El Salvador is facing the most significant economic crisis in recent years due to the fall of cryptocurrencies that have been reducing the value of Bitcoin by millions. What decision has President Nayib Bukele made?
Photo: Flickr-Ruling with the People
LatinAmerican Post | Luisa Fernanda Sánchez
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One year after the announcement by the president of that country, Nayib Bukele, about adopting the crypto asset as a national currency along with the dollar and encouraging people to use it in their daily transactions, expectations about this great economic bet in the Central American country have not yet had materialized why?
Although the reign of Bitcoin in the cryptocurrency market was seen to be more stable and was at its peak, recent events have shown the opposite. Nobody had global inflation, the war between Russia and Ukraine, on the radar, in addition to other evils that now have the most famous cryptocurrency going through one of its worst streaks.
As expected, these events slowed economic growth in El Salvador, which currently has a large fiscal deficit and has almost 90% of the Gross Domestic Product (GDP) in public debt. According to the Nayibtracker.com site, a portal that measures and records the purchases announced by President Bukele, the level of investment in that country has fallen by more than 67 million dollars.
This is not counting the fact that the Salvadoran president has spent more than 107 million dollars in purchasing 2,381 of these digital assets, which now cost less than 50 million due to the collapse of Bitcoin. This is how the cryptocurrency registered a 21% drop in the last week and reached a minimum price that had not been registered in the last two years.
To give us a clearer idea, when Bukele made Bitcoin official as legal currency, it was worth $45,000. Now, this is under 20 thousand dollars.
For experts, this represents a fairly high opportunity cost for a historically dollarized country like El Salvador, because the budget allocated to execute food security and health programs has been invested in the purchase of these digital currencies without generating much fruit.
The level of mistrust among the population has been increasing
According to data from the Central Bank of El Salvador, only 2% of remittance shipments are made through bitcoin, generating losses and great volatility in market prices. In addition, Bitcoin is not used as a means of payment by the majority of Salvadorans. According to a university survey at the Jesuit Central American University (UCA) "only 20% of merchants or commercial business owners accepted cryptocurrency as a method of payment." Thus, "77 out of 100 Salvadorans consider that the adoption of this cryptocurrency in the country has been a failure" (UCA).
On the other hand, the questions from the World Bank, the International Monetary Fund (IMF), and the Inter-American Development Bank (IDB) did not wait. Given the high volatility of this digital currency, financial organizations warned at the time that the Salvadoran economy was not prepared to assume large-scale investments and losses.
But to foolish words, deaf ears! And for now, both President Bukele and members of his economic cabinet have gone more than two months without referring to the financial crisis due to the collapse of Bitcoin. On the contrary, he maintains his confidence despite the million-dollar losses that he has been causing to the public funds of the country he presides over and has announced more investments for the purchase of this cryptocurrency, even though it has already lost 67% of its value.
Although Bitcoin is far from replacing El Salvador's other currency, the US dollar, it has not led the country to financial bankruptcy either, as many analysts predicted. The expectations are maintained!
"The Deepest and Darkest Moment"
After years of skepticism, virtual currencies finally began to gain credibility and their rise was imminent. Now its value is in free fall.
Experts in this field assure that the uncertainty and the global recession, as well as the tensions that exist in the face of a possible war between Russia and Ukraine, have generated a massive fall in the prices of cryptocurrencies. With interest rates rising, stocks plummeting and inflation skyrocketing, investors are turning their backs on these now high-risk assets.
Bitcoin does not stop its fall and is trading just above 20 thousand dollars. According to the Bank of America (BofA), the collapse in the value of this cryptocurrency represents the fifth largest collapse of all time and the main one since 1970. In just one year, the price of Bitcoin has fallen 77% worldwide, going from 69 thousand to 16 thousand dollars. "Thus, its decline surpasses "Black Monday" in 1987, the bursting of Japan's housing bubble in 1980, and the Saudi Arabian stock market crash of 2006, as far as financial collapses are concerned."
Its massive crash has been described by the data and intelligence provider specialized in blockchain Glassnoode as "the deepest and darkest moment". In that sense, what awaits the electronic currency sector after losing its largest asset?
The devaluation of Bitcoin on the stock market and the multi-million dollar losses generated do not seem to be a stone in the shoe for the rest of the crypto market that seems to be able to stand on its own. At least for now.
But the turbulence has triggered alarms among cryptocurrency investors, as it has become impossible for them to withdraw their money from exchange and transaction platforms. In addition, the world's central banks have raised interest rates to curb the spiral of inflation.
The fear of recession grows inside and outside the sector. Once seen as a hedge against the stock market and inflation, cryptocurrencies are now an economic threat.