El Salvador’s Bitcoin Decision: Adoption to Follow a Year Later

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El Salvador, the small Central American country that made history just over a year ago when it created Bitcoin (BTC), recently marked its first year of BTC adoption.

The Salvadoran government touted BTC as a tool to attract foreign investment, create new jobs and reduce reliance on the US dollar in the country’s economy at the time of adoption. Many BTC proponents and the libertarian community rallied behind the small nation, despite increasing pressure from global organizations such as the World Bank and the International Monetary Fund (IMF) to remove BTC from legal tender.

Much has changed in the past year since El Salvador became the first ‘Bitcoin nation’. Enthusiasm and public interest soared immediately after BTC’s recognition, with the price soaring to new heights.

Salvadoran President Nayib Bukele joined the growing group of Bitcoin proponents to buy several market dips and even reaped the benefits of their BTC purchase in the early days when the country built schools and hospitals with its profits.

However, as market conditions turned bearish, the frequency of BTC purchases slowed, and the president, who was often seen interacting with the crypto community on Twitter and sharing future Bitcoin efforts, significantly reduced his social media interactions.

El Salvador has bought 2,301 BTC for about $103.9 million since last September. That Bitcoin is currently worth about $45 million. The most recent purchase was made in mid-2022 when the nation bought 80 BTC for $19,000 each.

As BTC’s price plummeted, critics who had long expressed concerns about a crypto bubble felt validated, with several comments along the lines of “I told you so.” However, market experts believe that El Salvador’s BTC experiment is far from a failure.

El Salvador’s Bitcoin Volcanic Bond, a project intended to raise $1 billion from investors to build a Bitcoin city, has now been delayed several times, and skepticism is growing not only around the project, but also the general acceptance of BTC itself.

Samson Mow, a Bitcoin entrepreneur who played a key role in designing the Bitcoin volcanic bond — also known as the volcanic token — told TBEN that contrary to common outside perceptions, El Salvador is building up the bear market. . He noted that the volcanic bond was delayed for several reasons and is currently awaiting the approval of a digital securities law. He explained:

“We are still waiting for the new digital securities laws to go to Congress, and once it is passed, El Salvador can begin raising capital for the Bitcoin bonds. I’m hopeful it will happen before the end of this year. Like Bitcoin companies, El Salvador is focused on building through the bear market. I can’t see President Bukele not stacking at these prices anymore.”

BTC price hit a new all-time high of $68,789 just a month after El Salvador’s approval on Nov. 10. However, since then the price has fallen by more than 70% and is currently trading at around $19,000. Many critics believe that the future of the volcanic bond and its original token relies heavily on the crypto market, so it can only gain momentum during bull markets.

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Paolo Ardoino, chief technical officer at Bitfinex, told TBEN that the volcanic tokens would spark investor interest regardless of market conditions, he explained:

“The volcanic token will be the first of its kind. While investor interest in new offerings is typically higher during a bull market, we are confident that the unique proposition this token represents will generate significant interest regardless of market conditions. The Volcanic token has broad support in the Bitcoin community and there is clearly a lot of interest in the offering whether we are in a bear or bull market.

Bitfinex is the main infrastructure partner of the government of El Salvador responsible for processing transactions from the sale of volcanic tokens.

Bitcoin Adoption Increased Remittances and Tourism

While critics have called El Salvador’s Bitcoin experiment a failure from the start, proponents see it as something of a revolution and believe that El Salvador’s adoption could create a knock-on effect for other countries facing similar financial challenges, such as a large number of citizens without bank accounts and significant remittance volumes.

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Bukele has previously mentioned that the primary focus of BTC’s recognition has been to provide banking services to more than 80% of unbanked Salvodrans. Within six months of the law being passed, the country’s national Bitcoin wallet managed to get four million users on board, allowing 70% of the unbanked population to access payment and remittance services without going to a bank. .

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Aarti Dhapte, a senior research analyst at Market Research Future, told TBEN that El Salvador’s BTC adoption has proven to be a success on several fronts, be it banking the bank or boosting tourism:

“We have to accept that the digital currency has helped the Central American nation of El Salvador rebuild its tourism industry, despite the country still struggling to weather the long crypto winter. According to information from the Ministry of Tourism, travel spending in El Salvador has increased by 81% in the post-pandemic period. In 2021, the country welcomed 1.2 million visitors and 1.1 million in the first half of 2022.”

Statista data shows that more than 9% of El Salvador’s GDP is made up of the tourism industry, so nearly doubling tourism is a major boon to the country.

Share of tourism in El Salvador’s GDP. Source: Statista

Apart from tourism and providing financial services to those without bank accounts, the adoption of BTC has also proved beneficial in terms of cross-border remittances, significantly reducing transaction costs.

The El Salvador Central Reserve Bank estimates that from January to May 2022, remittances from citizens living abroad totaled more than $50 million. The adoption of Bitcoin and the Chivo wallet, an initiative backed by the government of El Salvador, has helped Lightning Network transactions increase 400% by 2022.

The Disadvantages of Bitcoin Adoption

The main downside of Bitcoin adoption in El Salvador is macroeconomic factors that have led to a decline in BTC price along with the amount of pushback it has received from around the world. The pushback wouldn’t matter in a bull market, but as a small nation-state facing financial challenges, the country cannot afford to be on bad terms with international monetary organizations.

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Currently, the vast majority of El Salvador’s Bitcoin has been purchased at a higher value than it currently enjoys. Bitcoin has been closely followed with traditional assets such as the stock market, especially technical stocks. They too have taken a beating this year as the world struggles to cope with the aftermath of pandemic-related government handouts.

Besides the price of Bitcoin, the bigger problem for El Salvador is how the international financial world views the move.

The country’s move towards Bitcoin has restricted the country’s access to traditional financial markets, causing Bukele real difficulties in financing the repayment of its bond obligations. Moody’s earlier this year cited disagreements over Bitcoin as one reason why El Salvador was struggling to come to terms with the IMF.

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Richard Gardner, CEO of Modulus, a provider of institutional infrastructure services, told TBEN that Bukele’s decision may not look too bad five years from now, but right now it’s controversial:

“The switch from Bukele to Bitcoin does not look wise. Even with high inflation for the USD, Bitcoin ultimately failed as an inflation hedge given the dip. However, we are looking at a one-year snapshot during a recession. For a country like El Salvador, access to funding through organizations like the IMF is vital. That makes Bukele’s Bitcoin gambit difficult to defend.”

El Salvador’s future depends heavily on the success of the delayed volcanic bonds, which could bring in billions in revenue and set a precedent for others to follow. Until the launch of the bond, the outside world will continue to measure its success based on its BTC purchases.