Last year, El Salvador became the first country in the world to accept bitcoin as legal tender alongside the American dollar. The moves gained Bukele accolades in the cryptocurrency world, while financial institutions warned caution. Months after El Salvador began buying bitcoin, however, it appears that Bukele’s crypto dream is on the way to threatening the embattled Central American economy to fall in default.
The cryptocurrency market has suffered a sudden and drastic fall, with Bitcoin’s price going from $41,149.5 to $28,761 in less than a month, and other crypto-assets (like Ethereum) have experimented a heavy fall as global markets were in disarray over the Federal Reserve announced it will raise interest rates as a way to curb inflation.
The astonishing crash of the cryptocurrency world has put the Salvadorian economy in a very difficult position. The central American nation started buying Bitcoin in October of 2021 when Bukele announced the purchase of $25 million worth of the cryptocurrency, and currently, the country has bought an estimated stock of 2,301 bitcoins.
El Salvador’s credit ranking falls in the “junk” category
Cryptocurrency instability and the structural issues facing the Salvadorian economy have forced international credit rating agencies like Moody’s and Fitch to downgrade El Salvador’s debt bond to CCC level, effectively marking it as “junk” debt. This rating prevents El Salvador’s access to international credit.
The decision to adopt bitcoin as legal tender is not even particularly popular among Salvadorians. A poll conducted by the Central American University in September found that 67.9% of Salvadorians either disagree or strongly disagree with the measure, and the rollout of the law was met with skepticism by Salvadorians after a myriad of technical glitches and identity thieves. As a result, many businesses have decided to not accept the cryptocurrency altogether, something confirmed by a study conducted by the National Bureau of Economic Research found that only 20% of firms accept bitcoin, and only 5% of sales are made with it.
To make matters worse, the full embrace of bitcoin by Bukele has made it difficult for him to reach a deal with the International Monetary Fund (IMF), which could aid El Salvador to pay its international obligations next January. The IMF has pushed for El Salvador to remove Bitcoin as legal tender, since it would expose the health of public finances to the volatility of the cryptocurrency market.
Bukele’s bitcoin dream might turn into a nightmare
Despite the ongoing onslaught on the cryptocurrency market, Bukele has not only remained firm in his decision to keep Bitcoin as a legal tender but has doubled down in his bitcoin bet. Bukele announced on Monday that El Salvador had just bought an additional 500 coins at an average price of $30,744, approximately $15.3 million. The price has gone even lower since then, and El Salvador has lost approximately one million dollars in Bukele’s latest crypto investment.
Nayib Bukele is not a stranger to polarization and controversies. His decisions to storm parliament with armed soldiers in 2020, pack the Supreme Court with his supporters in 2021, and his tough-on-crime approach to the gangs in El Salvador has gained him heavy criticism abroad, as many have criticized his actions as authoritarian. However, Bukele has managed to remain popular at home.
Nevertheless, it remains to be seen if the millennial president’s apparent unsinkable popularity will endure a potential financial or economic crisis that would come if El Salvador were to be unable to pay its debts obligations if the crypto market does not recover from its latest crash. If not, then Bukele’s bitcoin dream could easily turn into a nightmare of his own making.
Daniel is a Political Science and Economics student from the University of South Florida. He worked as a congressional intern to Rep. Gus Bilirakis (FL-12) from January to May 2020. He also is the head of international analysis at Politiks // Daniel es un estudiante de Cs Políticas y Economía en la Universidad del Sur de la Florida. Trabajo como pasante legislativo para el Representate Gus Bilirakis (FL-12) desde enero hasta mayo del 2020. Daniel también es el jefe de análisis internacional de Politiks.