As the cryptocurrency industry continues its slow descent into hell, El Salvador, which made bitcoin legal last September, is starting to face the financial repercussions. This new crypto winter is hurting the financial health of the country which has seen the value of its digital assets halve.
The harder the fall
In September 2021, El Salvador adopted bitcoin as legal tender. Nine months later, the Central American nation is struggling financially. This bill was intended to promote the growth of his country and was supported by the current president, Nayib Bukele. This was without counting on the vertiginous fall of these digital currencies that occurred after the collapse of the TerraUSD last May. The value of bitcoin has crashed 70% from its peak of €58,400 in November 2021 as the Salvadoran government acquired 400 bitcoins for €20.9 million upon entering into force of law.
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The drop in bitcoin had a major impact on El Salvador’s economy, which sank. According to research conducted by Fitch Ratings, an international financial rating agency, its deficit remains high. Additionally, its debt-to-GDP ratio, a key metric for comparing the money a country owes to the money it generates, could rise 87% over the year.
Boaz Sobradon, an analyst specializing in fintech data processing, said on CNBC that ” in terms of financial situation, El Salvador is in a very difficult situation. He has a lot of bonds that are trading at steep discounts “. The country led by Nayib Bukele has nearly $7.7 billion in debt. Last January, the International Monetary Fund urged El Salvador to give up bitcoin because of its high volatility.
Salvadorans don’t embrace bitcoin
In addition to having turned into a financial abyss rather than an Eldorado, bitcoin has failed to anchor itself in the habits of Salvadorans. Yet the government has done everything for it. A wallet app called Chivo was set up that offered citizens $30 when they signed up. A significant sum in a country where the minimum wage is 365 dollars per month.
Since September 7, residents of El Salvador have been able to pay in shops, bars, and even pay their tax contributions in bitcoins. In addition, exchanges with this cryptocurrency are exempt from taxes. However, according to a survey conducted by the Chamber of Commerce and Industry of El Salvador, 86% of stores have never made a sale in bitcoins.
While Nayib Bukele congratulated himself on Twitter in January on having 4 million subscribers to Chivo, out of a total population of 6.5 million people in El Salvador, studies have shown that their use of the crypto wallet is not not sustainable. A report (PDF) published in April by the National Bureau of Economic Research, a private economics organization, showed that only 20% of people who downloaded Chivo continued to use it after spending the $30 offered .
4 million users!
*Total population: 6.5 million (including people under 18 that are still not allowed to use the app).
We have the receipts👇🏼#BTC https://t.co/y3jvEdOtex
—Nayib Bukele (@nayibbukele) January 19, 2022
Other issues surround the Chivo wallet. In addition to slowdowns and connection issues, many Salvadorans have been the target of identity theft. Malicious users would collect their personal information to create an account for them and recover the 30 dollars.
While the next presidential election in El Salvador is scheduled for 2024, decision-making about bitcoin has not lowered Nayib Bukele in the polls, quite the contrary. The incumbent has an approval rating of over 85%, thanks in part to his tough approach to crime. Boaz Sobrado specifies that ” Mr. Bukele is, to date, one of the most popular presidents in power “. This situation could change depending on the progress of the crisis.