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El Salvador's reserves lose their value due to the fall of Bitcoin. Is it to worry?

The value of El Salvador's reserves in Bitcoin fell by up to 11%, which are valued at more than $75 million

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LatinAmerican Post | Yolanda González Madrid

The world of cryptocurrencies is uncertain, and just as one day they may be trading high, they can fall in a matter of hours. Investing in them has its risks, although everything seems to indicate that for the government of El Salvador optimism is part of the strategy to get ahead. And it is that due to the fall in the price of bitcoin, Salvadoran reserves have lost up to 11% of their value. How to face that reality?

President Nayib Bukele reported through his official accounts that from September 2021 to January 2022 he had acquired 1,801 bitcoins in nine tranches. Although official details of the public money invested in cryptocurrencies are unknown, the truth of the matter is that to date they have not been able to recover the investment due to the continuous drop in price that has gone from $68,000 to $33,000.

To better understand the situation that El Salvador is experiencing regarding its reserves, it is important to mention that by the time Bukele announced the purchase of bitcoins, he spent approximately $85.5 million. However, due to the constant decline in its price, Salvadoran reserves have a total value of $76.1 million, which would be equivalent to 11% in losses.

Despite this, the government continues to ensure that benefits are being obtained from the adoption of bitcoin since a veterinary hospital is still under construction with those profits obtained that are not part of the reserves, as well as the first Bitcoin City that is among Bukele's most ambitious plans. However, several experts doubt that all this is possible or profitable.

“In order to make a profit, the bitcoins should have been sold, and according to the government, this has not been done. If it is not sold, how are they going to make a profit? Also, if we review how much the government has spent, it would actually have losses, and with losses, there can be no gains,” says Ricardo Castaneda, senior economist at the Central American Institute for Fiscal Studies (ICEFI).

The IMF warns about the risks

As if the opinion of the experts in the matter were not enough, the International Monetary Fund (IMF) has warned El Salvador of the "serious" risks that they could face if they maintain their decision to adopt bitcoin as the legal tender currency. In fact, one of the biggest drawbacks would be the difficulty of obtaining a loan with the agency itself.

Also read: Nayib Bukele: From a Critic of Venezuela to a Partner of its Allies

“La The adoption of a cryptocurrency as legal tender poses serious risks to financial and market integrity, financial stability, and consumer protection, and may result in contingent fiscal liabilities," the IMF said in a statement. Given this, the institution's executive board urged the Bukele government to "reduce the scope of the Bitcoin Law by eliminating the status of bitcoin" as legal currency.

Likewise, the IMF also expressed concern about the issuance of bitcoin bonds that El Salvador would be granted in the coming months since they warned that the country's fiscal vulnerabilities "have worsened during the pandemic and require immediate action." They even added that the "increasing financing needs are limiting growth in the medium term and highlighted the need to implement structural fiscal reforms."

Optimism in the face of growth in the price of bitcoin

The fact that the price of bitcoin has fallen drastically and with it, the value of Salvadoran reserves does not seem to be a cause for alarm for Nayib Bukele. The president considers that the cryptocurrency will have a "giant" increase in its price sooner rather than later, and that "it is only a matter of time" for that to happen.

Likewise, not only the president of El Salvador remains optimistic about the growth of the bitcoin price in the short/medium term. The investor and bitcoin expert Max Keiser assured, in an interview with Bitcoin Magazine, that the future of the Salvadoran economy is on the right track due to the policies implemented by Bukele and his commitment to cryptocurrency. Even he also agrees that it will be a matter of time for the value of bitcoin to increase and thus generate a positive domino effect for the country.

In short, investments usually have a risk quota that not everyone dares to accept. The government of El Salvador is determined to innovate by betting everything on bitcoin, and as is often the case in the world of cryptocurrencies, price volatility will mark daily. As the saying goes "he who perseveres achieves", the big question is: Will the Savior make it?