mid-November.
We are buying one #Bitcoin every day starting tomorrow.
– Nayib Bukele (@nayibbukele) November 17, 2022
Bukele still hopes for stability from Bitcoin and points out that there will never be more than 21 million coins from the original cryptocurrency. Bitcoin thus stands for the opposite of the insolvent FTX, because there investors could place bets on thousands of cryptocoins whose money supply was virtually unlimited. “Some understand it, some don’t,” says Nayib Bukele.
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