The Bitcoin crash drags an entire country into the abyss – economy
In the middle of last week there was still something to celebrate: Alfa Karina Arrué reached the summit of Mount Everrest in the early morning of May 12th. Arriving at the top, the mountaineer beaming and unpacking a flag of her homeland, blue and white, with five volcanoes in the middle, a rainbow and a laurel wreath: the coat of arms of El Salvador.
The small Central American country is hardly larger than Hesse. Six million people live in ElSalvador and never before in the country’s history had any of them made it to the top of the world’s highest mountain. The joy was great, and rightly so. Even the President himself congratulated him. “El Salvador!” Nayib Bukele proudly wrote on Twitter, followed by an emoji with the country’s flag.
It’s quite possible, however, that the President, in addition to recognizing top sporting achievements, was also interested in something else: a bit of distraction. Because while the first El Salvadorian in history scaled the highest mountain in the world, the country’s finances rushed further and further into the depths.
Experts warn El Salvador could soon face bankruptcy. The state of finances has not been rosy for a long time: a government that is keen to spend, plus the pandemic and the consequences of the war in Ukraine. But there is another, completely incalculable point: The Bitcointhe value of the cryptocurrency – and most recently, its loss in value.
The Bitcoin price has been falling for months. This is annoying for investors and a huge problem for El Salvador. Last June, President Nayib Bukele declared cryptocurrency a legal means of payment. Anyone who wants to can theoretically pay for goods and services with the virtual currency, the bill from the doctor as well as shopping in the supermarket or taxes. This is largely unique in the world.
Apart from a few exceptions, bitcoin has hardly caught on in practice in El Salvador today. Even in the center of the capital, merchants do not accept them cryptocurrencies and in rural areas, many people are already struggling with poor internet connections or even a lack of electricity.
The introduction of Bitcoin as a means of payment brought Bukele a lot of applause
Nevertheless, Nayib Bukele did not allow himself to be dissuaded from his experiment. The introduction of Bitcoin as a legal means of payment has brought him a lot of applause in the crypto scene. The country’s image abroad has also improved: Until a few years ago, El Salvador was known primarily for gang violence and a high murder rate. Now the crisis country has become a crypto paradise: the number of foreign visitors has risen by 30 percent in recent months, says the tourism authority, and some Bitcoin fans have even settled in El Salvador.
“Big ideas are beautiful and have great power,” said Nayib Bukele, when he first announced at a conference in Miami that his country would introduce Bitcoin as a means of payment. The President promised his country a bright future: El Salvador could soon be mining for Bitcoin with energy from volcanic geothermal energy. Investors and founders are supposed to come to the country, so many that they even want to build their own city for them, “Bitcoin City”. For these goals, Bukele also invested in cryptocurrencies on a large scale, financed by taxpayers’ money.
The exact number of bitcoins in El Salvador’s treasury today is unknown. The government and the central bank do not provide any official information about it, only tweets from the president can be used to calculate that there must be around 2,300 pieces. For a time, this wasn’t a bad deal: Shortly after Bukele started buying bitcoin in the middle of last year, the cryptocurrency’s value skyrocketed.
But even then there was criticism: the International Monetary Fund warned of “considerable risks”. When the Bitcoin price began to fall at the end of last year and Bukele ruled more and more authoritarian at the same time, rating agencies began to downgrade the country’s creditworthiness. It is becoming increasingly difficult for the country to get money abroad. At the same time, it cannot print it itself: since the dollar was introduced as official currency around 20 years ago, El Salvador has no longer had its own national currency.
With Bitcoin, the government also wanted to get investors to invest money in a new sovereign wealth fund, around one billion dollars was planned. The country was hit all the harder when Bitcoin literally crashed at the beginning of May: In just a few days, it lost almost a quarter of its value. Nobody wants to know anything about the “Vulcano Bond” anymore and experts estimate that El Salvador has already lost millions due to the price losses.
Despite all criticism and resistance, Nayib Bukele is still sticking to his crypto strategy. In his profile picture on Twitter, lasers are now shooting out of the president’s eyes again: On the Internet, this is a sign of identification for particularly big crypto fans. The head of state posts futuristic images of his planned Bitcoin City and he continues to shop: he just bought 500 pieces, Bukele proudly explained last Monday, at a price of just under $31,000 a piece. That was a bargain, wrote Bukele and also posted a picture of a small celebrating emoji behind it. Since then, however, the value of bitcoin has continued to fall: on Monday it was less than $30,000.