Will El Salvador Survive the Bitcoin Crash?

The current volatility in Bitcoin and the larger crypto industry has fueled public opposition to the main crypto, strengthening the idea that the El Salvador’s Bitcoin experiment has backfired. The collapse in the price of Bitcoin and other crypto-assets has adversely affected the financial situation of El Salvador’s government.

It was only in September last year that this country recognized Bitcoin as its official currency. Experts are of the opinion that the situation in El Salvador will profusely discourage many countries from adopting cryptocurrencies in mainstream usage.

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The Story Behind Bitcoin Adoption – El Salvador

Bitcoin was adopted by El Salvador as its official currency in the month of September last year. With this adoption, El Salvador got two official currencies in its financial system: Bitcoin and US Dollar.

Through this decision, the government hoped to promote financial inclusivity, investment, commerce, innovation, and economic development in the nation. Interestingly, the government has been pushing for the increasing adoption of Bitcoin in daily transactions.

The government also released one digital wallet with the name ‘Chivo’ and distributed $30 worth of Bitcoin for free to the wallet users in an attempt to encourage transactions in Bitcoin.

Economists note that the government of El Salvador’s desire to introduce Bitcoin as its national currency stems from its difficulty to borrow in US dollars. El Salvador’s governmental debt has climbed to more than 100 percent of its GDP.

El Salvador’s government can use Bitcoin to reduce its dependency on the US dollar to finance its expenditures. With more Bitcoin acceptance in El Salvador, the government will be able to borrow and spend in Bitcoins rather than US dollars. This could explain why the administration is attempting to persuade residents to utilize Bitcoin instead of US dollars.

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Difficulties Faced by El Salvador

Bitcoin’s price has crashed from over $69,000 in November of last year to nearly $20,000 this week, leading to severe for traders all over the globe. This collapse has badly harmed the economic situation of the El Salvador government. It is estimated that about the $100 million investment of the El Salvador government in Bitcoin has come down to almost half of its value because of this meltdown.

However, President Nayib Bukele, who is known to be a huge fan of cryptocurrencies, has been betting on Bitcoin even in these circumstances. He has been buying the dip in the anticipation that the crypto industry would bounce back and recovery would happen in the near future.

The President has said in one of his tweets, “I see that some people are worried or anxious about the #Bitcoin market price. My advice: stop looking at the graph and enjoy life. If you invested in #BTC your investment is safe and its value will immensely grow after the bear market. Patience is the key.”

Though the government has been promoting Bitcoin as a medium of exchange in its full swing, however, the citizens have been reluctant to accept this digital currency in their daily transactions.

Only about 2% of the remittances have taken place using the digital wallet, which highlights the dismal response of the citizens towards Bitcoin. The excessive price fluctuation in cryptocurrencies, which makes them an untrustworthy medium of exchange, is among the main reasons for their poor acceptability.

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What Lies Ahead for El Salvador?

El Salvador has been given a warning by the International Monetary Fund about the implications of using Bitcoin as its national currency. Price fluctuations, the risk of cybercrime, and the influence of market swings on daily users are only a few examples.

However, considering the response of President Bukele towards the current situation, it seems quite unlikely that there would be any revocation of the status of Bitcoin as a legal tender. It would be interesting to see whether any country will put any restrictions on cryptocurrency usage after looking at the situation in El Salvador.

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