A year ago, El Salvador began accepting bitcoin as legal tender following a controversial and much criticized decision by Salvadoran President Nayib Bukele.
All seemed rosy for the first few months as citizens enthusiastically embraced the new opportunity, but bitcoin’s value has since plummeted and some experts say the move has been a failure.
Maria Aguirre, 52, a shopkeeper in a seaside resort in El Zonte that has been a major center for bitcoin use, said that things were going well last year as bitcoin’s value rose from US$52,660 at opening on Sept. 7 last year to briefly more than US$68,000 a couple of months later.
Photo: EPA-EFE
“But over the last five months, it’s been only falling,” said Aguirre, who continues to accept bitcoin transactions.
Bitcoin has dipped under US$20,000 for most of this month.
In El Zonte, about 60km southwest of the capital, San Salvador, bitcoin was already being used before Bukele’s move, which was designed to encourage a population where only 35 percent of people owned an account at a financial institution last year, according to the World Bank.
El Salvador became the first country to accept bitcoin as legal tender, alongside the US dollar that has been the official currency for two decades.
The government even created the Chivo electronic wallet and granted each user the equivalent of US$30.
By January, the application had been downloaded 4 million times, said Bukele — an impressive amount in a country of 6.6 million, although with a diaspora of 3 million living mostly in the US.
Bukele’s idea was to ensure that remittances, which make up 28 percent of El Salvador’s GDP, be sent by Chivo, meaning less money lost in commission to exchange agencies.
However, former El Salvador central bank president Carlos Acevedo said the body’s records show that “less than 2 percent of remittances are arriving through digital wallets, which means that this hasn’t been a benefit either.”
University student Carmen Majia, 22, said she used bitcoin in the beginning, “but given how things are going, now I don’t trust it and I uninstalled the application.”
When Bukele’s plan was launched, Aguirre had already been using bitcoin for eight months in the Pacific seaside resort that is popular with surfers.
After bitcoin shot up in value between September and November last year, Bukele announced a plan to build Bitcoin City — a tax haven for cryptocurrencies and blockchain technology on the Gulf of Fonseca that would be powered by geothermal energy from the Conchagua volcano.
To build it, Bukele was going to issue US$1 billion in bitcoin bonds, but those plans were delayed by the volatile cryptocurrency market that saw some less robust currencies crash and bitcoin take a huge hit.
Bukele’s plan has cost El Salvador US$375 million, credit rating company Moody’s said.
Taking advantage of the drop in value, Bukele bought 80 bitcoins at US$19,000 each in July, taking El Salvador’s total holdings to 2,381 units of the cryptocurrency, all bought over the past year.
In June, he told compatriots to “stop looking at the graph,” insisting that bitcoin was a secure investment that would bounce back up.
“Patience is the key,” he said.
However, Acevedo said that the use of bitcoin “really has not worked” and that “so far it has really been a failed bet,” but added that it not a total failure, “because it could recover and get out of this crypto winter.”
Bitcoin has not produced Bukele’s stated aim of “financial inclusion” and its fall in value has “psychologically influenced people who do not view it with enthusiasm,” Acevedo added.
The adoption of bitcoin has also complicated El Salvador’s attempts to secure a US$1.3 billion loan from the IMF, which had urged against the move.
Faced with a warning that the country could default over its public debt that has surpassed 80 percent of GDP, Bukele in June announced a plan to buy back bonds due to expire next year and in 2025.
He said the country has the cash to do so.
That reduced the country’s risk from 35 percent to 25 percent, but Acevedo said El Salvador would not be able to return to the debt markets until that figure comes down to “at least 5 percent.”
In El Zonte, Cheetara Hasbun, a hotel employee, still thinks bitcoin is a “good payment” method and just “needs more time, as was given to the [US] dollar.”
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